Prospectus Supplement dated August 28, 2000 (To Prospectus dated November 8,
1999)
$534,522,854 (APPROXIMATE)
UNION PLANTERS MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-UP1
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
UNION PLANTERS PMAC, INC.
MASTER SERVICER
UNION PLANTERS BANK, NATIONAL ASSOCIATION
MORTGAGE LOAN SELLER
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 4 IN THE PROSPECTUS.
The certificates will represent interests only in a trust consisting primarily
of mortgage loans and will not represent ownership interests in or obligations
of any other entity.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
THE TRUST --
o will consist primarily of a mortgage pool of one- to four-family
fixed-rate residential mortgage loans which will be segregated into two
groups, one consisting of mortgage loans whose principal balances conform
to the requirements of Fannie Mae and Freddie Mac and the other consisting
of mortgage loans whose principal balances may or may not conform to the
requirements of Fannie Mae and Freddie Mac; and
o will be represented by eleven classes of certificates, two of which are
offered by this prospectus supplement.
THE OFFERED CERTIFICATES --
o will represent senior interests in the trust and will receive
distributions from the assets of the trust; and
o will receive monthly distributions commencing on September 25, 2000.
CREDIT ENHANCEMENT --
o the senior certificates will have credit enhancement in the form of
subordination.
Salomon Smith Barney Inc. (the "Underwriter") will offer the Class A-1
Certificates and the Class A-2 Certificates (together, 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 100.25% of the initial principal balance of such
certificates, plus accrued interest. 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" in this prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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, New York, New York 10013, Attention: Mortgage Finance,
and its phone number is (212) 816-6000.
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT............................................S-3
RISK FACTORS................................................................S-8
USE OF PROCEEDS............................................................S-12
THE MORTGAGE POOL..........................................................S-12
YIELD ON THE CERTIFICATES..................................................S-29
DESCRIPTION OF THE CERTIFICATES............................................S-36
POOLING AND SERVICING AGREEMENT............................................S-55
MORTGAGE LOAN SELLER.......................................................S-59
FEDERAL INCOME TAX CONSEQUENCES............................................S-59
METHOD OF DISTRIBUTION.....................................................S-61
SECONDARY MARKET...........................................................S-61
LEGAL OPINIONS.............................................................S-61
RATINGS....................................................................S-62
LEGAL INVESTMENT...........................................................S-62
ERISA CONSIDERATIONS.......................................................S-63
ANNEX I.....................................................................I-1
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, CAREFULLY READ 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.
<TABLE>
<CAPTION>
<S> <C>
Title of Series.............................Union Planters Mortgage Pass-Through Certificates, Series 2000-UP1.
Cut-off Date................................August 1, 2000.
Closing Date................................On or about August 30, 2000.
Depositor...................................Salomon Brothers Mortgage Securities VII, Inc. (the
"Depositor"), an indirect wholly-owned subsidiary of Salomon
Smith Barney Holdings Inc. and an affiliate of Salomon
Smith Barney Inc. The Depositor will deposit the mortgage
loans into the trust. See "The Depositor" in the prospectus.
Master Servicer.............................Union Planters PMAC, Inc., a Mississippi corporation (the
"Master Servicer"), a wholly-owned subsidiary of Union
Planters Bank, National Association. The Master Servicer
will service the mortgage loans for the trust. See "The
Mortgage Pool--Underwriting Standards" and "Pooling and
Servicing Agreement--The Master Servicer" in this
prospectus supplement.
Mortgage Loan Seller........................Union Planters Bank, National Association (the "Mortgage
Loan Seller"). The Mortgage Loan Seller will sell the
mortgage loans to the Depositor. See "Mortgage Loan
Seller" in this prospectus supplement.
Trustee.....................................Wells Fargo Bank Minnesota, National Association, a
national banking association, will be the Trustee of the trust.
See "Pooling and Servicing Agreement--The Trustee" in this
prospectus supplement.
Distribution Dates..........................Distributions on the Offered Certificates will be made on the
25th day of each month, or, if such day is not a business
day, on the next succeeding business day, beginning in
September 2000.
Offered Certificates........................The classes of Offered Certificates, their pass-through rates
and initial certificate principal balances are set forth in the
table below.
</TABLE>
S-3
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================================================================================
INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE(1) RATE
--------------------------------------------------------------------------------
A-1..................... $454,217,362 8.00%
A-2..................... $80,305,492 8.00%
================================================================================
-----------------
(1) Approximate.
THE TRUST
The Depositor will establish a trust with respect to the Series 2000-UP1
Certificates, pursuant to a pooling and servicing agreement dated as of August
1, 2000 among the Depositor, the Master Servicer and the Trustee. There are
eleven classes of certificates representing beneficial interests in the trust.
See "Description of the Certificates" in this prospectus supplement.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and/or principal on the Offered
Certificates will be made only from payments received in connection with the
mortgage loans described below.
THE MORTGAGE LOANS
References to percentages of the mortgage loans under this section are
calculated based on the aggregate principal balance of the mortgage loans in the
related loan group as of the Cut-off Date.
The trust will contain approximately 8,594 conventional, one- to four-family,
fixed-rate mortgage loans secured by first liens on residential real properties.
The mortgage loans have an aggregate principal balance of approximately
$579,896,109 as of the Cut-off Date, after application of scheduled payments due
on or before the Cut-off Date whether or not received and subject to a permitted
variance of plus or minus 5%.
The mortgage loans will be divided into two loan groups, Loan Group I and Loan
Group II (each, a "Loan Group"). Loan Group I will consist of fixed-rate
mortgage loans with principal balances as of the Cut-off Date that conform to
the requirements of Fannie Mae and Freddie Mac (the "Group I Mortgage Loans").
The Group I Mortgage Loans consist of 7,983 fixed-rate mortgage loans with an
aggregate outstanding principal balance as of the Cut-off Date of approximately
$490,608,051, after application of scheduled payments due on or before the
Cut-off Date whether or not received and subject to a permitted variance of plus
or minus 5%.
Loan Group II will consist of fixed-rate mortgage loans with principal balances
as of the Cut-off Date that may or may not conform to the requirements of Fannie
Mae and Freddie Mac (the "Group II Mortgage Loans"). The Group II Mortgage Loans
consist of 611 fixed- rate mortgage loans with an aggregate outstanding
principal balance as of the Cut-off Date of approximately $89,288,057, after
application of scheduled payments due on or before the Cut-off Date whether or
not received and subject to a permitted variance of plus or minus 5%.
The mortgage loans have the following approximate characteristics as of the
Cut-off Date.
Range of origination dates of
the Group I Mortgage Loans: June 1971 to June 2000.
Range of origination dates of
the Group II Mortgage Loans: March 1975 to June 2000.
Range of mortgage rates of 6.000% per annum to
the Group I Mortgage Loans: 12.970% per annum
Range of mortgage rates of 6.500% per annum to
the Group II Mortgage Loans: 16.000% per annum
Weighted average
mortgage rate of the Group I
Mortgage Loans: 8.772% per annum
Weighted average
mortgage rate of the Group II
Mortgage Loans: 8.387% per annum
Weighted average amortized
remaining term to maturity of
the Group I Mortgage Loans: 241 months
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<PAGE>
Weighted average amortized
remaining term to maturity of
the Group II Mortgage Loans: 258 months
Range of principal balances
of the Group I Mortgage
Loans: $622 to $251,775
Range of principal balances
of the Group II Mortgage
Loans: $210 to $2,830,136
Average principal balance of
the Group I Mortgage Loans: $61,457
Average principal balance of
the Group II Mortgage Loans: $146,134
Range of current
loan-to-value ratios(1) of
the 0.13% to 99.75%
Group I Mortgage Loans:
Range of current
loan-to-value ratios(1) of
the 1.89% to 94.55%
Group II Mortgage Loans:
Weighted average current
loan-to-value ratio(1) of the
Group I Mortgage Loans: 71.70%
Weighted average current
loan-to-value ratio(1) of the
Group II Mortgage Loans: 67.21%
------------------
(1) See "The Mortgage Pool--General" for a description regarding the calculation
of loan-to-value ratio.
For additional information regarding the mortgage loans, see "The Mortgage Pool"
herein.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A-1 Certificates and the Class A-2 Certificates
are the only classes of certificates offered by this prospectus supplement. The
Offered Certificates will have the characteristics shown in the table above in
this prospectus supplement.
The Class A-1 Certificates (the "Group I Certificates") will represent interests
primarily in Loan Group I. The Class A-2 Certificates (the "Group II
Certificates") will represent interests primarily in Loan Group II.
The pass-through rates on the Class A-1 Certificates and the Class A-2
Certificates (together, the "Class A Certificates"; and together with the Class
IO Certificates and the Class PO Certificates, the "Senior Certificates") are
fixed and shown in the table above.
The Offered Certificates will be sold by the Depositor to the Underwriter on the
closing date.
The Offered Certificates will initially be represented by one or more global
certificates registered in the name of Cede & Co., as nominee of the Depository
Trust Company in minimum denominations of $100,000 and integral multiples of
$1.00 in excess thereof. See "Description of the Certificates --Registration of
the Book-Entry Certificates" herein.
OTHER CERTIFICATES.
SUBORDINATE CERTIFICATES. The Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates, the Class B-4 Certificates, the Class
B-5 Certificates and the Class B-6 Certificates (collectively, the "Subordinate
Certificates") are not being offered by this prospectus supplement. Such
certificates have in the aggregate an initial certificate principal balance of
approximately $27,545,110, evidencing an aggregate initial undivided interest in
the trust of approximately 4.75%. Such Certificates will be delivered by the
Depositor to the Mortgage Loan Seller or its designee on the closing date as
part of the consideration for the mortgage loans.
CLASS IO CERTIFICATES. The Class IO Certificates will receive a portion of the
interest payments ONLY from mortgage loans in each Loan Group that have net
mortgage rates higher than 8.00% per annum. The Class IO Certificates are not
being offered by this prospectus supplement and will be delivered by the
Depositor to the Mortgage Loan Seller or its designee on the closing date as
part of the consideration for the mortgage loans.
CLASS PO CERTIFICATES. The Class PO Certificates will receive a portion of the
principal payments ONLY on the mortgage loans in each Loan Group that have net
mortgage rates lower than 8.00% per annum. The Class PO Certificates are not
being offered by this prospectus supplement and will be delivered
S-5
<PAGE>
by the Depositor to the Mortgage Loan Seller or its designee on the closing date
as part of the consideration for the mortgage loans.
RESIDUAL CERTIFICATES. The Class R Certificates represent the residual interests
in the trust, but are not offered by this prospectus supplement. The Class R
Certificates will be delivered by the Depositor to the Mortgage Loan Seller or
its designee on the closing date as part of the consideration for the mortgage
loans.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of subordination as described below and under "Description
of the Certificates--Allocation of Losses; Subordination" herein and cross-
collateralization as described below and under "Description of the
Certificates--Cross-Collateralization."
SUBORDINATION. The rights of the holders of the Subordinate Certificates to
receive distributions will be subordinated, to the extent described herein, to
the rights of the holders of the Senior Certificates.
Further, the rights of the holders of Subordinate Certificates with higher
numerical class designations will be subordinated to the rights of holders of
Subordinate Certificates with lower numerical class designations, to the extent
described herein.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the mortgage loans as
described below.
ALLOCATION OF LOSSES. Except as described below, if Subordinate Certificates
remain outstanding, losses on the mortgage loans will be allocated first to the
class of Subordinate Certificates then outstanding with the lowest payment
priority, and the other classes of certificates will not bear any portion of
such losses.
If none of the Subordinate Certificates remain outstanding, losses on mortgage
loans will be allocated to the Class A Certificates and the Class PO
Certificates in the manner described below.
Not all losses will be allocated in the priority set forth above. Losses due to
natural disasters such as floods and earthquakes, fraud by a mortgagor,
bankruptcy of a mortgagor or certain other extraordinary events will be
allocated as described above only up to specified amounts. A portion of losses
of these types in excess of the specified amount may be allocated to the Class
PO Certificates as described below and the remaining portion of those losses
will be allocated in the manner set forth under "Description of the Certificates
--Allocation of Losses; Subordination" herein. Therefore, the Subordinate
Certificates do not act as credit enhancement for such losses.
Any losses that are not allocated to the Subordinate Certificates, as described
above, will be allocated as follows: the portion of the loss on each mortgage
loan represented by the Class PO Certificates will be allocated to the Class PO
Certificates, and the remaining portion of the loss will be allocated in the
manner set forth under "Description of the Certificates --Allocation of Losses;
Subordination" herein.
Once realized losses are allocated to a class of certificates, the certificate
principal balance of such class will be permanently reduced by the amounts so
allocated. The amounts of realized losses allocated to the certificates will no
longer accrue interest nor will these amounts be reinstated thereafter.
See, "Description of the Certificates
--Allocation of Losses; Subordination" herein.
CROSS-COLLATERALIZATION
In certain limited circumstances, certain amounts received on the mortgage loans
in one Loan Group may be available to pay interest and principal due on the
Class A Certificates related to the other Loan Group. See, "Description of the
Certificates--Interest Distributions", "--Principal Distributions on the Senior
Certificates" and "--Cross- Collateralization" herein.
S-6
<PAGE>
P&I ADVANCES
The Master Servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described herein. The
Master Servicer is entitled to be reimbursed for such advances, and therefore
such advances are not a form of credit enhancement. See "Description of the
Certificates--P&I Advances" herein and "Description of the Securities--Advances
in respect of Delinquencies" in the prospectus.
OPTIONAL TERMINATION
At its option, the Master Servicer may purchase all of the mortgage loans in
both Loan Groups, together with any properties in respect thereof acquired on
behalf of the trust, and thereby effect termination and early retirement of the
Certificates, after the aggregate principal balance of the mortgage loans in
both Loan Groups (and properties acquired in respect thereof) remaining in the
trust has been reduced to less than 5% of the aggregate principal balance of the
mortgage loans in both Loan Groups as of the Cut-off Date. See "Pooling and
Servicing Agreement--Termination" herein and "Description of the Securities--
Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the trust as a real estate mortgage investment
conduit for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences"
herein and in the prospectus.
RATINGS
It is a condition to the issuance of the certificates that the Class A-1
Certificates and the Class A-2 Certificates be rated "AAA" by Standard & Poor's
Ratings Services, Inc., a division of The McGraw-Hill Companies, Inc. ("Standard
& Poor's") and "AAA" by Fitch, Inc. ("Fitch").
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to investors. See "Yield on the
Certificates" and "Ratings" in this prospectus supplement 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-7
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this prospectus
supplement and the prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates.
THE UNDERWRITING STANDARDS OF THE MORTGAGE LOANS ARE NOT UNDERWRITTEN TO THE
STANDARDS OF FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES ALLOCATED TO
THE OFFERED CERTIFICATEHOLDERS
The Mortgage Loan Seller's underwriting standards are primarily intended to
assess the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan and the applicant's credit standing
and ability to repay. A substantial majority of the mortgage loans were
originated under a stated income program. See "The Mortgage Pool--Underwriting
Standards" in this prospectus supplement.
THE VALUES OF THE MORTGAGED PROPERTIES USED IN THE CALCULATION OF THE
LOAN-TO-VALUE RATIOS MAY DIFFER FROM THE ACTUAL VALUE OF THE MORTGAGED
PROPERTIES AT ORIGINATION, AND MAY NOT ACCURATELY REFLECT THE ACTUAL VALUES OF
THE MORTGAGED PROPERTIES AT THE CUT-OFF DATE
The loan-to-value ratio of a mortgage loan as described in this prospectus
supplement is the ratio (expressed as a percentage) of the outstanding principal
balance of the mortgage loan as of the Cut-off Date over a value of the related
mortgaged property determined at origination. There can be no assurance that the
value of a mortgaged property used in the calculation of the loan-to- value
ratio accurately reflected the actual value of the related mortgaged property at
origination.
Approximately 19.23% of the Group I Mortgage Loans and approximately 8.11%
of the Group II Mortgage Loans, by aggregate principal balance of the related
Loan Group as of the Cut-off Date, had a current loan-to-value ratio in excess
of 80%. All of the mortgage loans with current loan-to- value ratios in excess
of 80% have primary mortgage insurance. No mortgage loan in either Loan Group
had a current loan-to-value ratio exceeding 100.00%. Mortgage loans with higher
loan-to-value ratios may present a greater risk of loss. In addition, an overall
decline in the residential real estate market, a rise in interest rates over a
period of time and the general condition of a mortgaged property, as well as
other factors, may have the effect of reducing the value of such mortgaged
property from the value at the time the mortgage loan was originated. If there
is a reduction in value of the mortgaged property, the loan-to-value ratio may
increase over what it was at the time the mortgage loan was originated. Such an
increase may reduce the likelihood of liquidation or other proceeds being
sufficient to satisfy the mortgage loan. Investors should also note that the
mortgage loans in the mortgage pool were originated between June 1971 and June
2000 and with respect to certain of the mortgage loans that were originated in
the last 7 years, the mortgage file may contain a tax card rather than an
appraisal and with respect to any mortgage loan originated more than 7 years
before the date hereof, such mortgage file may not contain an appraisal or a tax
card. There can be no assurance that the loan-to-value ratio of any mortgage
loan determined at any time after origination will be less than or equal to its
original loan-to-value ratio. See "The Mortgage Pool--General" in this
prospectus supplement.
S-8
<PAGE>
THE GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS IN CERTAIN STATES MAY PRESENT
A GREATER RISK OF LOSS
Approximately 23.41%, 18.26%, 13.25% and 11.48% of the Group I Mortgage
Loans and approximately 30.37%, 34.64%, 6.74% and 5.80% of the Group II Mortgage
Loans, in each case, by aggregate principal balance of the related Loan Group as
of the Cut-off Date, are secured by mortgaged properties located in the States
of Florida, Tennessee, Alabama and Mississippi, respectively. If the residential
real estate markets in states with high concentrations of the mortgaged
properties should experience an overall decline in property values after the
dates of origination of the mortgage loans, the rates of delinquencies,
foreclosures, bankruptcies and losses on the mortgage loans may increase over
historical levels of comparable type loans, and may increase substantially.
THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Master Servicer, the Mortgage Loan Seller, the Trustee or any of
their respective affiliates. Neither the certificates nor the underlying
mortgage loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Master Servicer, the Trustee or any of
their respective affiliates. Proceeds of the assets included in the trust will
be the sole source of payments on the Offered Certificates, and there will be no
recourse to the Depositor, the Master Servicer, the Mortgage Loan Seller, the
Trustee or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Offered
Certificates.
CROSS-COLLATERALIZATION MAY EFFECT THE PAYMENTS ON THE OFFERED CERTIFICATES
Interest and principal will generally be payable on the Class A-1
Certificates out of amounts collected in respect of the Group I Mortgage Loans
and on the Class A-2 Certificates out of amounts collected in respect of the
Group II Mortgage Loans. However, the Class A Certificates are
cross-collateralized to the extent described in this prospectus supplement.
Consequently, if the Class A-1 Certificates are undercollateralized, the
cross-collateralization of the Class A Certificates will generally result in an
entitlement of the Class A-1 Certificates to receive amounts in respect of its
Undercollateralization Amount (as defined herein under "Description of the
Certificates--Interest Distributions") and interest thereon from payments on the
Group II Mortgage Loans and if the Class A-2 Certificates are
undercollateralized, the cross-collateralization of the Class A Certificates
will generally result in an entitlement of the Class A-2 Certificates to receive
amounts in respect of its Undercollateralization Amount and interest thereon
from payments on the Group I Mortgage Loans . Losses on the Mortgage Loans in
either Loan Group will be allocated to the most subordinate then outstanding
class of Subordinate Certificates. NO AMOUNTS IN RESPECT OF ANY
UNDERCOLLATERALIZATION AMOUNT, OTHER THAN INTEREST THEREON, WILL BE PAID TO THE
CLASS ENTITLED THERETO UNTIL THE CERTIFICATE PRINCIPAL BALANCE OF THE RELATED
CLASS A CERTIFICATES HAS BEEN REDUCED TO ZERO. Investors should note that on any
Distribution Date on which the Subordinate Certificates are no longer
outstanding, any losses on the mortgage loans will be allocated to the related
Class A Certificates without regard to any entitlement of the other class.
The credit support provided to holders of the Class A Certificates by the
subordination of the Subordinate Certificates will be on an aggregate basis and
losses on the mortgage loans in either Loan Group will be allocated to the most
subordinate then outstanding class of Subordinate Certificates. Thus, it is
possible that a disproportionately high rate of losses in Loan Group I could
exhaust a disproportionately high amount, or the entire amount, of credit
support provided by the Subordinate Certificates for the benefit of the Class A
Certificates, thereby reducing or eliminating the protection available to
holders of the Class A-2 Certificates and a disproportionately high rate of
losses in Loan Group II could exhaust a disproportionately high amount, or the
entire amount, of
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<PAGE>
credit support provided by the Subordinate Certificates for the benefit of the
Class A Certificates, thereby reducing or eliminating the protection available
to holders of the Class A-1 Certificates.
Furthermore, payments on the mortgage loans in Loan Group I which would
otherwise be payable on the Subordinate Certificates may be diverted to the
Class A-2 Certificates and payments on the mortgage loans in Loan Group II which
would otherwise be payable on the Subordinate Certificates may be diverted to
the Class A-1 Certificates and the Senior Percentage and the Senior Prepayment
Percentage with respect to the Class A Certificates may be calculated on an
aggregate basis rather than with respect to each Loan Group, in each case, under
certain limited circumstances described herein.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON SUCH
CERTIFICATES
The rate and timing of distributions allocable to principal on the Offered
Certificates will depend, in general, on the rate and timing of principal
payments (including prepayments and collections upon defaults, liquidations and
repurchases) on the related mortgage loans and the allocation thereof to pay
principal on such certificates as provided herein. As is the case with mortgage
pass-through certificates generally, the Offered Certificates are subject to
substantial inherent cash-flow uncertainties because the related mortgage loans
may be prepaid at any time. The Mortgage Loans may be paid in full or in part at
any time without penalty. See "The Mortgage Pool" herein.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease. A decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the Offered Certificates at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
are declining, prepayment rates on mortgage loans tend to increase. An increase
in the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the Offered Certificates at time when
reinvestment at comparable yields may not be possible.
Prior to the distribution date in September 2005 and provided that one or
more classes of Class A Certificates are still outstanding, the Subordinate
Certificates will be entitled to receive distributions allocable to principal
based on a disproportionately small percentage (which will likely be 0%) of
principal prepayments on the mortgage loans, and the class of Class A
Certificates then entitled to distributions of principal will be entitled to
receive distributions allocable to principal based on a disproportionately large
percentage (which will likely be 100%) of principal prepayments on the related
mortgage loans. To the extent that no principal prepayments or a
disproportionately small percentage of such prepayments are distributed on the
Subordinate Certificates, the subordination afforded to the Senior Certificates
by the Subordinate Certificates, in the absence of losses allocated to the
Subordinate Certificates, will be increased.
For further information regarding the effect of principal prepayments on
the weighted average lives of the Offered Certificates, see "Yield on the
Certificates" herein, including the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at the Specified Percentages of CPR."
S-10
<PAGE>
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the Offered Certificates will depend, in general,
on:
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) on the related
mortgage loans and the allocation thereof to reduce the certificate
principal balance of such certificates, as well as other factors;
o the applicable purchase price; and
o the rate, timing and severity of realized losses on the related
mortgage loans and the allocation thereof to reduce the certificate
principal balance of such certificates, as well as the allocation to
the Offered Certificates of some types of interest shortfalls.
In general, if the Offered Certificates are purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Offered Certificates
are purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of 15% of the Constant Prepayment Rate model as described in this
prospectus supplement under "Yield on the Certificates" and weighted average
lives corresponding thereto. No representation is made that the mortgage loans
will prepay at such rate or at any other rate. The yield assumptions for the
Offered Certificates will vary as determined at the time of sale. See "Yield on
the Certificates" herein.
THE MULTIPLE CLASS STRUCTURE OF THE OFFERED CERTIFICATES CAUSES THE YIELD OF
CERTAIN CLASSES TO BE PARTICULARLY SENSITIVE TO CHANGES IN THE RATES OF
PREPAYMENT OF THE RELATED MORTGAGE LOANS AND OTHER FACTORS
Because distributions of principal will be made to the classes of Class A
Certificates according to the priorities described herein, the yield to maturity
on the Certificates of any such class will be sensitive to the rates of
prepayment on the related Mortgage Loans experienced both before and after the
commencement of principal distributions on such class. See "Yield on the
Certificates" herein.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED
Salomon Smith Barney Inc. has no obligation to make a secondary market in
the classes of Offered Certificates. There is therefore no assurance that a
secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
The secondary markets for mortgage-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
S-11
<PAGE>
USE OF PROCEEDS
The Mortgage Loan Seller will sell the Mortgage Loans to the Depositor, and
the Depositor will convey the Mortgage Loans to the Trust Fund (as defined
herein) in exchange for and concurrently with the delivery of the Certificates.
Net proceeds from the sale of the Offered Certificates, together with the
Subordinate Certificates, the Class IO Certificates, the Class PO Certificates
and the Class R Certificates, will be applied by the Depositor to the purchase
of the Mortgage Loans from the Mortgage Loan Seller. Such net proceeds, together
with such classes of Certificates, will represent the purchase price to be paid
by the Depositor to the Mortgage Loan Seller for the Mortgage Loans. The
Mortgage Loan Seller will have originated or acquired the Mortgage Loans prior
to the sale thereof to the Depositor.
THE MORTGAGE POOL
GENERAL
References to percentages of the Mortgage Loans, unless otherwise noted,
are calculated based on the aggregate principal balance of the Mortgage Loans in
the related Loan Group as of August 1, 2000 (the "Cut-off Date").
The pool of Mortgage Loans (the "Mortgage Pool") will consist of
approximately 8,594 conventional, one- to four-family, fixed-rate,
fully-amortizing and balloon payment mortgage loans (the "Mortgage Loans")
secured by first liens on residential real properties (the "Mortgaged
Properties") and having an aggregate principal balance as of the Cut-off Date of
approximately $579,896,109, after application of scheduled payments due on or
before the Cut-off Date whether or not received and subject to a permitted
variance of plus or minus 5%. The Mortgage Pool will consist of a group of
fixed-rate, first lien Mortgage Loans with principal balances as of the Cut-off
Date that conform to the requirements of Fannie Mae and Freddie Mac (the "Group
I Mortgage Loans") and a group of fixed-rate, first lien mortgage loans with
principal balances as of the Cut-off Date that may or may not conform to the
requirements of Fannie Mae and Freddie Mac (the "Group II Mortgage Loans"). The
Mortgage Loans have original terms to maturity of not greater than 30 years.
The Mortgage Loans in each Loan Group are secured by first mortgages or
deeds of trust or other similar security instruments creating first liens on
one- to four-family residential properties consisting of one- to four-family
dwelling units, individual condominium units and individual units in planned
unit developments. With respect to any Mortgage Loan secured by individual
condominium units, the Mortgage Loan may not conform to the requirements of
Fannie Mae and Freddie Mac regarding condominiums and notwithstanding the
provisions under "The Trust Funds" in the Prospectus, the Mortgage Loan Seller
will not be required to represent the percentage of condominiums occupied as
primary residences or vacation or second homes.
Primarily all of the Mortgage Loans have scheduled monthly payments due
generally on the first day of the month (with respect to each Mortgage Loan, a
"Due Date"). Each Mortgage Loan will contain a customary "due-on-sale" clause or
will be assumable by a creditworthy purchaser of the related mortgaged property.
The "Loan-to-Value Ratio" of a mortgage loan as described in this
prospectus supplement is the ratio (expressed as a percentage) of the
outstanding principal balance of the mortgage loan as of the Cut-off Date over a
value of the related mortgaged property determined at origination. There can be
no assurance that the value of a mortgaged property used in the calculation of
the Loan-to- Value Ratio accurately reflected the actual value of the related
mortgaged property at origination.
S-12
<PAGE>
Furthermore, the Group I Mortgage Loans were originated between June 1971 and
June 2000 and the Group II Mortgage Loans were originated between March 1975 and
June 2000 and with respect to certain of the Mortgage Loans in both Loan Groups
that were originated in the last 7 years, the mortgage file may contain a tax
card rather than an appraisal. In addition, with respect to any Mortgage Loan
originated more than 7 years before the date hereof, such mortgage file may not
contain an appraisal or a tax card. There can be no assurance that the
loan-to-value ratio of any mortgage loan determined at any time after
origination is less than or equal to its original loan-to- value ratio.
GROUP I MORTGAGE LOAN STATISTICS
The Group I Mortgage Loans consist of 7,983 fixed-rate mortgage loans with
an aggregate outstanding principal balance as of the Cut-off Date of
approximately $490,608,051, after application of scheduled payments due on or
before the Cut-off Date whether or not received and subject to a permitted
variance of plus or minus 5%.
The amortized remaining terms to maturity of the Group I Mortgage Loans
range from approximately one month to approximately 359 months. The weighted
average amortized remaining term to maturity of the Group I Mortgage Loans will
be approximately 241 months as of the Cut-off Date. The latest maturity date of
any Group I Mortgage Loan is July 2030.
The average principal balance of the Group I Mortgage Loans at origination
was approximately $67,163. No Group I Mortgage Loan had a principal balance at
origination of greater than approximately $252,000 or less than approximately
$3,500. The average principal balance of the Group I Mortgage Loans as of the
Cut-off Date was approximately $61,457. No Group I Mortgage Loan had a principal
balance as of the Cut-off Date of greater than approximately $251,775 or less
than approximately $622.
As of the Cut-off Date, the Group I Mortgage Loans had Mortgage Rates (as
defined herein) ranging from approximately 6.000% per annum to approximately
12.970% per annum and the weighted average Mortgage Rate of the Group I Mortgage
Loans was approximately 8.772% per annum. Approximately 58.91% of the Group I
Mortgage Loans, by aggregate principal balance of the Group I Mortgage Loans as
of the Cut-off Date, provide that the Mortgage Rate thereon can be adjusted
every 36 or 60 months at the sole option of the Mortgage Loan Seller. However,
pursuant to the terms of the Agreement, no such Mortgage Loan will be so
adjusted by the Master Servicer.
As of the Cut-off Date, the weighted average current Loan-to-Value Ratio of
the Group I Mortgage Loans was approximately 71.70%. As of the Cut-off Date, no
Group I Mortgage Loan had a current Loan-to-Value Ratio greater than
approximately 99.75% or less than approximately 0.13%. All of the Group I
Mortgage Loans with current Loan-to-Value Ratios in excess of 80% have primary
mortgage insurance. See "Description of Primary Insurance Policies--Primary
Mortgage Insurance Policies" in the Prospectus.
None of the Group I Mortgage Loans are Buydown Mortgage Loans.
Approximately 0.10% of the Group I Mortgage Loans, by aggregate principal
balance of the Group I Mortgage Loans as of the Cut-off Date, are mortgage loans
with balloon payments.
The Group I Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not be equal
to the total indicated due to rounding):
S-13
<PAGE>
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AT ORIGINATION
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE ORIGINAL ORIGINAL
RANGE ($) NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- --------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00 3,834 $ 120,310,814.00 22.44%
50,000.01 - 100,000.00 2,560 184,527,055.00 34.42
100,000.01 - 150,000.00 1,035 125,536,200.00 23.41
150,000.01 - 200,000.00 363 62,788,031.00 11.71
200,000.01 - 250,000.00 188 42,249,560.00 7.88
250,000.01 - 300,000.00 3 754,150.00 0.14
------- ------------------ ------
Total 7,983 $ 536,165,810.00 100.00%
======= ================== ======
</TABLE>
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
RANGE ($) NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
--------- --------------- ---------------------- ------------------
<S> <C> <C> <C>
0.01 - 50,000.00 4,113 $ 108,388,483.06 22.09%
50,000.01 - 100,000.00 2,411 173,611,994.88 35.39
100,000.01 - 150,000.00 961 115,533,247.34 23.55
150,000.01 - 200,000.00 347 59,669,691.40 12.16
200,000.01 - 250,000.00 150 33,152,859.54 6.76
250,000.01 - 300,000.00 1 251,775.23 0.05
----- ------------------ ------
Total 7,983 $ 490,608,051.45 100.00%
===== ================== ======
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
MORTGAGE RATE (%) NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
----------------- --------------- ---------------------- ----------------
<S> <C> <C> <C>
6.000 - 6.499 16 $ 1,170,561.44 0.24%
6.500 - 6.999 124 11,454,609.50 2.33
7.000 - 7.499 461 46,225,559.41 9.42
7.500 - 7.999 604 55,366,031.35 11.29
8.000 - 8.499 755 69,945,616.13 14.26
8.500 - 8.999 1,095 82,785,537.43 16.87
9.000 - 9.499 1,221 82,338,417.82 16.78
9.500 - 9.999 1,917 87,287,756.19 17.79
10.000 - 10.499 738 25,766,036.84 5.25
10.500 - 10.999 481 15,426,555.16 3.14
11.000 - 11.499 214 5,758,907.38 1.17
11.500 - 11.999 156 3,380,793.64 0.69
12.000 - 12.499 123 2,346,237.47 0.48
12.500 - 12.999 78 1,355,431.69 0.28
----- ------------------ ------
Total 7,983 $ 490,608,051.45 100.00%
===== ================== ======
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
CURRENT LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
NUMBER BALANCE OUTSTANDING OUTSTANDING AS OF THE
LOAN-TO-VALUE RATIO (%) OF LOANS AS OF THE CUT-OFF DATE CUT-OFF DATE
----------------------- -------- ---------------------- ------------
<S> <C> <C> <C>
Less than or equal to 25.00 531 $ 5,494,118.19 1.12%
25.01 - 30.00 166 4,272,741.86 0.87
30.01 - 35.00 180 4,592,006.60 0.94
35.01 - 40.00 238 7,504,723.04 1.53
40.01 - 45.00 294 10,808,685.88 2.20
45.01 - 50.00 353 14,458,088.44 2.95
50.01 - 55.00 473 21,397,667.53 4.36
55.01 - 60.00 500 26,112,408.19 5.32
60.01 - 65.00 511 28,644,139.85 5.84
65.01 - 70.00 788 50,674,308.02 10.33
70.01 - 75.00 941 65,932,052.70 13.44
75.01 - 80.00 2,038 156,393,584.90 31.88
80.01 - 85.00 126 10,634,030.10 2.17
85.01 - 90.00 524 50,726,523.70 10.34
90.01 - 95.00 318 32,867,935.64 6.70
95.01 - 100.00 2 95,036.81 0.02
----- ------------------ ------
Total 7,983 $ 490,608,051.45 100.00%
===== ================== ======
</TABLE>
-------------
(1) Loan-to-Value ratio of a mortgage loan as described in this prospectus
supplement is the ratio (expressed as a percentage) of the then outstanding
principal balance of the mortgage loan as of the Cut-off Date over a value
of the related mortgaged property determined at origination. There can be
no assurance that the value of a mortgaged property used in the calculation
of the Loan-to-Value ratio accurately reflected the actual value of the
related mortgaged property at origination. Furthermore, the Group I
Mortgage Loans were originated between June 1971 and June 2000 and with
respect to certain of the Group I Mortgage Loans, by aggregate principal
balance of the Group I Mortgage Loans as of the Cut-off Date, that were
originated in the last 7 years, the mortgage file may contain a tax card
rather than an appraisal and with respect to any Group I Mortgage Loan
originated more than 7 years before the date hereof, such mortgage file may
not contain an appraisal or a tax card.
<TABLE>
<CAPTION>
PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
TYPE NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
---- --------------- ---------------------- ----------------
<S> <C> <C> <C>
Single Family Detached 7,564 $ 463,266,184.52 94.43%
Townhouse 3 194,059.37 0.04
Condominium 416 27,147,807.56 5.53
--- ------------- ----
Total 7,983 $ 490,608,051.45 100.00%
===== ================== ======
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS(1)
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS
OCCUPANCY NUMBER OF LOANS AS OF THE CUT-OFF DATE OF THE CUT-OFF DATE
--------- --------------- ---------------------- -------------------
<S> <C> <C> <C>
Owner Occupied 6,900 447,168,773.27 91.15%
Non Owner Occupied 1,083 43,439,278.18 8.85
----- ----------------- ------
Total 7,983 490,608,051.45 100.00%
===== ================= ======
</TABLE>
-------------
(1) The occupancy status of a Mortgaged Property is as represented by a
mortgagor in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING AS OUTSTANDING AS OF THE
LOAN PURPOSE NUMBER OF LOANS OF THE CUT-OFF DATE CUT-OFF DATE
------------ --------------- ------------------- ------------
<S> <C> <C> <C>
Purchase 5,285 $ 333,283,258.73 67.94%
Rate-Term Refinance 1,697 102,677,607.05 20.93
Equity-out Refinance 1,001 54,647,185.67 11.14
----- ---------------- -----
Total 7,983 $ 490,608,051.45 100.00%
===== ================ ======
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
RELATING TO THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING AS OUTSTANDING AS OF THE
LOCATION NUMBER OF LOANS OF THE CUT-OFF DATE CUT-OFF DATE
-------- --------------- ------------------- ------------
<S> <C> <C> <C>
Alabama 1,114 $ 65,015,059.76 13.25%
Arizona 3 230,728.13 0.05
Arkansas 173 9,672,489.01 1.97
California 3 269,467.15 0.05
Colorado 18 2,760,962.38 0.56
District of Columbia 1 35,186.69 0.01
Florida 1,486 114,839,242.16 23.41
Georgia 267 22,312,632.83 4.55
Illinois 633 22,675,968.15 4.62
Indiana 184 13,477,873.00 2.75
Iowa 207 15,403,363.99 3.14
Kansas 4 59,859.97 0.01
Kentucky 259 11,767,930.95 2.40
Louisiana 119 6,824,897.57 1.39
Maryland 5 519,774.06 0.11
Mississippi 1,332 56,299,022.17 11.48
Missouri 252 16,960,545.38 3.46
Nebraska 23 2,705,887.73 0.55
Nevada 3 340,636.53 0.07
New Jersey 1 214,438.04 0.04
New York 1 59,555.05 0.01
North Carolina 120 11,131,051.56 2.27
Ohio 1 25,333.35 0.01
Oklahoma 15 616,978.88 0.13
Pennsylvania 2 270,218.80 0.06
South Carolina 29 2,583,636.82 0.53
South Dakota 3 138,744.40 0.03
Tennessee 1,339 89,597,062.81 18.26
Texas 324 19,109,566.81 3.90
Utah 1 53,168.36 0.01
Virginia 58 4,247,295.60 0.87
Washington 2 374,436.77 0.08
Wisconsin 1 15,036.59 0.00
----- ------------------ ------
Total 7,983 $ 490,608,051.45 100.00%
===== ================== ======
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
AMORTIZED REMAINING TERM TO MATURITY OF THE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
AMORTIZED REMAINING NUMBER OF OUTSTANDING AS OF BALANCE OUTSTANDING AS OF
TERM (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------- ----- ---------------- ----------------
<S> <C> <C> <C>
0 - 19 146 $ 657,620.78 0.13 %
20 - 39 293 2,750,454.01 0.56
40 - 59 273 3,778,310.22 0.77
60 - 79 317 6,279,626.87 1.28
80 - 99 363 8,697,644.49 1.77
100 - 119 408 11,927,135.14 2.43
120 - 139 452 18,674,577.75 3.81
140 - 159 624 30,459,255.37 6.21
160 - 179 1,461 77,136,302.38 15.72
180 - 199 147 9,032,343.96 1.84
200 - 219 245 15,925,359.39 3.25
220 - 239 669 55,214,080.14 11.25
240 - 259 79 5,628,331.15 1.15
260 - 279 149 13,054,929.42 2.66
280 - 299 1,310 127,099,793.64 25.91
300 - 319 249 24,941,609.98 5.08
320 - 339 302 28,377,343.35 5.78
340 - 359 496 50,973,333.41 10.39
----- ------------------ ------
Total 7,983 $ 490,608,051.45 100.00%
===== ================== ======
-------------
</TABLE>
(1) The Amortized Remaining Term to Maturity for the Group I Mortgage Loans
was calculated based on the minimum of (a) the monthly payments of the
Group I Mortgage Loans in effect as of the Cut-off Date and the
principal balance of the Group I Mortgage Loans as of the Cut-off Date
and (b) the stated maturity date of the Group I Mortgage Loans.
S-19
<PAGE>
GROUP II MORTGAGE LOAN STATISTICS
The Group II Mortgage Loans consist of 611 fixed-rate mortgage loans
with an aggregate outstanding principal balance as of the Cut-off Date of
approximately $89,288,057, after application of scheduled payments due on or
before the Cut-off Date whether or not received and subject to a permitted
variance of plus or minus 5%.
The amortized remaining terms to maturity of the Group II Mortgage
Loans range from approximately one month to approximately 359 months. The
weighted average remaining term to maturity of the Group II Mortgage Loans will
be approximately 258 months as of the Cut-off Date. The latest maturity date of
any Group II Mortgage Loan is July 2030.
The average principal balance of the Group II Mortgage Loans at
origination was approximately $162,897. No Group II Mortgage Loan had a
principal balance at origination of greater than approximately $2,873,432 or
less than approximately $5,500. The average principal balance of the Group II
Mortgage Loans as of the Cut-off Date was approximately $146,134. No Group II
Mortgage Loan had a principal balance as of the Cut-off Date of greater than
approximately $2,830,136 or less than approximately $210.
As of the Cut-off Date, the Group II Mortgage Loans had Mortgage Rates
(as defined herein) ranging from approximately 6.500% per annum to approximately
16.000% per annum and the weighted average Mortgage Rate of the Group II
Mortgage Loans was approximately 8.387% per annum. Approximately 42.76% of the
Group II Mortgage Loans, by aggregate principal balance of the Group II Mortgage
Loans as of the Cut-off Date, provide that the Mortgage Rate thereon can be
adjusted every 36 or 60 months at the sole option of the Mortgage Loan Seller.
However, pursuant to the terms of the Agreement, no such Mortgage Loan will be
so adjusted by the Master Servicer.
As of the Cut-off Date, the weighted average current Loan-to-Value
Ratio of the Group II Mortgage Loans was approximately 67.21%. As of the Cut-off
Date, no Group II Mortgage Loan had a current Loan-to-Value Ratio greater than
approximately 94.55% or less than approximately 1.89%. All of the Group II
Mortgage Loans with current Loan-to-Value Ratios in excess of 80% have primary
mortgage insurance. See "Description of Primary Insurance Policies--Primary
Mortgage Insurance Policies" in the Prospectus.
None of the Group II Mortgage Loans are Buydown Mortgage Loans.
The Group II Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not be equal
to the total indicated due to rounding):
S-20
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AT ORIGINATION
% OF AGGREGATE
NUMBER OF AGGREGATE ORIGINAL ORIGINAL
RANGE ($) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- ----- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00 261 $ 7,122,066.00 7.16%
50,000.01 - 100,000.00 93 6,545,588.00 6.58
100,000.01 - 150,000.00 30 3,542,489.00 3.56
150,000.01 - 200,000.00 10 1,751,170.00 1.76
200,000.01 - 250,000.00 5 1,105,550.00 1.11
250,000.01 - 300,000.00 98 27,268,618.00 27.40
300,000.01 - 350,000.00 45 14,693,900.00 14.76
350,000.01 - 400,000.00 24 9,074,540.00 9.12
400,000.01 - 450,000.00 9 3,870,400.00 3.89
450,000.01 - 500,000.00 11 5,255,300.00 5.28
500,000.01 - 550,000.00 3 1,551,430.00 1.56
550,000.01 - 600,000.00 7 4,112,600.00 4.13
600,000.01 - 650,000.00 4 2,570,000.00 2.58
650,000.01 - 700,000.00 3 2,018,750.00 2.03
700,000.01 - 750,000.00 2 1,470,000.00 1.48
750,000.01 - 800,000.00 1 800,000.00 0.80
850,000.01 - 900,000.00 1 880,000.00 0.88
950,000.01 - 1,000,000.00 2 2,000,000.00 2.01
1,000,000.01 - 1,050,000.00 1 1,024,000.00 1.03
2,850,000.01 - 2,900,000.00 1 2,873,432.00 2.89
--- ----------------- ------
Total 611 $ 99,529,833.00 100.00%
=== ================= ======
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING AS OUTSTANDING AS OF THE
RANGE ($) NUMBER OF LOANS OF THE CUT-OFF DATE CUT-OFF DATE
------------ --------------- ------------------- ------------
<S> <C> <C> <C>
0.01 - 50,000.00 266 $ 6,435,937.84 7.21%
50,000.01 - 100,000.00 94 6,566,124.73 7.35
100,000.01 - 150,000.00 39 4,725,029.23 5.29
150,000.01 - 200,000.00 17 3,136,925.50 3.51
200,000.01 - 250,000.00 27 6,132,606.66 6.87
250,000.01 - 300,000.00 81 22,185,129.26 24.85
300,000.01 - 350,000.00 30 9,631,202.49 10.79
350,000.01 - 400,000.00 20 7,573,231.76 8.48
400,000.01 - 450,000.00 11 4,778,939.71 5.35
450,000.01 - 500,000.00 7 3,406,255.26 3.81
500,000.01 - 550,000.00 2 1,026,735.90 1.15
550,000.01 - 600,000.00 6 3,460,327.04 3.88
600,000.01 - 650,000.00 5 3,141,097.63 3.52
750,000.01 - 800,000.00 3 2,372,371.77 2.66
850,000.01 - 900,000.00 1 874,917.43 0.98
1,000,000.01 - 1,050,000.00 1 1,011,089.30 1.13
2,800,000.01 - 2,850,000.00 1 2,830,135.97 3.17
--- ------------ ----
Total 611 $ 89,288,057.48 100.00%
=== =============== ======
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE PRINCIPAL % OF AGGREGATE PRINCIPAL
BALANCE OUTSTANDING AS BALANCE OUTSTANDING AS
MORTGAGE RATE (%) NUMBER OF LOANS OF THE CUT-OFF DATE OF THE CUT-OFF DATE
----------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
6.50- 6.999 21 $ 4,040,695.76 4.53%
7.00- 7.499 54 18,515,492.89 20.74
7.50- 7.999 69 19,774,196.03 22.15
8.00- 8.499 68 13,651,292.03 15.29
8.50- 8.999 78 10,400,699.74 11.65
9.00- 9.499 32 6,702,227.95 7.51
9.50- 9.999 54 8,377,143.78 9.38
10.000- 10.499 14 1,289,442.70 1.44
10.500- 10.999 5 239,571.25 0.27
11.000- 11.499 27 1,376,841.69 1.54
11.500- 11.999 25 1,563,720.98 1.75
12.000- 12.499 41 1,103,234.99 1.24
12.500- 12.999 32 694,763.85 0.78
13.000- 13.499 52 888,313.28 0.99
13.500- 13.999 25 365,954.76 0.41
14.000- 14.499 5 108,087.12 0.12
14.500- 14.999 4 153,365.51 0.17
15.000- 15.499 2 21,803.67 0.02
15.500- 15.999 2 17,208.31 0.02
16.000- 16.499 1 4,001.19 0.00
--- ----------------- -------
Total 611 $ 89,288,057.48 100.00%
=== ================= ======
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
CURRENT LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
AGGREGATE PRINCIPAL % OF AGGREGATE PRINCIPAL
NUMBER BALANCE OUTSTANDING AS BALANCE OUTSTANDING AS
LOAN-TO-VALUE RATIO (%) OF LOANS OF THE CUT-OFF DATE OF THE CUT-OFF DATE
----------------------- -------- ------------------- -------------------
<S> <C> <C> <C>
Less than or equal to 25.00 10 $ 152,407.63 0.17%
25.01- 30.00 9 345,686.64 0.39
30.01- 35.00 14 422,652.48 0.47
35.01- 40.00 11 731,469.88 0.82
40.01- 45.00 17 758,856.89 0.85
45.01- 50.00 20 2,726,734.78 3.05
50.01- 55.00 96 6,097,103.63 6.83
55.01- 60.00 35 6,611,327.55 7.40
60.01- 65.00 27 5,154,732.65 5.77
65.01- 70.00 64 10,339,236.85 11.58
70.01- 75.00 62 9,659,434.79 10.82
75.01- 80.00 64 34,599,205.57 38.75
80.01- 85.00 24 3,485,086.55 3.90
85.01- 90.00 33 4,950,641.25 5.54
90.01- 95.00 21 3,178,523.46 3.56
95.01- 100.00 4 74,956.88 0.08
--- ----------------- ------
Total 611 $ 89,288,057.48 100.00%
=== ================= ======
</TABLE>
-------------
(1) Loan-to-Value ratio of a mortgage loan as described in this prospectus
supplement is the ratio (expressed as a percentage) of the then
outstanding principal balance of the mortgage loan as of the Cut-off
Date over a value of the related mortgaged property determined at
origination. There can be no assurance that the value of a mortgaged
property used in the calculation of the Loan-to-Value ratio accurately
reflected the actual value of the related mortgaged property at
origination. Furthermore, the Group II Mortgage Loans were originated
between March 1975 and June 2000 and with respect to certain of the
Group II Mortgage Loans, by aggregate principal balance of the Group II
Mortgage Loans as of the Cut-off Date, that were originated in the last
7 years, the mortgage file may contain a tax card rather than an
appraisal and with respect to any Group II Mortgage Loan originated
more than 7 years before the date hereof, such mortgage file may not
contain an appraisal or a tax card.
<TABLE>
<CAPTION>
PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
NUMBER OF BALANCE OUTSTANDING OUTSTANDING AS OF
TYPE LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
---- ----- ---------------------- ----------------
<S> <C> <C> <C>
Single Family Detached 586 $84,244,689.17 94.35%
Condominium 25 5,043,368.31 5.65
-- ------------ ----
Total 611 $89,288,057.48 100.00%
=== ============== ======
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL % OF AGGREGATE PRINCIPAL
NUMBER BALANCE OUTSTANDING AS BALANCE OUTSTANDING AS
OCCUPANCY OF LOANS OF THE CUT-OFF DATE OF THE CUT-OFF DATE
----------------------- -------- ------------------- -------------------
<S> <C> <C> <C>
Owner Occupied 577 $ 86,903,015.13 97.33%
Non Owner Occupied 34 2,385,042.35 2.67
--- ----------------- ------
Total 611 $ 89,288,057.48 100.00%
=== ================= ======
</TABLE>
-------------
(1) The occupancy status of a Mortgaged Property is as represented by a
mortgagor in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING AS OUTSTANDING AS OF THE
LOAN PURPOSE NUMBER OF LOANS OF THE CUT-OFF DATE CUT-OFF DATE
------------ --------------- ------------------- ------------
<S> <C> <C> <C>
Purchase 312 $ 54,385,889.07 60.91%
Rate-Term Refinance 194 23,673,657.63 26.52
Equity-out Refinance 105 11,228,510.78 12.58
--- ----------------- -------
Total 611 $ 89,288,057.48 100.00%
</TABLE>
S-25
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
RELATING TO THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING AS OUTSTANDING AS OF THE
LOCATION NUMBER OF LOANS OF THE CUT-OFF DATE CUT-OFF DATE
-------- --------------- ------------------- ------------
<S> <C> <C> <C>
Alabama 84 $ 6,014,389.80 6.74%
Arkansas 12 655,606.22 0.73
Colorado 3 647,868.26 0.73
Florida 111 27,114,489.85 30.37
Georgia 11 2,883,166.84 3.23
Illinois 42 2,132,239.04 2.39
Indiana 18 2,824,418.09 3.16
Iowa 11 679,932.34 0.76
Kentucky 12 482,548.22 0.54
Louisiana 8 603,222.64 0.68
Maryland 3 467,129.31 0.52
Mississippi 89 5,178,589.92 5.80
Missouri 19 2,338,465.09 2.62
Nebraska 1 253,773.40 0.28
New Jersey 1 199,401.82 0.22
North Carolina 6 1,509,523.20 1.69
Oklahoma 3 101,344.33 0.11
South Carolina 5 710,327.12 0.80
Tennessee 154 30,927,805.37 34.64
Texas 10 1,632,929.20 1.83
Virginia 8 1,930,887.42 2.16
--- ----------------- ------
Total 611 $ 89,288,057.48 100.00%
=== ================= ======
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
AMORTIZED REMAINING TERM TO MATURITY OF THE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
AMORTIZED REMAINING NUMBER OF OUTSTANDING AS OF BALANCE OUTSTANDING AS OF
TERM (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------- ----- ---------------- ----------------
<S> <C> <C> <C>
0 - 19 9 $ 86,143.62 0.10%
20 - 39 12 94,084.88 0.11
40 - 59 32 599,755.97 0.67
60 - 79 18 1,214,062.86 1.36
80 - 99 24 2,649,527.21 2.97
100 - 119 30 1,844,852.79 2.07
120 - 139 32 5,407,437.11 6.06
140 - 159 36 2,752,896.54 3.08
160 - 179 137 10,500,923.51 11.76
180 - 199 4 131,423.62 0.15
200 - 219 8 1,532,573.21 1.72
220 - 239 35 6,818,274.42 7.64
240 - 259 9 1,512,773.71 1.69
260 - 279 14 2,948,843.11 3.30
280 - 299 80 16,545,874.80 18.53
300 - 319 37 8,034,118.11 9.00
320 - 339 33 11,624,335.21 13.02
340 - 359 61 14,990,156.80 16.79
--- ----------------- ------
Total 611 $ 89,288,057.48 100.00%
=== ================= ======
</TABLE>
-------------
(1) The Amortized Remaining Term to Maturity for the Group II Mortgage
Loans was calculated based on the minimum of (a) the monthly payments
of the Group II Mortgage Loans in effect as of the Cut-off Date and the
principal balance of the Group II Mortgage Loans as of the Cut-off Date
and (b) the stated maturity date of the Group II Mortgage Loans.
S-27
<PAGE>
UNDERWRITING STANDARDS
The information set forth below with regard to the Mortgage Loan
Seller's underwriting standards has been provided to the Depositor by the
Mortgage Loan Seller. None of the Depositor, the Trustee, the Underwriter or any
of their respective affiliates has made any independent investigation of such
information or has made or will make any representation as to the accuracy or
completeness of such information.
The Mortgage Loans will be acquired by the Depositor from the Mortgage
Loan Seller. Approximately 68.42% of the Mortgage Loans (the "Program Mortgage
Loans"), by aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, were originated or acquired by the Mortgage Loan Seller generally in
accordance with the underwriting criteria described below. The remaining
approximately 31.58% of the Mortgage Loans (the "Non-Program Mortgage Loans"),
by aggregate principal balance of the Mortgage Loan Seller as of the Cut-off
Date, were acquired by the Mortgage Loans in connection with the acquisition of
various entities by the Mortgage Loan Seller and its affiliates and were not
subject to the underwriting criteria described below.
The Mortgage Loan Seller's stated income program was used to underwrite
the Program Mortgage Loans. The stated income program is generally limited to
borrowers who have demonstrated an established ability and willingness to repay
the mortgage loan in a timely fashion. An examination of the loan files for the
Program Mortgage Loans will disclose very little credit documentation about the
borrowers. The Mortgage Loan Seller relies on credit scoring and places special
emphasis on the value of the collateral. Interest rates and loan-to-value ratios
are based on predictive credit scores and then adjusted for risk using a
documented and proven credit scoring system. Lower credit scores receive
increasingly higher rates and lower loan-to value ratios. These underwriting
standards generally allow loan-to-value ratios at origination of up to 95% for
mortgage loans with original principal balances of up to $400,000, up to 80% for
mortgage loans with original principal balances of up to $500,000 and up to 60%
for mortgage loans with principal balances of greater than $500,000. Any
mortgage loans originated with a loan-to-value ratio at origination in excess of
80% are required to have primary mortgage insurance; provided, however, that
such mortgage loans may no longer have primary mortgage insurance if the current
loan-to-value ratio on such mortgage loan is less than 80%. Notwithstanding the
foregoing, the maximum loan-to-value ratio permitted for applicants with a
credit score of 579 and below is 55%. In addition, applicants with a credit
score of 610 and below are not eligible for purchase loans or a refinance loan
on non- owner occupied or investment mortgaged property, unless the borrower has
equity in the mortgaged property of at least 45%. From time to time, exceptions
to the Mortgage Loan Seller's underwriting policies may be made. Such exceptions
may be made on a loan-by-loan basis at the discretion of the Mortgage Loan
Seller. Exceptions may be made only after consideration of certain mitigating
factors such as borrower capacity, liquidity, employment and residential
stability and local economic conditions.
The Non-Program Mortgage Loans may have been underwritten under a
stated documentation, limited documentation or full documentation program. As of
the Cut-off Date, approximately 85% of the Mortgage Loans, by aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, have credit
scores obtained in the last 3 months and the weighted average credit score with
respect to the Mortgage Loans is 697.34. As of the Cut-off Date, approximately
46.61% of the Non-Program Mortgage Loans, by aggregate principal balance of the
Non-Program Mortgage Loans as of the Cut-off Date, have credit scores obtained
in the last 3 months and the weighted average credit score with respect to such
Non-Program Mortgage Loans is 715. With respect to approximately 46.61% of the
Non-Program Mortgage Loans, by aggregate principal balance of the Non-Program
Mortgage Loans as of the Cut-off Date, for which there is no credit score, the
weighted average seasoning is approximately 60 months, with approximately 5.83%
of such Non-Program Mortgage Loans, by aggregate principal balance of the
Non-Program Mortgage
S-28
<PAGE>
Loans as of the Cut-off Date, having seasoning of 24 months or less. As of the
Cut-off Date, approximately 18.08% of the Non-Program Mortgage Loans, by
aggregate principal balance of the Non-Program Mortgage Loans as of the Cut-off
Date, have seasoning of 24 months or less and the weighted average seasoning of
the Non-Program Mortgage Loans is approximately 56 months.
Credit scores are obtained from credit reports provided by various
credit reporting organizations, each of which may employ differing computer
models and methodologies. The credit score is designed to assess a borrower's
credit history at a single point in time, using objective information currently
on file for the borrower at a particular credit reporting organization.
Information utilized to create a credit score may include, among other things,
payment history, delinquencies on accounts, levels of outstanding indebtedness,
length of credit history, types of credit and bankruptcy experience. However, a
credit score purports only to be a measurement of the relative degree of risk a
borrower represents to a lender (i.e., a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score). In addition, it should be noted that credit score were
developed to indicate a level of default probability over a two-year period,
which does not correspond to the life of a mortgage loan. Furthermore, credit
scores assess only the borrower's past credit history and do not take into
consideration the specific characteristics of the related mortgage loan. There
can be no assurance that the credit score of the mortgagors will be an accurate
predictor of the likelihood of repayment of the related mortgage loans.
The Mortgage Loan Seller will make representations and warranties as of
the Closing Date with respect to the Mortgage Loans, and will be obligated to
repurchase any such Mortgage Loan in respect of which a material breach of the
representations and warranties it has made has occurred (other than those
breaches which have been cured). For a discussion of the representations and
warranties made and the repurchase obligation, see "Mortgage Loan
Program--Representations by or on behalf of the Mortgage Loan Seller;
Repurchases" in the Prospectus.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
beginning of business on the Cut- off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise if the Depositor deems such removal
necessary or desirable, and may be prepaid at any time. A limited number of
other mortgage loans may be included in the Mortgage Pool prior to the issuance
of the Certificates unless including such mortgage loans would materially alter
the characteristics of the Mortgage Pool as described herein. The Depositor
believes that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON CERTAIN CLASSES OF OFFERED CERTIFICATES
The effective yield to holders of the Offered Certificates of each
class will be less than the yields otherwise produced by their respective
Pass-Through Rates (as defined herein) and purchase prices because (i) on the
first Distribution Date one month's interest is payable thereon even though 54
or more days will have elapsed from the date on which interest begins to accrue
thereon, (ii) on each succeeding Distribution Date the interest payable thereon
is the interest accrued during the month preceding the month of such
Distribution Date, which ends 24 or more days prior to such
S-29
<PAGE>
Distribution Date and (iii) during each Interest Accrual Period (other than the
first Interest Accrual Period), interest accrues on a Certificate Principal
Balance that is less than the Certificate Principal Balance of such class
actually outstanding for the first 24 or more days of such Interest Accrual
Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment made after
the Due Date in the month in which such prepayment is made. In addition, the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), to any Mortgage Loan will adversely affect, for an
indeterminate period of time, the ability of the Master Servicer to collect full
amounts of interest on such Mortgage Loan. See "Certain Legal Aspects of the
Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the
Prospectus. The Master Servicer is obligated to pay from its own funds interest
shortfalls attributable to full and partial prepayments by the mortgagors on the
Mortgage Loans, but only to the extent of its aggregate Servicing Fee for the
related Due Period (each as defined herein). See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" herein.
Accordingly, the effect of (i) any principal prepayments on the related Mortgage
Loans, to the extent that any resulting shortfall (a "Prepayment Interest
Shortfall") exceeds any payments made by the Master Servicer from its own funds
("Compensating Interest") or (ii) any shortfalls resulting from the application
of the Relief Act, will be to reduce the aggregate amount of interest collected
that is available for distribution to holders of the Offered Certificates. Any
such shortfalls will be allocated among the Offered Certificates as provided
herein under "Description of the Certificates--Interest Distributions."
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on each class of Offered Certificates,
the aggregate amount of distributions on each class of Offered Certificates and
the yield to maturity of each class of Offered Certificates will be related to
the rate and timing of payments of principal on the related Mortgage Loans. The
rate of principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of such Mortgage Loans and by the rate of principal
prepayments thereon (including for this purpose payments resulting from
refinancings, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases, whether optional or required, by the Depositor,
the Mortgage Loan Seller or the Master Servicer, as the case may be). The
Mortgage Loans may be prepaid by the mortgagors at any time without penalty. All
of the Mortgage Loans contain due-on-sale clauses or will be assumable by a
creditworthy purchaser of the related mortgaged property. As described under
"Description of the Certificates--Principal Distributions on the Senior
Certificates" herein, prior to the Distribution Date in September 2005, all
principal prepayments on the Mortgage Loans will be allocated to the related
Class A Certificates, if such Certificates are still outstanding, and to the
Class PO Certificates. Thereafter, as further described herein, during certain
periods, subject to certain loss and delinquency criteria described herein, the
Senior Prepayment Percentage (as defined herein) may continue to be
disproportionately large (relative to the related Senior Percentage) and the
percentage of principal prepayments payable to the Subordinate Certificates may
continue to be disproportionately small.
Prepayments, liquidations and repurchases of the Mortgage Loans in a
Loan Group will result in distributions on the related Class A Certificates in
respect of principal that otherwise would be distributed over the remaining
terms of the Mortgage Loans. See "Maturity and Prepayment Considerations" in the
Prospectus. Since the rates of payment of principal on the Mortgage Loans will
depend on future events and a variety of factors (as described more fully herein
and in the
S-30
<PAGE>
Prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations"), no assurance can be given as to such rate or the rate of
principal prepayments. The extent to which the yield to maturity of either class
of Offered Certificates may vary from the anticipated yield will depend upon the
degree to which they are purchased at a discount or premium and the degree to
which the timing of payments thereon is sensitive to prepayments on the related
Mortgage Loans in the related Loan Group. Further, an investor should consider,
in the case of any such Certificate purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Mortgage Loans in the
related Loan Group could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any such Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. In general, the earlier a prepayment of
principal on the Mortgage Loans, the greater will be the effect on the
investor's yield to maturity. As a result, the effect on an investor's yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of such Certificates would not be fully offset by a subsequent like reduction
(or increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate. Moreover, the timing of prepayments on the related Mortgage Loans
may significantly affect the actual yield to maturity on the related class of
Offered Certificates, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans
is influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Certificates. See
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
Prospectus.
Default rates generally are higher for mortgage loans used to refinance
an existing mortgage loan. In the event of a mortgagor's default on a Mortgage
Loan, there can be no assurance that recourse beyond the specific Mortgaged
Property pledged as security for repayment will be available.
MARKET INTEREST RATE AND SUBORDINATION YIELD CONSIDERATIONS
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through
Rates on the Offered Certificates are fixed, such rates will not change in
response to changes in market interest rates. Accordingly, if mortgage market
interest rates or market yields for securities similar to such certificates were
to rise, the market value of such certificates may decline.
As described under "Description of the Certificates--Allocation of
Losses; Subordination", amounts otherwise distributable to holders of the
Subordinate Certificates may be made available to protect the holders of the
Senior Certificates against interruptions in distributions due to certain
mortgagor delinquencies, to the extent not covered by P&I Advances (as defined
herein), and amounts otherwise distributable to holders of the Subordinate
Certificates with a higher numerical class designation may be made available to
protect the holders of Subordinate Certificates with a lower numerical class
designation against such interruptions in distributions. Such delinquencies
S-31
<PAGE>
may affect the yield to investors on such classes of the Subordinate
Certificates, and, even if subsequently cured, will affect the timing of the
receipt of distributions by the holders of such classes of Subordinate
Certificates. Furthermore, the Class PO Certificates will share in the principal
portion of Realized Losses on the Mortgage Loans only to the extent that they
are incurred with respect to Class PO Mortgage Loans (as defined herein) and
only to the extent of the related Class PO Percentage (as defined herein); thus,
after the Subordinate Certificates are retired or in the case of Excess Losses
(as defined herein), the Senior Certificates (other than the Class PO
Certificates) may be affected to a greater extent by losses on the related Class
IO Mortgage Loans than losses on the related Class PO Mortgage Loans.
In addition, a larger than expected rate of delinquencies or losses
will affect the rate of principal payments on each class of the Subordinate
Certificates if it delays the scheduled reduction of the Senior Prepayment
Percentage, triggers an increase of the Senior Prepayment Percentage to 100% or
triggers a lockout of one or more classes of Subordinate Certificates from
distributions of certain portions of the Subordinate Principal Distribution
Amount. See "Description of the Certificates--Principal Distributions on the
Senior Certificates" and "--Principal Distributions on the Subordinate
Certificates" herein.
Except in the limited circumstances described herein, principal
distributions on the Class A-1 Certificates relate to principal payments on the
Group I Mortgage Loans and principal distributions on the Class A-2 Certificates
relate to principal payments on the Group II Mortgage Loans.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Offered Certificates of each class will be influenced by the rate at which
principal on the related Mortgage Loans is paid, which may be in the form of
scheduled payments or prepayments (including prepayments of principal by the
mortgagor as well as amounts received by virtue of condemnation, insurance or
foreclosure with respect to such Mortgage Loans), and the timing thereof.
The timing of commencement of principal distributions to each class of
the Class A Certificates and the weighted average life of each such class will
be affected by the rates of prepayment on the Mortgage Loans in the related Loan
Group experienced both before and after the commencement of principal
distributions on each such class.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
assumes a prepayment rate for the Mortgage Loans of 15% of the Constant
Prepayment Rate model ("CPR"). CPR assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual rate
or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume 15% CPR or any other CPR percentage
is to assume that the stated percentage of the outstanding principal balance of
the pool is prepaid over the course of a year. No representation is made that
the Mortgage Loans will prepay at 15% CPR or any other rate.
The table following the next paragraph indicates the percentage of the
initial Certificate Principal Balance of the indicated classes of Certificates
that would be outstanding after each of the dates shown at various percentages
of CPR and the corresponding weighted average lives of such classes of
Certificates. The table is based on the following assumptions (the "Modeling
Assumptions"): (i) the Mortgage Pool consists of ten assumed Mortgage Loans in
Loan Group I and nine assumed Mortgage Loans in Loan Group II with the
characteristics set forth in the table below, (ii) distributions on such
Certificates are received, in cash, on the 25th day of each month,
S-32
<PAGE>
commencing in September 2000, (iii) the Mortgage Loans prepay at the percentages
of CPR indicated, (iv) no defaults or delinquencies occur in the payment by
mortgagors of principal and interest on the Mortgage Loans and no shortfalls due
to the application of the Relief Act are incurred, (v) none of the Depositor,
the Mortgage Loan Seller, the Master Servicer or any other person purchases from
the Trust Fund any Mortgage Loan pursuant to any obligation or option under the
Agreement (as defined herein), except as indicated in footnote (2) in the table,
(vi) scheduled monthly payments on the Mortgage Loans are received on the first
day of each month commencing in September 2000, 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 August 2000, and include 30 days' interest
thereon, (viii) the scheduled monthly payment for each Mortgage Loan is
calculated based on its principal balance, Mortgage Rate and remaining term to
maturity such that the Mortgage Loan will amortize in amounts sufficient to
repay the remaining principal balance of such Mortgage Loan by its remaining
term to maturity, (ix) the Certificates are purchased on August 30, 2000 and (x)
the Servicing Fee Rate is equal to 0.25% per annum.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
AMORTIZED
PRINCIPAL BALANCE ORIGINAL TERM REMAINING TERM
AS OF THE MORTGAGE TO MATURITY TO MATURITY
CUT-OFF DATE RATE (MONTHS) (MONTHS)
---------------------- ------------------- ---------------- -------------
<S> <C> <C> <C> <C>
Loan Group I
1 $ 321,984.15 7.080833300% 118 82
2 $ 7,177,192.67 10.162245349% 106 81
3 $ 8,332,962.27 7.186294090% 175 136
4 $126,799,698.81 9.709240038% 174 153
5 $ 1,954,731.37 7.064832602% 221 160
6 $ 78,130,588.01 9.237251377% 237 219
7 $ 42,418,190.17 7.849952733% 298 288
8 $ 71,734,883.07 8.905822034% 298 288
9 $101,060,770.31 7.496315727% 352 311
10 $ 52,677,050.62 8.970567997% 352 296
Loan Group II
11 $ 796,869.18 11.649769507% 99 92
12 $ 10,448,445.38 7.183759914% 175 115
13 $ 11,814,546.59 10.404834906% 174 166
14 $ 603,289.21 6.801732166% 193 113
15 $ 6,302,837.50 9.365603935% 237 220
16 $ 6,281,359.20 7.974648057% 299 290
17 $ 8,886,868.98 9.034725294% 299 292
18 $ 32,831,082.61 7.513285191% 352 312
19 $ 11,322,758.83 8.955660750% 352 321
</TABLE>
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table below. Any
such discrepancy may have an effect upon the percentages of the initial
Certificate Principal Balances outstanding (and the weighted average lives) of
the classes of Certificates set forth in the table. In addition, to the extent
that the actual Mortgage Loans included in the Mortgage Pool have
characteristics that differ from those assumed in preparing the table below,
such classes of Certificates may mature earlier or later than indicated by the
table below. Based on the foregoing assumptions, the table below indicates the
weighted average life of each class of the Class A Certificates and sets forth
the percentage of the initial Certificate Principal Balance of each such class
of Certificates that would be outstanding after
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<PAGE>
each of the dates shown, at various percentages of CPR. Neither the prepayment
model used herein nor any other prepayment model or assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans included in the Mortgage Pool. Variations in the prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease the percentages of initial 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 CPR.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF CPR
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
DISTRIBUTION DATE 0% 10% 15% 20% 25% 0% 10% 15% 20% 25%
----------------- -- --- --- --- --- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date.......... 100 100 100 100 100 100 100 100 100 100
August, 2001.......... 98 87 82 77 72 98 87 82 77 72
August, 2002.......... 95 76 67 59 51 95 76 67 59 51
August, 2003.......... 92 66 55 45 36 92 66 55 45 36
August, 2004.......... 89 57 44 34 25 89 57 44 34 25
August, 2005.......... 85 49 35 25 17 86 49 36 25 17
August, 2006.......... 81 41 28 19 11 82 42 28 19 11
August, 2007.......... 77 35 23 14 8 78 36 23 14 8
August, 2008.......... 73 30 18 10 5 74 30 18 10 5
August, 2009.......... 68 25 14 7 3 70 25 14 8 3
August, 2010.......... 63 21 11 6 2 65 21 11 6 2
August, 2011.......... 58 17 9 4 2 62 18 9 4 2
August, 2012.......... 52 14 7 3 1 58 15 7 3 1
August, 2013.......... 46 11 5 2 1 54 13 6 2 1
August, 2014.......... 43 9 4 2 1 49 11 5 2 1
August, 2015.......... 39 8 3 1 0 46 9 4 1 0
August, 2016.......... 35 6 2 1 0 43 7 3 1 0
August, 2017.......... 31 5 2 1 0 39 6 2 1 0
August, 2018.......... 27 4 1 0 0 35 5 2 1 0
August, 2019.......... 23 3 1 0 0 31 4 1 0 0
August, 2020.......... 20 2 1 0 0 28 3 1 0 0
August, 2021.......... 16 2 0 0 0 24 2 1 0 0
August, 2022.......... 13 1 0 0 0 19 2 0 0 0
August, 2023.......... 8 1 0 0 0 15 1 0 0 0
August, 2024.......... 4 0 0 0 0 9 1 0 0 0
August, 2025.......... 1 0 0 0 0 5 0 0 0 0
August, 2026.......... 0 0 0 0 0 1 0 0 0 0
August, 2027.......... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life
in Years(1)........... 12.91 6.21 4.64 3.59 2.86 14.00 6.40 4.71 3.62 2.87
Weighted Average
Life
in Years(2)........... 12.88 6.08 4.49 3.48 2.78 13.89 6.20 4.53 3.49 2.78
</TABLE>
-----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans. See "Pooling and
Servicing Agreement--Termination" herein.
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<PAGE>
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of CPR indicated in the table above or to any other level,
or that the actual weighted average life of any class of Certificates will
conform to any of the weighted average life set forth in the table above.
Furthermore, the information contained in the table with respect to the weighted
average life of each specified class of Certificates is not necessarily
indicative of the weighted average life of each such class that might be
calculated or projected under different or varying prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any percentage of CPR 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.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Union Planters Mortgage Pass-Through Certificates, Series 2000-UP1 will
consist of eleven classes of certificates (collectively, the "Certificates"),
designated as: (i) the Class A-1 Certificates and the Class A-2 Certificates
(together, the "Offered Certificates"); (ii) the Class IO Certificates; (iii)
the Class PO Certificates (the Class A Certificates, the Class IO Certificates
and the Class PO Certificates, collectively, the "Senior Certificates"); (iv)
the Class B-1 Certificates, the Class B-2 Certificates and the Class B-3
Certificates, the Class B-4 Certificates, the Class B-5 Certificates and the
Class B-6 Certificates (collectively, the "Subordinate Certificates") and (v)
the Class R Certificates (the "Residual Certificates"). Only the Offered
Certificates are offered hereby.
Distributions on the Offered Certificates will be made on the 25th day of
each month, or, if such day is not a business day, on the next succeeding
business day, beginning in September 2000 (each, a "Distribution Date").
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the "Trust Fund") consisting primarily of
conventional, one- to four-family, fixed-rate, fully- amortizing and balloon
payment, first lien mortgage loans having original terms to maturity of not
greater than 30 years (the "Mortgage Loans"), divided into the Group I Mortgage
Loans and the Group II Mortgage Loans. Except in the limited circumstances
described herein under "--Cross- Collateralization," the Class A-1 Certificates
will be entitled to payments received on the Group I Mortgage Loans and the
Class A-2 Certificates will be entitled to payments received on the Group II
Mortgage Loans.
Each class of the Offered Certificates will have the approximate initial
Certificate Principal Balance and Pass-Through Rate as described under "Summary
of Prospectus Supplement--Offered Certificates" and "--Pass-Through Rates"
below.
The Subordinate Certificates have in the aggregate an initial Certificate
Principal Balance of approximately $27,545,110 and such Certificates each have a
fixed Pass-Through Rate for each Distribution Date of 8.00% per annum. The Class
IO Certificates will receive a portion of the interest payments ONLY from the
Mortgage Loans in both Loan Groups that have Net Mortgage Rates higher than
8.00% per annum. The Class PO Certificates will receive a portion of the
principal payments ONLY on the Mortgage Loans in both Loan Groups that have Net
Mortgage Rates lower than 8.00% per annum. The Subordinate Certificates, the
Class IO Certificates, the Class PO Certificates and
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<PAGE>
the Residual Certificates will be delivered by the Depositor to the Mortgage
Loan Seller or its designee on the Closing Date as part of the consideration for
the Mortgage Loans.
The Offered Certificates will be issued, maintained and transferred on the
book-entry records of the Depository Trust Company ("DTC") and its Participants
(as defined herein) in minimum denominations of $100,000 and integral multiples
of $1.00 in excess thereof (such classes, for so long as they are in such
book-entry form, the "Book-Entry Certificates"). The Class IO Certificates, the
Class PO Certificates, the Subordinate Certificates and the Residual
Certificates will be issued in fully registered, certificated form.
The Book-Entry Certificates will initially be represented by one or more
global certificates registered in the name of a nominee of DTC (together with
any successor clearing agency selected by the Depositor, the "Clearing Agency"),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be Cede & Co. ("Cede"). No person acquiring an interest in any
class of the Book-Entry Certificates (a "Certificate Owner") will be entitled to
receive a certificate representing such person's interest, except as set forth
below under "--Definitive Certificates". Unless and until a certificate is
issued in fully registered certificated form (a "Definitive Certificate") under
the limited circumstances described herein, all references to actions by
Certificateholders with respect to the Book-Entry Certificates shall refer to
actions taken by DTC upon instructions from its Participants (as defined below),
and all references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Book-Entry Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of the Book-Entry Certificates, for distribution to Certificate Owners in
accordance with DTC procedures. See "--Registration of the Book-Entry
Certificates" and "--Definitive Certificates" herein.
No service charge will be imposed for any registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge imposed in connection therewith.
All distributions to holders of the Certificates, other than the final
distribution on any class of Certificates, will be made on each Distribution
Date by or on behalf of the Trustee to the persons in whose names such
Certificates are registered at the close of business on each Record Date. The
"Record Date" for each Distribution Date will be the close of business on the
last business day of the month preceding the month in which such Distribution
Date occurs. Such distributions will be made either (a) by check mailed to the
address of each such Certificateholder as it appears in the Certificate Register
or (b) upon written request to the Trustee at least five business days prior to
the relevant Record Date by any holder of Certificates, by wire transfer in
immediately available funds to the account of such Certificateholder specified
in the request. The final distribution on any class of Certificates will be made
in like manner, but only upon presentment and surrender of such Certificates at
the corporate trust office of the Trustee or such other location specified in
the notice to Certificateholders of such final distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including the
Underwriter), banks, trust companies and clearing corporations. Indirect
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<PAGE>
access to the DTC system is also available to others such as banks, brokers,
dealers, and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the Book-Entry Certificates from the Trustee
through DTC and DTC Participants. The Trustee will forward payments to DTC in
same day funds and DTC will forward such payments to Participants in next day
funds settled through the New York Clearing House. Each Participant will be
responsible for disbursing such payments to Indirect Participants or to
Certificate Owners. Unless and until Definitive Certificates are issued, it is
anticipated that the only Certificateholder of the Book-Entry Certificates will
be Cede, as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders, as such term is used in the Agreement and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess Definitive Certificates, the Rules provide a mechanism by which
Certificate Owners through their Participants and Indirect Participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the absence of physical certificates for the
Book- Entry Certificates. In addition, under a book-entry format, Certificate
Owners may experience delays in their receipt of payments since distribution
will be made by the Trustee to Cede, as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC account the Book-Entry Certificates are credited.
Clearstream Banking, formerly known as Cedelbank SA ("Clearstream") or the
Euroclear Operator (as defined herein), as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Clearstream Participant (as defined herein) or Euroclear Participant
(as defined herein) only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary (as defined herein) to
effect such actions on its behalf through DTC. Additionally, under the Rules,
DTC will take such actions with respect to specified Voting Rights only at the
direction of and on behalf of Participants whose holdings of Book-Entry
Certificates evidence such specified Voting Rights. DTC may take conflicting
actions with respect to Voting Rights, to the extent that Participants whose
holdings of Book-Entry Certificates evidence such Voting Rights, authorize
divergent action.
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
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<PAGE>
provision of services, including telecommunication and electrical utility
service providers, among others.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
The Depositor, the Master Servicer, the Trustee and the Mortgage Loan
Seller will have no liability for any action taken by DTC or its nominee or
Clearstream or the Euroclear System ("Euroclear"), 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, 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 $100,000, except that any beneficial
ownership represented by a Book- Entry Certificate in an amount less than
$100,000 immediately prior to the issuance of a Definitive Certificate shall be
issued in a minimum denomination equal to the amount of such beneficial
ownership.
BOOK-ENTRY FACILITIES
Certificate Owners may elect to hold their interests in the Book-Entry
Certificates through DTC in the United States or through Clearstream or
Euroclear in Europe, if they are participants of such systems, or indirectly
through organizations which are participants in such systems. The Book-Entry
Certificates of each class will be issued in one or more certificates which
equal the aggregate Certificate Principal Balance of such class and will
initially be registered in the name of Cede, the nominee of DTC. Clearstream and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Clearstream's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank N.A. will act as depositary for Clearstream and The Chase Manhattan
Bank will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries").
S-39
<PAGE>
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants or Clearstream Participants on such business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or Euroclear Participant to a Participant will
be received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Federal Income Tax
Consequences--REMICS--Backup Withholding with Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" in the Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
Clearstream is incorporated under the laws of Luxembourg as a professional
depository. Clearstream holds securities for its participating organizations
("Clearstream Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream Participants through electronic
book-entry changes in accounts of Clearstream Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to its Clearstream Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Monetary Institute. Clearstream Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Clearstream is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
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<PAGE>
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Federal Income Tax
Consequences--REMICS--Backup Withholding with Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" in the Prospectus.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time. See Annex I hereto.
PASS-THROUGH RATES
The pass-through rate (the "Pass-Through Rate") on each class of the Class
A Certificates and on each class of the Subordinate Certificates will be a fixed
rate equal to 8.00% per annum. The Class PO Certificates do not bear interest
and therefore do not have a Pass-Through Rate.
The Pass-Through Rate applicable to the calculation of the Interest
Distribution Amount for the Class IO Certificates for any Distribution Date is
equal to the weighted average of the Stripped Interest Rates on the Mortgage
Loans in both Loan Groups in effect during the calendar month prior to the month
in which such Distribution Date occurs. Mortgage Loans having Stripped Interest
Rates greater than or equal to zero are referred to herein as "Class IO Mortgage
Loans." The "Stripped Interest Rate" on each Mortgage Loan is equal to the
greater of (i) the Net Mortgage Rate minus 8.00% per annum and (ii) 0% per
annum. The "Net Mortgage Rate" on any Mortgage Loan is equal to the then
applicable Mortgage Rate thereon minus the Servicing Fee Rate. The "Mortgage
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<PAGE>
Rate" on each Mortgage Loan is the per annum rate of interest specified in the
related mortgage note. The Servicing Fee Rate on each Mortgage Loan is equal to
0.25% per annum.
DISTRIBUTIONS--GENERAL
The "Due Period" with respect to any Distribution Date commences on the
second day of the month immediately preceding the month in which such
Distribution Date occurs and ends on the first day of the month in which such
Distribution Date occurs. The "Prepayment Period" with respect to any
Distribution Date is the calendar month immediately preceding the month in which
such Distribution Date occurs. The "Determination Date" with respect to any
Distribution Date is on the 15th day of the month in which such Distribution
Date occurs or, if such day is not a business day, on the immediately succeeding
business day.
INTEREST DISTRIBUTIONS
Distributions on each Distribution Date will be made, in the case of the
Class A-1 Certificates, to the extent of the Group I Available Distribution
Amount for such Distribution Date and in the case of the Class A-2 Certificates,
to the extent of the Group II Available Distribution Amount. The "Group I
Available Distribution Amount" for any Distribution Date will include scheduled
payments on the Group I Mortgage Loans due during the related Due Period and
received on or prior to the related Determination Date, prepayments and other
unscheduled collections received on the Group I Mortgage Loans during the
related Prepayment Period and any P&I Advances made by the Master Servicer for
such Distribution Date, net of fees payable to the Master Servicer and the
Trustee and certain amounts reimbursable to the Master Servicer, the Depositor
and the Trustee as provided in the Agreement. The "Group II Available
Distribution Amount" for any Distribution Date will include scheduled payments
on the Group II Mortgage Loans due during the related Due Period and received on
or prior to the related Determination Date, prepayments and other unscheduled
collections received on the Group II Mortgage Loans during the related
Prepayment Period and any P&I Advances made by the Master Servicer for such
Distribution Date, net of fees payable to the Master Servicer and the Trustee
and certain amounts reimbursable to the Master Servicer, the Depositor and the
Trustee as provided in the Agreement. The Group I Available Distribution Amount
and the Group II Available Distribution Amount, are together referred to herein
as the "Available Distribution Amount."
Notwithstanding the foregoing, if one Loan Group is undercollateralized (an
"Undercollateralized Loan Group") because the aggregate principal balance of the
Non-Class PO Percentage of the Scheduled Principal Balances of the Mortgage
Loans in such Loan Group is less than the aggregate Certificate Principal
Balance of the Class A Certificates representing an interest in such Loan Group
and the other Loan Group is overcollateralized (an "Overcollateralized Loan
Group") because the aggregate principal balance of the Non-Class PO Percentage
of the Scheduled Principal Balances of the Mortgage Loans in such Loan Group
exceeds the aggregate Certificate Principal Balance of the Class A Certificates
representing an interest in such Loan Group, the Available Distribution Amount
for the Class A Certificates relating to the Undercollateralized Loan Group will
be increased to pay interest on the Undercollateralization Amount and the
Available Distribution Amount for the Class A Certificates relating to the
Overcollateralized Loan Group will be decreased by the amount of interest paid
on the Undercollateralization Amount. The "Undercollateralization Amount" with
respect to any Distribution Date is the excess of the Certificate Principal
Balance of the related class of Class A Certificates over the Non-Class PO
Percentages of the Scheduled Principal Balances of the related Mortgage Loans.
Distributions in respect of interest will be made on each Distribution Date
(i) to the holders of the Senior Certificates (other than the Class PO
Certificates), in an aggregate amount equal to the
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Senior Interest Distribution Amount and (ii) to the holders of the Subordinate
Certificates, in an aggregate amount equal to the Subordinate Interest
Distribution Amount, to the extent of the portion of the Group I Available
Distribution Amount and the Group II Available Distribution Amount remaining
after the distribution on such date of the Senior Interest Distribution Amount,
the Class PO Principal Distribution Amount and the Senior Principal Distribution
Amount (and, in the case of distributions in respect of interest to the most
subordinate class of Subordinate Certificates outstanding on such Distribution
Date, remaining after the distribution on such date of the Class PO Carryforward
Amount (as defined herein), if any, for such Distribution Date). The "Senior
Interest Distribution Amount" on each Distribution Date is equal to the
aggregate of the Interest Distribution Amounts for such Distribution Date on all
of the Senior Certificates (other than the Class PO Certificates). The
"Subordinate Interest Distribution Amount" on each Distribution Date is equal to
the aggregate of the Interest Distribution Amounts for such Distribution Date on
all of the Subordinate Certificates.
The "Interest Distribution Amount" for the Certificates of any class, other
than the Class PO Certificates which are not entitled to distributions of
interest, on any Distribution Date is equal to interest accrued during the
related Interest Accrual Period on the Certificate Principal Balance or Notional
Amount, as applicable, of such Certificates immediately prior to such
Distribution Date at the then applicable Pass-Through Rate for such class, plus,
in the case of each such class, any such amount remaining unpaid from previous
Distribution Dates, and reduced (to not less than zero), in the case of each
such class, by the allocable share for such class of Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the Master
Servicer and shortfalls resulting from the application of the Relief Act. Any
Prepayment Interest Shortfalls for any Distribution Date to the extent not
covered by Compensating Interest paid by the Master Servicer and any shortfalls
resulting from the application of the Relief Act on the Mortgage Loans will be
allocated among the holders of all the Certificates (other than the Class PO
Certificates) on a PRO RATA basis based on the respective amounts of interest
accrued on such Certificates for such Distribution Date.
The "Interest Accrual Period" for any Distribution Date and for each class
of Certificates (other than the Class PO Certificates) is the one-month period
preceding the month in which such Distribution Date occurs, and all
distributions of interest on the Certificates will be based on a 360- day year
consisting of twelve 30-day months. Except as otherwise described herein, on any
Distribution Date, distributions of the Interest Distribution Amount for a class
of Certificates will be made in respect of such class of Certificates, to the
extent provided herein, on a PARI PASSU basis, based on the Certificate
Principal Balance or Notional Amount, as applicable, of the Certificates of each
such class.
The "Certificate Principal Balance" of a Certificate (other than a Class IO
Certificate) outstanding at any time represents the then maximum amount that the
holder thereof is thereafter entitled to receive as distributions allocable to
principal from the cash flow on the related Mortgage Loans and the other assets
in the Trust Fund. The Certificate Principal Balance of any class of
Certificates (other than the Class IO Certificates) as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) without duplication of
amounts described in clause (a) above, any reductions in the Certificate
Principal Balance thereof deemed to have occurred in connection with allocations
thereto of (i) Realized Losses on the related Mortgage Loans and (ii)
Extraordinary Trust Fund Expenses, in either case as described below.
Notwithstanding the foregoing, the Certificate Principal Balance of the class of
Subordinate Certificates outstanding with the highest numerical designation at
any given time shall not be greater than the excess, if any, of (a) the then
aggregate principal balance of the Mortgage Loans over (b) the then aggregate
Certificate Principal Balances of all other classes of Certificates.
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The "Notional Amount" of the Class IO Certificates as of any date of
determination is equal to the aggregate principal balance of the then
outstanding Mortgage Loans. Reference to the Notional Amounts of the Class IO
Certificates is solely for convenience in certain calculations and does not
represent the right to receive any distributions allocable to principal.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Holders of the Class PO Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Group I Available
Distribution Amount and the Group II Available Distribution Amount remaining
after the Senior Interest Distribution Amount is distributed, a distribution
allocable to principal equal to the Class PO Principal Distribution Amount. The
"Class PO Principal Distribution Amount" is equal to the sum of the following:
(i) the related Class PO Percentage of the principal portion of all
scheduled monthly payments on each Class PO Mortgage Loan due during the
related Due Period, whether or not received;
(ii) the related Class PO Percentage of the principal portion of all
proceeds received in respect of the repurchase of a Class PO Mortgage Loan
(or, in the case of a substitution, certain amounts received representing a
principal adjustment) as required by the Agreement during the related
Prepayment Period;
(iii) the related Class PO Percentage of the principal portion of all
other unscheduled collections on each Class PO Mortgage Loan (other than
amounts described in clause (iv) hereof), including full and partial
prepayments, insurance proceeds and liquidation proceeds, received during
the related Prepayment Period, to the extent applied as recoveries of
principal;
(iv) the related Class PO Percentage of the outstanding Stated
Principal Balance of each Class PO Mortgage Loan as to which a final
liquidation occurred during the related Prepayment Period (net of the
principal portion of any related Realized Loss allocated to the Class PO
Certificates) to the extent of the principal portion of all liquidation
proceeds with respect to such Class PO Mortgage Loan; and
(v) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to the four preceding clauses) that remain
undistributed, to the extent that any such amounts are not attributable to
Realized Losses that were allocated to the Subordinate Certificates.
In addition to the foregoing distribution allocable to principal on each
Distribution Date, following the payment of the Interest Distribution Amount on
the Subordinate Certificates of each class, other than the most subordinate
class of Subordinate Certificates for such Distribution Date, holders of the
Class PO Certificates will be entitled to receive as a distribution allocable to
principal an amount equal to the Class PO Carry Forward Amount in respect of
each Class PO Mortgage Loan as to which a final liquidation has occurred until
the Class PO Carry Forward Amount in respect of such Class PO Mortgage Loan
equals zero. With respect to each Class PO Mortgage Loan, the "Class PO Carry
Forward Amount" is equal to the amount, if any, by which the Class PO Percentage
of the outstanding principal balance of such Class PO Mortgage Loan exceeds the
amount distributed in respect of such Class PO Mortgage Loan pursuant to clause
(iv) of the definition of Class PO Principal Distribution Amount.
A "Class PO Mortgage Loan" is any Mortgage Loan with a Net Mortgage Rate
less than 8.00% per annum. With respect to each Class PO Mortgage Loan, the
"Class PO Percentage" will equal a fraction, expressed as a percentage (but not
less than 0%), the numerator of which will equal 8.00%
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minus the applicable Net Mortgage Rate and the denominator of which will equal
8.00%. The Class PO Percentage will be 0% with respect to each Class IO Mortgage
Loan. As of the Cut-off Date, the weighted average Net Mortgage Rate of the
Class PO Mortgage Loans is approximately 7.302% per annum. With respect to each
Mortgage Loan, the "Non-Class PO Percentage" will equal 100% minus the related
Class PO Percentage. The Non-Class PO Percentage will be 100% with respect to
the Class IO Mortgage Loans.
Holders of the Class A-1 Certificates and the Class A-2 Certificates will
be entitled to receive on each Distribution Date, to the extent of the portion
of the Group I Available Distribution Amount and the Group II Available
Distribution Amount, as applicable, remaining after distribution of the Senior
Interest Distribution Amount and the Class PO Principal Distribution Amount on
such date, distributions allocable to principal until the Certificate Principal
Balance thereof has been reduced to zero, an amount equal to the sum of the
following:
(i) the product of (A) the then applicable related Senior Percentage
and (B) the aggregate of the following amounts:
(1) the related Non-Class PO Percentage of the principal
portion of all scheduled monthly payments on the related Mortgage Loans
due during the related Due Period, whether or not received;
(2) the related Non-Class PO Percentage of the principal
portion of all proceeds received in respect of the repurchase of a
related Mortgage Loan (or, in the case of a substitution, certain
amounts received representing a principal adjustment) as required by
the Agreement during the related Prepayment Period; and
(3) the related Non-Class PO Percentage of the principal
portion of all other unscheduled collections (other than amounts
described in clauses (ii) and (iii) hereof), including insurance
proceeds and liquidation proceeds relating to the related mortgage
loans, received during the related Prepayment Period, to the extent
applied as recoveries of principal;
(ii) the product of (A) the then applicable related Senior Prepayment
Percentage and (B) the related Non-Class PO Percentage of the aggregate of
all full and partial principal prepayments received on the related Mortgage
Loans during the related Prepayment Period;
(iii) with respect to the net liquidation proceeds received and
allocable to principal of any related Mortgage Loan that was finally
liquidated during the related Prepayment Period, the least of (a) the
product of the then applicable related Senior Prepayment Percentage and the
related Non-Class PO Percentage of such net liquidation proceeds, (b) the
product of the then applicable related Senior Percentage and the related
Non-Class PO Percentage of the Scheduled Principal Balance of such Mortgage
Loan at the time of liquidation and (c) the principal portion of all
amounts collected in connection with such final liquidation to the extent
not distributed to the Class PO Certificates; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to the three preceding clauses) that remain
undistributed, to the extent that any such amounts are not attributable to
Realized Losses that were allocated to the Subordinate Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of the
related Available Distribution Amount remaining after the Senior Interest
Distribution Amount and the Class PO
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Principal Distribution Amount are distributed and (b) the sum of the amounts
described in clauses (i) through (iv) above is hereinafter referred to as the
related "Senior Principal Distribution Amount."
Holders of the Class IO Certificates are not entitled to receive any
distributions allocable to principal.
Except as described in the next paragraph, the "Senior Percentage," which
initially will equal approximately 95.12% with respect to the Class A-1
Certificates and 94.98% with respect to the Class A-2 Certificates, and will in
no event exceed 100%, will be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Class A Certificates immediately prior to such Distribution Date divided by the
aggregate of the Non-Class PO Percentages of the Scheduled Principal Balances of
the related Mortgage Loans immediately prior to such Distribution Date. The
"Subordinate Percentage" is the weighted average of the Group I Subordinate
Percentage and the Group II Subordinate Percentage (each a "Group Subordinate
Percentage"), weighted based on the aggregate principal balance of the Non-Class
PO Percentages of the Scheduled Principal Balances of the related Mortgage Loans
immediately prior to such Distribution Date. The "Group I Subordinate
Percentage" is 100% minus the Senior Percentage with respect to the Class A-1
Certificates. The "Group II Subordinate Percentage" is 100% minus the Senior
Percentage with respect to the Class A-2 Certificates.
Notwithstanding the foregoing, on any Distribution Date on which there is
an Undercollateralized Loan Group and an Overcollateralized Loan Group (a
"Cross-Collateralization Date"), the Senior Percentage for the Class A
Certificates relating to the Overcollaterized Loan Group will equal the sum of
the Certificate Principal Balance of the related Class A Certificates
immediately prior to such Distribution Date plus the Overcollateralization
Amount divided by the aggregate of the Non-Class PO Percentage of the Scheduled
Principal Balances of the related Mortgage Loans immediately prior to such
Distribution Date and therefore the Senior Principal Distribution Amount for the
Overcollaterized Loan Group may be increased. Any such increase will be paid to
the Class A Certificates in the Overcollateralized Loan Group until the balance
of such Class A Certificates has been reduced to zero. On the Distribution Date
on which the balance of the Class A Certificates in the Overcollateralized Loan
Group has been reduced to zero, amounts in respect of the Overcollateralization
Amount will be diverted to the Class A Certificates for the Undercollateralized
Loan Group until the Overcollateralization Amount has been reduced to zero. The
"Overcollateralization Amount" with respect to any Distribution Date is the
excess of the Non-Class PO Percentages of the Scheduled Principal Balances of
the related Mortgage Loans over the Certificate Principal Balances of the
related class of Class A Certificates and the Subordinate Certificates. On any
Distribution Date after the reduction of the Certificate Principal Balance of
either the Class A-1 Certificates or the Class A-2 Certificates to zero, the
Senior Percentage for the remaining class of Class A Certificates will be a
percentage equal to the Certificate Principal Balance of the remaining Class A
Certificates immediately prior to such Distribution Date divided by the
aggregate of the Non-Class PO Percentages of the Scheduled Principal Balances of
the Mortgage Loans in both Loan Groups immediately prior to such Distribution
Date and the Subordinate Percentage on such a Distribution Date will be 100%
minus the Senior Percentage.
The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date
(after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received), reduced by (x) the principal portion of
all monthly payments due on or before the date of determination, whether or not
received, (y) all amounts allocable to unscheduled principal that were received
prior to the calendar month in which the date of determination occurs, and (z)
any Bankruptcy Loss occurring out of a Deficient Valuation (as defined herein)
that was incurred prior to the calendar month in which the date of determination
occurs.
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Except as described below, the related "Senior Prepayment Percentage" with
respect to the Class A Certificates and any Distribution Date occurring prior to
the Distribution Date in September 2005 will equal 100%. Except as described
below, the related Senior Prepayment Percentage for the Class A Certificates and
any Distribution Date occurring after the first five years will be as follows:
for any Distribution Date during the sixth year after the Closing Date, the
related Senior Percentage for such Distribution Date plus 70% of the related
Group Subordinate Percentage for such Distribution Date; for any Distribution
Date during the seventh year after the Closing Date, the related Senior
Percentage for such Distribution Date plus 60% of the related Group Subordinate
Percentage for such Distribution Date; for any Distribution Date during the
eighth year after the Closing Date, the related Senior Percentage for such
Distribution Date plus 40% of the related Group Subordinate Percentage for such
Distribution Date; for any Distribution Date during the ninth year after the
Closing Date, the related Senior Percentage for such Distribution Date plus 20%
of the related Group Subordinate Percentage for such Distribution Date; and for
any Distribution Date thereafter, the related Senior Percentage for such
Distribution Date (unless on any Distribution Date the related Senior Percentage
exceeds the initial related Senior Percentage, in which case the related Senior
Prepayment Percentage for such Distribution Date will equal 100%). Any scheduled
reduction to the related Senior Prepayment Percentage described above shall not
be made as of any Distribution Date unless (i) the outstanding principal balance
of the Mortgage Loans delinquent 60 days or more (including real estate owned
and Mortgage Loans in foreclosure) averaged over the last six months does not
exceed 50% of the sum of the then current Certificate Principal Balances of the
Subordinate Certificates and (ii) Realized Losses on the Mortgage Loans to date
are less than the then applicable Trigger Amount. The "Trigger Amount" for any
Distribution Date occurring after the first five years will be as follows: for
any Distribution Date during the sixth year after the Closing Date, 30% of the
initial sum of the Certificate Principal Balances of the Subordinate
Certificates; for any Distribution Date during the seventh year after the
Closing Date, 35% of the initial sum of the Certificate Principal Balances of
the Subordinate Certificates; for any Distribution Date during the eighth year
after the Closing Date, 40% of the initial sum of the Certificate Principal
Balances of the Subordinate Certificates; for any Distribution Date during the
ninth year after the Closing Date, 45% of the initial sum of the Certificate
Principal Balances of the Subordinate Certificates; and for any Distribution
Date during the tenth year (or any year thereafter) after the Closing Date, 50%
of the initial sum of the Certificate Principal Balances of the Subordinate
Certificates. Notwithstanding the foregoing, upon reduction of the Certificate
Principal Balances of the Class A-1 Certificates and the Class A-2 Certificates
to zero, the Senior Prepayment Percentage will equal 0%. Furthermore, on any
Distribution Date after the reduction of the Certificate Principal Balance of
either the Class A-1 Certificates or the Class A-2 Certificates to zero, the
Senior Percentage for the remaining class of Class A Certificates will be a
percentage equal to the Certificate Principal Balance of the remaining Class A
Certificates immediately prior to such Distribution Date divided by the
aggregate of the Non- Class PO Percentages of the Scheduled Principal Balances
of the Mortgage Loans in both Loan Groups immediately prior to such Distribution
Date and the Subordinate Percentage on such a Distribution Date will be 100%
minus the Senior Percentage. In addition, on any Distribution Date on which the
Senior Percentage for either class of Class A Certificates exceeds the initial
Senior Percentage for such class, the Senior Prepayment Percentage for each
class of Class A Certificates shall be 100%.
The disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Class
A Certificates while, in the absence of Realized Losses, increasing the
respective percentage interest in the principal balance of the Mortgage Loans
evidenced by the Subordinate Certificates. Increasing the respective percentage
interest of the Subordinate Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
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For purposes of all principal distributions described above and for
calculating the related Senior Percentage, the related Group Subordinate
Percentage and the related Senior Prepayment Percentage, the applicable
Certificate Principal Balance for any Distribution Date shall be determined
prior to the allocation of losses on the Mortgage Loans in, and Extraordinary
Trust Fund Expenses attributable to, the Mortgage Pool to be made on such
Distribution Date as described under "--Allocation of Losses; Subordination"
below.
CROSS-COLLATERALIZATION
On each Distribution Date after the reduction of the Certificate Principal
Balance of either the Class A-1 Certificates or the Class A-2 Certificates to
zero, the Senior Percentage and the Senior Prepayment Percentage with respect to
the remaining class of Class A Certificates will be calculated on an aggregate
basis as set forth above. In addition, on any Cross-Collateralization Date, the
Class A Certificates relating to the Undercollateralized Loan Group will have an
entitlement to receive amounts in respect of its Undercollateralization Amount
on the Distribution Date on which the balance of the Class A Certificates in the
Overcollateralized Loan Group have been reduced to zero. On any Distribution
Date on which the Subordinate Certificates are no longer outstanding, any losses
on the Mortgage Loans will be allocated to the related Class A Certificates.
PRINCIPAL DISTRIBUTION ON THE SUBORDINATE CERTIFICATES
Holders of each class of Subordinate Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Group I
Available Distribution Amount and the Group II Available Distribution Amount
remaining after distribution on such date of the Senior Interest Distribution
Amount, the Class PO Principal Distribution Amount, the Senior Principal
Distribution Amount, the Subordinate Interest Distribution Amount and any Class
PO Carry Forward Amount, distributions allocable to principal in reduction of
the Certificate Principal Balances thereof equal to the sum of the following:
(i) the product of (A) the then applicable related Class B Percentage
and (B) the aggregate of the following amounts:
(1) the related Non-Class PO Percentage of the principal
portion of all scheduled monthly payments on the Mortgage Loans due
during the related Due Period, whether or not received;
(2) the related Non-Class PO Percentage of the principal
portion of all proceeds received in respect of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
received representing a principal adjustment) as required by the
Agreement during the related Prepayment Period; and
(3) the related Non-Class PO Percentage of the principal
portion of all other unscheduled collections (other than amounts
described in clauses (ii) and (iii) hereof), including insurance
proceeds and liquidation proceeds relating to the mortgage loans,
received during the related Prepayment Period, to the extent applied as
recoveries of principal;
(ii) the portion allocable to such class of Subordinate Certificates,
as described below, of the product of (A) the then applicable Subordinate
Prepayment Percentage and (B) the Non-Class PO Percentage of the aggregate
of all full and partial principal prepayments received during the related
Prepayment Period;
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(iii) the portion allocable to such class of Subordinate Certificates,
as described below, of net liquidation proceeds received and allocable to
principal of any Mortgage Loan that was finally liquidated during the
related Prepayment Period, to the extent of the amount, if any, by which
such net liquidation proceeds exceed the amount distributable to the Class
A Certificates and the Class PO Certificates in respect of such net
liquidation proceeds pursuant to clause (iii) of the definition of Senior
Principal Distribution Amount and clause (iv) of the definition of Class PO
Principal Distribution Amount; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to the three preceding clauses) that remain
undistributed, to the extent that any such amounts are not attributable to
Realized Losses that were allocated to classes of the Subordinate
Certificates bearing a higher numerical class designation.
With respect to any Distribution Date, the lesser of (a) the balance of the
Available Distribution Amount remaining after the distribution of the Senior
Interest Distribution Amount, the Class PO Principal Distribution Amount, the
Senior Principal Distribution Amount, the Subordinate Interest Distribution
Amount and the Class PO Carry Forward Amount and (b) the aggregate of the sum
for each class of Subordinate Certificates of the amounts described in clauses
(i) through (iv) of the immediately preceding paragraph is hereinafter referred
to as the "Subordinate Principal Distribution Amount."
The Class B Percentage for the Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates, the Class B-4 Certificates, the Class
B-5 Certificates and the Class B-6 Certificates (with respect to each such
class, the related "Class B Percentage") initially will equal approximately
2.58%, approximately 0.93%, approximately 0.62%, approximately 0.31%,
approximately 0.21% and approximately 0.26%, respectively, and will in no event
exceed 100%, and will be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Subordinate Certificates immediately prior to such Distribution Date divided by
the aggregate Non-Class PO Percentage of the Scheduled Principal Balance of the
Mortgage Loans immediately prior to such Distribution Date. The "Subordinate
Prepayment Percentage" for any Distribution Date will equal the weighted average
of (i) 100% minus the Senior Prepayment Percentage with respect to the Class A-1
Certificates for such Distribution Date, weighted based on the aggregate
principal balance of the Non-Class PO Percentage of the Scheduled Principal
Balance of the Group I Mortgage Loans and (ii) 100% minus the Senior Prepayment
Percentage with respect to the Class A-2 Certificates for such Distribution
Date, weighted based on the aggregate principal balance of the Non-Class PO
Percentage of the Scheduled Principal Balance Group II Mortgage Loans.
On any Distribution Date, the portion of (a) all principal prepayments on
the Mortgage Loans and (b) net liquidation proceeds allocable to principal of
any Mortgage Loan that was finally liquidated during the related Prepayment
Period, in each case not included in the Senior Principal Distribution Amount
and the Class PO Principal Distribution Amount will be allocated on a PRO RATA
basis among the following classes of Subordinate Certificates in proportion to
the respective outstanding Certificate Principal Balances thereof: (i) the Class
B-1 Certificates; (ii) the Class B-2 Certificates, if on such Distribution Date
the aggregate percentage interest in the Trust Fund evidenced by the Class B-2
Certificates, the Class B-3 Certificates, the Class B-4 Certificates, the Class
B-5 Certificates and the Class B-6 Certificates equals or exceeds 2.25% before
giving effect to distributions on such Distribution Date; (iii) the Class B-3
Certificates, if on such Distribution Date the aggregate percentage interest in
the Trust Fund evidenced by the Class B-3 Certificates, the Class B-4
Certificates, the Class B-5 Certificates and the Class B-6 Certificates equals
or exceeds 1.35% before giving effect to distributions on such Distribution
Date; (iv) the Class B-4 Certificates, if on such Distribution Date the
aggregate percentage interest in the Trust Fund evidenced by the Class B-4
Certificates, the Class B-5 Certificates and the Class B-6 Certificates equals
or exceeds
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0.75% before giving effect to distributions on such Distribution Date; (v) the
Class B-5 Certificates, if on such Distribution Date the aggregate percentage
interest in the Trust Fund evidenced by the Class B-5 Certificates and the Class
B-6 Certificates equals or exceeds 0.45% before giving effect to distributions
on such Distribution Date; and (vi) the Class B-6 Certificates, if on such
Distribution Date the aggregate percentage interest in the Trust Fund evidenced
by the Class B-6 Certificates equals or exceeds 0.25% before giving effect to
distributions on such Distribution Date.
For purposes of all principal distributions described above and for
calculating the related Group Subordinate Percentage, the applicable Certificate
Principal Balance for any Distribution Date shall be determined prior to the
allocation of losses on the Mortgage Loans in, and Extraordinary Trust Fund
Expenses attributable to, the Mortgage Pool to be made on such Distribution Date
as described under "--Allocation of Losses; Subordination" below.
As stated above under "--Principal Distributions on the Senior
Certificates", for each Distribution Date occurring prior to the Distribution
Date in September 2005, the Senior Prepayment Percentage will equal 100%, and
until the earlier of such date and the date on which all of the Class A
Certificates are paid in full, no distributions based on principal prepayments
or, in certain instances, net liquidation proceeds, on the Mortgage Loans will
be distributed to the Subordinate Certificates. Thereafter, unless the
Certificate Principal Balance of each class of the Class A Certificates has been
reduced to zero, the Subordinate Prepayment Percentage may continue to be 0% or
otherwise be disproportionately small relative to the related Group Subordinate
Percentage. See "--Principal Distributions on the Senior Certificates" herein.
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Certificate Account that are not included in the related
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of all payments of principal and interest, net of the Servicing
Fee, that were due during the related Due Period on the Mortgage Loans and that
were delinquent on the related Determination Date, plus certain amounts
representing assumed payments not covered by any current net income on the
Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure (any
such advance, a "P&I Advance").
P&I Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such P&I Advances is to
maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
P&I Advances with respect to reductions in the amount of the monthly payments on
the Mortgage Loans due to bankruptcy proceedings or the application of the
Relief Act.
All P&I Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by the
Master Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Master Servicer out of
any funds in the Certificate Account prior to the distributions on the
Certificates. In the event the Master Servicer fails in its obligation to make
any advance that it is required to make, the Trustee will be obligated to make
any such advance, to the extent required in the Agreement.
The Agreement provides that the Master Servicer may enter into a facility
with any person which provides that such person (an "Advancing Person") may fund
P&I Advances and/or servicing
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advances, although no such facility shall reduce or otherwise affect the Master
Servicer's obligation to fund such P&I Advances and/or servicing advances. Any
P&I Advances and/or servicing advances made by an Advancing Person will be
reimbursed to the Advancing Person in the same manner as reimbursements would be
made to the Master Servicer.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed- in-lieu of foreclosure or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer for P&I Advances, Servicing Fees and Servicing Advances) towards
interest and principal owing on the Mortgage Loan. Such amount of loss realized
and any Special Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary
Losses are referred to herein as "Realized Losses".
In the event that Realized Losses are incurred that are covered by
subordination, such losses will be allocated to the most subordinate class of
Certificates then outstanding. The priorities for distribution of cash flows
described herein, in certain circumstances, may result in cash flow shortfalls
to any class of Subordinate Certificates even if it is not the most subordinate
class of Certificates then outstanding; however, the interest portion of any
such shortfall would be distributable as unpaid Interest Distribution Amount on
future Distribution Dates as cash flows allow, to the extent of available funds,
and the principal portion of any such shortfall would not result in a reduction
of the Certificate Principal Balance of such class. In such event, the
percentage interest represented by such class would increase relative to the
respective Certificate Principal Balances of the more subordinate classes of
Certificates.
Realized Losses (other than Excess Losses) will be allocated on any
Distribution Date as follows: first, to the Class B-6 Certificates; second, to
the Class B-5 Certificates; third, to the Class B-4 Certificates; fourth, to the
Class B-3 Certificates; fifth, to the Class B-2 Certificates; and sixth, to the
Class B-1 Certificates, in each case until the Certificate Principal Balance of
such class has been reduced to zero. Thereafter, upon the reduction of the
Certificate Principal Balances of the Subordinate Certificates to zero, if such
Realized Losses are on a Class IO Mortgage Loan such Realized Losses will be
allocated on any Distribution Date to the Class A-1 Certificates, if the
Realized Loss is on a Group I Mortgage Loan and to the Class A-2 Certificates,
if the Realized Loss is on a Group II Mortgage Loan. If such Realized Losses are
on a Class PO Mortgage Loan such Realized Losses (i) will be allocated to the
Class PO Certificates in an amount equal to the related Class PO Percentage of
such Realized Losses and (ii) the remainder of such Realized Losses will be
allocated on any Distribution Date to the Class A-1 Certificates, if the
Realized Loss occurs on a Group I Mortgage Loan and to the Class A-2
Certificates, if the Realized Loss occurs with respect to a Group I Mortgage
Loan.
Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess Fraud Losses
and Extraordinary Losses (collectively, "Excess Losses") on a Class IO Mortgage
Loan will be allocated on any Distribution Date by allocating the related Senior
Percentage of such Excess Loss to the related Senior Certificates and the
related Group Subordinate Percentage of such Excess Loss to the Subordinate
Certificates. Excess Losses on a Class PO Mortgage Loan (i) will be allocated to
the Class PO Certificates in an amount equal to the related Class PO Percentage
of such Excess Losses and (ii) the remainder of such Excess Losses will be
allocated on any Distribution Date to the by allocating the related Senior
Percentage of such Excess Loss to the related Senior
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Certificates and the related Group Subordinate Percentage of such Excess Loss to
the Subordinate Certificates.
Once Realized Losses are allocated to a class of Certificates, the
Certificate Principal Balance of such class will be permanently reduced by the
amounts so allocated. The amounts of Realized Losses allocated to the
Certificates will no longer accrue interest nor will these amounts be reinstated
thereafter.
Extraordinary Trust Fund Expenses will be allocated on any Distribution
Date as follows: first, to the Class B-6 Certificates; second, to the Class B-5
Certificates; third, to the Class B-4 Certificates; fourth, to the Class B-3
Certificates; fifth, to the Class B-2 Certificates; and sixth, to the Class B-1
Certificates, in each case until the Certificate Principal Balance of such class
has been reduced to zero. Thereafter, such Extraordinary Trust Fund Expenses
will be allocated on any Distribution Date among the Senior Certificates (other
than the Class IO Certificates) on a PRO RATA basis.
Any allocation of a Realized Loss or Extraordinary Trust Fund Expense to a
Certificate will be made by reducing the Certificate Principal Balance thereof
by the amount so allocated as of the Distribution Date in the month following
the calendar month in which such Realized Loss or Extraordinary Trust Fund
Expense was incurred.
An allocation of a Realized Loss or an Extraordinary Trust Fund Expense on
a PRO RATA basis among two or more classes of Certificates means an allocation
to each such class of Certificates on the basis of its then outstanding
Certificate Principal Balance prior to giving effect to distributions to be made
on such Distribution Date.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount, the Class PO Principal Distribution Amount and the
Senior Principal Distribution Amount, on each Distribution Date, holders of
Senior Certificates have a right to distributions of the Group I Available
Distribution Amount and the Group II Available Distribution Amount that is prior
to the rights of the holders of the Subordinate Certificates, to the extent
necessary to satisfy the Senior Interest Distribution Amount, the Class PO
Principal Distribution Amount and the Senior Principal Distribution Amount.
The application of the related Senior Prepayment Percentage (when it
exceeds the related Senior Percentage) to determine the related Senior Principal
Distribution Amount will accelerate the amortization of the related Class A
Certificates relative to the actual amortization of the related Mortgage Loans.
The Class PO Certificates will not receive more than the Class PO Percentage of
any unscheduled payment relating to a Class PO Mortgage Loan. To the extent that
the related Class A Certificates are amortized faster than the related Mortgage
Loans, in the absence of offsetting Realized Losses allocated to the Subordinate
Certificates, the percentage interest evidenced by such Class A Certificates in
the Trust Fund will be decreased (with a corresponding increase in the
percentage interest in the Trust Fund evidenced by the Subordinate
Certificates), thereby increasing, relative to their respective Certificate
Principal Balances, the subordination afforded the Senior Certificates by the
Subordinate Certificates.
The holders of the Class A Certificates will generally not be entitled to
any additional payments with respect to Realized Losses from amounts otherwise
distributable on any classes of Certificates subordinate thereto. Accordingly,
the subordination provided to the Class A Certificates with respect to Realized
Losses allocated on any Distribution Date will be effected primarily by
increasing the percentage of future distributions of principal of the remaining
Mortgage Loans.
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Because the Class PO Percentage of the Class PO Mortgage Loans will not
change over time, the protection from losses provided to the Class PO
Certificates by the Subordinate Certificates is limited to the prior right of
the Class PO Certificates to receive distributions in respect of principal as
described herein. Furthermore, principal losses on the Mortgage Loans that are
not covered by subordination will be allocated to the Class PO Certificates only
to the extent they occur on a Class PO Mortgage Loan and only to the extent of
the related Class PO Percentage of such losses. Such allocation of principal
losses on the Class PO Mortgage Loans may result in such losses being allocated
to the Non-Class PO Certificates in an amount that is greater or less than would
have been the case had such losses been allocated in proportion to the
Certificate Principal Balance of the Class PO Certificates. Thus, the Class A
Certificates will bear the entire amount of losses that are not allocated to the
Subordinate Certificates, other than the amount allocable to the Class PO
Certificates.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses on the Mortgage Loans (the "Special Hazard
Amount") through subordination shall initially be equal to approximately
$5,798,961. As of any date of determination following the Cut-off Date, the
Special Hazard Amount shall equal the amount set forth in the preceding sentence
less the sum of (A) any amounts allocated through subordination in respect of
Special Hazard Losses and (B) the Adjustment Amount. The Adjustment Amount will
be equal to an amount calculated pursuant to the terms of the Agreement.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses on the Mortgage Loans (the "Fraud Loss Amount")
through subordination shall initially be equal to approximately $5,798,961. As
of any date of determination after the Cut-off Date, the Fraud Loss Amount shall
equal (X) prior to the third anniversary of the Cut-off Date an amount equal to
1.00% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date minus the aggregate amounts allocated through subordination with respect to
Fraud Losses on the Mortgage Loans up to such date of determination and (Y) from
the third to the fifth anniversary of the Cut-off Date, an amount equal to (1)
the lesser of (a) the Fraud Loss Amount as of the most recent anniversary of the
Cut-off Date and (b) 0.50% of the aggregate principal balance of the Mortgage
Loans as of the most recent anniversary of the Cut-off Date minus (2) the
aggregate amounts allocated through subordination with respect to Fraud Losses
on the Mortgage Loans since the most recent anniversary of the Cut-off Date up
to such date of determination. On and after the fifth anniversary of the Cut-off
Date, the Fraud Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses on the Mortgage Loans (the "Bankruptcy
Amount") through subordination will initially be equal to approximately
$166,512. As of any date of determination, the Bankruptcy Amount shall equal the
initial Bankruptcy Amount less the sum of any amounts allocated through
subordination for such losses up to such date of determination.
The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may be
reduced or modified upon confirmation from Standard & Poor's and Fitch that such
reduction or modification will not adversely affect the then-current ratings
assigned to the Offered Certificates rated thereby. Such a reduction or
modification may adversely affect the coverage provided by the subordination
with respect to Special Hazard Losses, Fraud Losses and Bankruptcy Losses.
A "Special Hazard Loss" is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgaged
Property (except as a result of the exclusions described below), which is not
insured against under the standard hazard insurance policy or blanket policy
insuring against hazard losses which the Master Servicer is required to cause to
be
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maintained on each Mortgage Loan. See "Description of Primary Insurance
Policies--Primary Hazard Insurance Policies" in the Prospectus.
Special Hazard Losses will not include any loss resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet
or dry rot; inherent vice or latent defect; animals, birds, vermin,
insects;
(ii) smog, smoke, vapor, liquid or dust discharge from
agricultural or industrial operations; pollution; contamination;
(iii) settling, subsidence, cracking, shrinkage, bulging or
expansion of pavements, foundations, walls, floors, roofs or ceilings;
(iv) errors in design, faulty workmanship or faulty materials,
unless the collapse of the property or a part thereof ensues and then only
for the ensuing loss.
Special Hazard Losses also will not include any loss (each, an "Extraordinary
Loss") resulting from:
(i) nuclear or chemical reaction or nuclear radiation or
radioactive or chemical contamination, all whether controlled or
uncontrolled and whether such loss be direct or indirect, proximate or
remote or be in whole or in part caused by, contributed to or aggravated by
a peril covered by the definition of the term "Special Hazard Loss";
(ii) hostile or warlike action in time of peace or war,
including action in hindering, combating or defending against an actual,
impending or expected attack by any government or sovereign power, de jure
or de facto, or by any authority maintaining or using military, naval or
air forces, or by military, naval or air forces, or by an agent of any such
government, power, authority or forces;
(iii) any weapon of war employing atomic fission or radioactive
forces whether in time of peace or war; and
(iv) insurrection, rebellion, revolution, civil war, usurped
power or action taken by governmental authority in hindering, combating or
defending against such an occurrence, seizure or destruction under
quarantine or customs regulations, confiscation by order of any government
or public authority, or risks of contraband or illegal transactions or
trade.
"Excess Special Hazard Losses" are Special Hazard Losses in excess of the
Special Hazard Amount.
A "Fraud Loss" is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan, including a loss by reason of the denial of coverage
under any related Primary Mortgage Insurance Policy because of such fraud,
dishonesty or misrepresentation.
"Excess Fraud Losses" are Fraud Losses in excess of the Fraud Loss Amount.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code.
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A "Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
"Excess Bankruptcy Losses" are Bankruptcy Losses in excess of the
Bankruptcy Amount.
An "Extraordinary Trust Fund Expense" is an unanticipated, non-Mortgage
Loan specific Trust Fund expense, including certain reimbursements to the Master
Servicer or Depositor described in the Prospectus under "Description of the
Certificates--Certain Matters Regarding the Master Servicer and the Depositor",
certain reimbursements to the Trustee described under "Pooling and Servicing
Agreement--The Trustee" in this prospectus supplement and certain taxes that may
be payable by the Trust Fund as described herein under "Federal Income Tax
Consequences.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will generate (based on information received from the Master
Servicer) the monthly statements discussed in the Prospectus under "Description
of the Certificates--Reports to Certificateholders", which will include
information as to the outstanding principal balance of the Offered Certificates
and the status of the applicable form of credit enhancement. The Trustee will
make each monthly statement (and, at its option, any additional files containing
the same information in an alternative format) available each month via the
Trustee's internet website and its fax-on-demand service. The Trustee's fax-on-
demand service may be accessed by calling (301) 815-6610. The Trustee's internet
website shall initially be located at "www.ctslink.com". Assistance in using the
website or the fax-on-demand service can be obtained by calling the Trustee's
customer service desk at (301) 815-6600. Parties that are unable to use the
above distribution options are entitled to have a paper copy mailed to them via
first class mail by calling the customer service desk and indicating such. The
Trustee will have the right to change the way statements are distributed in
order to make such distribution more convenient and/or more accessible to the
above parties and the Trustee shall provide timely and adequate notification to
all above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of August 1, 2000 (the "Agreement"), among the Depositor,
the Master Servicer and the Trustee, a form of which is filed as an exhibit to
the Registration Statement. A Current Report on Form 8-K relating to the
Certificates containing a copy of the Agreement as executed will be filed by the
Depositor with the Securities and Exchange Commission within fifteen days of the
initial issuance of the Certificates. The Trust Fund created under the Agreement
will consist of (i) all of the Depositor's right, title and interest in and to
the Mortgage Loans, the related Mortgage Notes, Mortgages and other related
documents, (ii) all payments on or collections in respect of the Mortgage Loans
due after the Cut-off Date, together with any proceeds thereof, (iii) any
Mortgaged Properties acquired on behalf of Certificateholders by foreclosure or
by deed in lieu of foreclosure, and any revenues
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received thereon, (iv) the rights of the Trustee under all insurance policies
required to be maintained pursuant to the Agreement and (v) certain of the
rights of the Depositor under the Mortgage Loan Purchase Agreement pursuant to
which the Depositor acquired the Mortgage Loans from the Mortgage Loan Seller.
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the Trust Fund, the terms and conditions of the
Agreement and the Offered Certificates. The Offered Certificates that are not
held by DTC will be transferable and exchangeable at the corporate trust offices
of the Trustee, located in Minneapolis, Minnesota. The Depositor will provide to
a prospective or actual Certificateholder without charge, on written request, a
copy (without exhibits) of the Agreement. Requests should be addressed to the
Secretary, Salomon Brothers Mortgage Securities VII, Inc., 390 Greenwich Street,
4th Floor, New York, New York 10013.
ASSIGNMENT OF THE MORTGAGE LOANS
The Mortgage Loans will be acquired by the Depositor from the Mortgage Loan
Seller. The Depositor will deliver or cause to be delivered to the Trustee with
respect to each Mortgage Loan, among other things, (i) the Mortgage Note
endorsed without recourse to the Trustee, (ii) the original Mortgage with
evidence of recording indicated thereon and (iii) an assignment of the Mortgage
recorded in the name of the Trustee. Such assignments of mortgages are required
to be recorded by or on behalf of the Depositor in the appropriate offices for
real property records; provided, however, that such assignments of mortgage are
not required to be recorded if the Depositor furnishes to the Trustee, on or
before the Closing Date, at the Mortgage Loan Seller's expense, an opinion of
counsel with respect to the relevant jurisdictions that such recording is not
necessary to perfect the Trustee's interest in the related Mortgage Loan;
provided further, however, notwithstanding the delivery of such opinion of
counsel, upon the occurrence of certain events set forth in the Agreement, each
such assignment of mortgage shall be recorded by the Trustee as set forth in the
Agreement.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided to
the Depositor by the Mortgage Loan Seller and/or the Master Servicer. None of
the Depositor, the Trustee, the Underwriter or any of their respective
affiliates has made any independent investigation of such information or has
made or will make any representation as to the accuracy or completeness of such
information.
Union Planters Corporation (the "Corporation") is a $34.2 billion,
multi-state bank holding company. As of year-end 1999, the Corporation is ranked
as one of the top 30 largest bank holding companies in the United States. The
Mortgage Loan Seller, headquartered in Memphis, Tennessee, is the Corporation's
largest subsidiary with $33.8 billion in total assets at June 30, 2000. The
principal banking markets of the Corporation are in Alabama, Arkansas, Florida,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, Tennessee,
and Texas. The Corporation has 866 banking offices and 1,061 ATMs to serve its
twelve-state market.
The Master Servicer, a wholly-owned subsidiary of the Mortgage Loan Seller,
originates, processes, and services mortgage loans primarily in the central and
southeastern United States. As of June 30, 2000, the Master Servicer serviced a
$3.9 billion mortgage loan portfolio. In addition to conventional, FHA, and VA
mortgage loans, the Master Servicer offers borrowers, through its Union Planters
Bank branch network, correspondent lenders, and mortgage brokers, a complete
line of non-conforming, fixed-and adjustable-rate EasyExpress Mortgage loan
products. Special features of EasyExpress programs include streamlined
documentation, quick turnaround, reduced closing costs, and assumability. The
Master Servicer provides lending services in Alabama, Arkansas,
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Colorado, Florida, Georgia, Illinois, Indiana, Kentucky, Missouri, Mississippi,
North Carolina, South Carolina, Tennessee, Texas, and Virginia. The Master
Servicer's year to date mortgage production totaled approximately $713 million
at June 30, 2000.
Over the past 60 years, the Master Servicer has built a franchise and
recognizable brand names based on a strong credit culture and controlled growth
using risk-based pricing. The non-conforming home loan portfolio serviced by the
Master Servicer is currently comprised of loans with original amortization terms
of 15 to 30 years with most emphasis on loans with terms not to exceed 20 years.
DELINQUENCY HISTORY OF THE MASTER SERVICER'S SERVICING PORTFOLIO
<TABLE>
<CAPTION>
AT 12/31/1998
AT 6/30/2000 AT 12/31/1999 PORTFOLIO BALANCE
PORTFOLIO BALANCE (MM) PORTFOLIO BALANCE (MM) (MM)
$3,906.83 $3,445.93 $1,309.21
--------------------- ---------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Days Past Due.................... $ (MM) % $ (MM) % $ (MM) %
------ - ------ - ------ -
30-59....................... 51.39 1.32 59.73 1.73 24.38 1.86
60-89....................... 11.47 0.29 12.27 0.36 5.62 0.43
90+ or in Bankruptcy........ 72.37 1.85 68.40 1.98 52.29 4.00
-------------------- ------ ---- ----- ---- ----- ----
TOTAL DELINQUENCY................ 135.23 3.46 140.40 4.07 82.29 6.29
Foreclosures in process(1)....... 28.77 0.74 23.55 0.68 11.42 0.87
</TABLE>
(1) These balances and percentages are included in Total Delinquencies and are
shown here for informational purposes only.
It is unlikely that the delinquency experience of the Mortgage Loans
included in the Mortgage Pool will correspond to the delinquency experience of
the Master Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Master
Servicer's mortgage servicing portfolio only for the periods presented, whereas
the aggregate delinquency experience on the Mortgage Loans included in the
Mortgage Pool will depend on the results obtained over the life of the Mortgage
Pool. In particular, investors should note that newly originated mortgage loans
will not be added to the Mortgage Pool, and the Mortgage Pool will therefore
consist of a static pool of Mortgage Loans, whereas new mortgage loans are
continually being originated and added to the pool for which such statistics
above are compiled. Accordingly, the actual delinquency percentages with respect
to the Mortgage Pool may be substantially higher than those indicated in the
tables above. In addition, if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by the Master Servicer. Furthermore, adverse economic conditions may affect the
timely payment by borrowers of scheduled payments of principal and interest on
such Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
THE TRUSTEE
Wells Fargo Bank Minnesota, N.A., a national banking association organized
and existing under the laws of the United States, will be named Trustee for the
holders of the Certificates pursuant to the Agreement.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to any interest or other income
earned on funds held in the distribution account as provided in the Agreement.
The Agreement will provide that the Trustee and any director, officer, employee
or agent of the Trustee will be indemnified by the Trust Fund and will be held
harmless against any loss, liability or expense (not including expenses,
disbursements and
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advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Agreement)
incurred by the Trustee in connection with any pending or threatened claim or
legal action arising out of or in connection with the acceptance or
administration of its obligations and duties under the Agreement, other than any
loss, liability or expense (i) resulting from a breach of the Master Servicer's
obligations and duties under the Agreement, (ii) that constitutes a specific
liability of the Trustee under the Agreement or (iii) incurred by reason of
willful misfeasance, bad faith or negligence in the performance of the Trustee's
duties under the Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trustee's obligations and duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of 0.25% per annum with respect to each Mortgage Loan
for each calendar month on the same principal balance on which interest on such
Mortgage Loan accrues for such calendar month (the "Servicing Fee"). As
additional servicing compensation, the Master Servicer is entitled to retain all
assumption fees and late payment charges in respect of Mortgage Loans, to the
extent collected from mortgagors, together with any interest or other income
earned on funds held in the Certificate Account and any escrow accounts in
respect of Mortgage Loans. The Master Servicer is obligated to offset any
Prepayment Interest Shortfall in respect of the Mortgage Loans on any
Distribution Date (payments made by the Master Servicer in satisfaction of such
obligation, "Compensating Interest") to the extent of its aggregate Servicing
Fee for such Distribution Date. The Master Servicer is obligated to pay certain
insurance premiums and certain ongoing expenses associated with the Mortgage
Pool incurred by the Master Servicer in connection with its responsibilities
under the Agreement and is entitled to reimbursement therefor as provided in the
Agreement. See "Description of the Certificates--Retained Interest; Servicing
Compensation and Payment of Expenses" in the Prospectus for information
regarding expenses payable by the Master Servicer and "Federal Income Tax
Consequences" herein regarding certain taxes payable by the Master Servicer.
VOTING RIGHTS
At all times, 98% of all Voting Rights will be allocated among the holders
of the Certificates (other than the Class IO Certificates and the Residual
Certificates) in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates, 1% of all Voting Rights will be
allocated among the holders of the Class IO Certificates in proportion to the
then outstanding Notional Amounts of their respective Certificates and 1/2 of 1%
of all Voting Rights will be allocated among the holders of each class of
Residual Certificates in proportion to the percentage interests in such classes
evidenced by their respective Certificates.
TERMINATION
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in "Description of the
Certificates--Termination" in the Prospectus. The Master Servicer will have the
right to purchase all of the Mortgage Loans in both Loan Groups and any
properties acquired in respect thereof on any Distribution Date, once the
aggregate principal balance of the Mortgage Loans and such properties at the
time of purchase is reduced to less than 5% of the aggregate principal balance
of the Mortgage Loans in both Loan Groups as of the Cut-off Date. If the Master
Servicer elects to exercise the foregoing option, such election will effect the
termination of the Trust Fund and the early retirement of the Certificates. In
the event the Master Servicer exercises such option, the purchase price payable
in connection
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therewith generally will be equal to the greater of par or the fair market value
of the Mortgage Loans and such properties, plus accrued interest for each
Mortgage Loan at the related Mortgage Rate to but not including the first day of
the month in which such repurchase price is distributed, together with any
amounts due to the Master Servicer for servicing compensation at the Servicing
Fee Rate and any unreimbursed Servicing Advances. In the event the Master
Servicer exercises such option, the portion of the purchase price allocable to
the Certificates of each class will be, to the extent of available funds, (i) in
the case of the Certificates of any class (other than the Class IO
Certificates), 100% of the then outstanding Certificate Principal Balance
thereof, plus (ii) in the case of the Certificates of any class (other than the
Class PO Certificates), one month's interest on the then outstanding Certificate
Principal Balance or Notional Amount thereof at the then applicable Pass-
Through Rate for such class, plus (iii) any previously accrued but unpaid
interest thereon. In no event will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the survivor of the persons
named in the Agreement. See "Description of the Certificates--Termination" in
the Prospectus.
MORTGAGE LOAN SELLER
Union Planters Bank, National Association (the "Mortgage Loan Seller"), a
national banking association, will transfer the Mortgage Loans to the Depositor
pursuant to a mortgage loan purchase agreement, dated as of August 28, 2000 (the
"Mortgage Loan Purchase Agreement"), between the Mortgage Loan Seller and the
Depositor.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. Upon the
issuance of the Offered Certificates, Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC under Sections 860A through
860G of the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Class R Certificates will be the
sole class of "residual interests" in the REMIC and (ii) the Senior Certificates
and the Subordinate Certificates will represent ownership of "regular interests"
in, and will be treated as debt instruments of the REMIC. See "Federal Income
Tax Consequences--REMIC--Classification of REMICs" in the Prospectus.
For federal income tax reporting purposes, the Offered Certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that, subsequent to the date of any
determination, the Mortgage Loans will prepay at a rate equal to 15% CPR. 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.
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If the method of computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to any
Certificateholder, the amount of original issue discount allocable to such
period would be zero, and such Certificateholder will be permitted to offset
such amounts only against the respective future income (if any) from such
Certificate. Although uncertain, a Certificateholder may be permitted to deduct
a loss to the extent that his or her respective remaining basis in such
Certificate exceeds the maximum amount of future payments to which such
Certificateholder is entitled, assuming no further prepayments of the Mortgage
Loans. Although the matter is not free from doubt, any such loss might be
treated as a capital loss.
The OID Regulations in some circumstances permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that of the issuer. Accordingly, it is possible that holders of Offered
Certificates issued with original issue discount may be able to select a method
for recognizing original issue discount that differs from that used in preparing
reports to Certificateholders and the IRS. Prospective purchasers of Offered
Certificates issued with original issue discount are advised to consult their
tax advisors concerning the tax treatment of such Certificates in this regard.
The Offered Certificates will be treated for federal income tax purposes as
having been issued with a premium. Certificateholders may elect to amortize such
premium under a constant yield method in which case such amortizable premium
will generally be allocated among the interest payments on such Certificates and
will be applied as an offset against such interest payments. See "Federal Income
Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the related
Trust Fund would be so treated. In addition, interest on the Offered
Certificates will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code, generally to the extent
that the Offered Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. The Offered Certificates also will be treated as
"qualified mortgages" under Section 860G(a)(3) of the Code. See "Federal Income
Tax Consequences --REMICs--Characterization of Investments in REMIC
Certificates" in the Prospectus.
It is not anticipated that the Trust Fund will engage in any transactions
that would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust Fund, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Agreement,
(ii) by the Master Servicer, if the Master Servicer has breached its obligations
with respect to REMIC compliance under the Agreement and (iii) otherwise by the
Trust Fund, with a resulting reduction in amounts otherwise distributable to
holders of the related Offered Certificates. See "Description of the
Certificates-- General" and "Federal Income Tax Consequences
--REMICs--Prohibited Transactions Tax and Other Taxes" in the Prospectus.
The responsibility for filing annual federal information returns and other
reports will be generally borne by the Trustee. See "Federal Income Tax
Consequences--REMICs--Reporting and Other Administrative Matters" in the
Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
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METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated August 28, 2000 (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 offered hereby if it purchases any. The Underwriter is
an affiliate of the Depositor.
Distribution of the Offered Certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be
approximately 100.25% of the aggregate initial Certificate Principal Balance of
the Offered Certificates, plus accrued interest. 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, Clearstream and the Euroclear System on or about
the Closing Date. The Offered Certificates will be offered in Europe and the
United States of America.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
Underwriter may be required to make in respect thereof.
SECONDARY MARKET
There 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, other than the
Residual Certificates, but it is not obligated to do so. The primary source of
information available to investors concerning the Offered Certificates will be
the monthly statements discussed in the Prospectus under "Description of the
Certificates--Reports to Certificateholders", which will include information as
to the outstanding principal balance of the Offered Certificates and the status
of the applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Offered Certificates will be available
through any other source. In addition, the Depositor is not aware of any source
through which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information regarding
the Offered Certificates may adversely affect the liquidity of the Offered
Certificates, even if a secondary market for the Offered Certificates becomes
available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be passed
upon for the Depositor and the Underwriter by Thacher Proffitt & Wood, New York,
New York.
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RATINGS
It is a condition to the issuance of the certificates that the Class A-1
Certificates and the Class A-2 Certificates be rated "AAA" by Standard & Poor's
Ratings Services, Inc., a division of The McGraw-Hill Companies, Inc. ("Standard
& Poor's") and "AAA" by Fitch, Inc. ("Fitch").
The ratings of Standard & Poor's and Fitch assigned to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which such prepayments will differ from that
originally anticipated. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield due to non-credit
events.
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 in "mortgage related securities" provided that such restrictive
legislation was enacted prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA.
The Depositor makes no representations as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of Offered Certificates constitutes a legal
investment or is subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
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ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (each, a "Plan") or any person investing
Plan Assets of any Plan (as defined in the Prospectus under "ERISA
Considerations") should carefully review with its legal advisors whether the
purchase, sale or holding of Certificates will give rise to a prohibited
transaction under ERISA or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23 (the "Exemption"), as described under "ERISA
Considerations" in the Prospectus, to the Underwriter. The Exemption generally
exempts from the application of certain of the prohibited transaction provisions
of Section 406 of ERISA, and the excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the Code and Section 502(i) of ERISA,
transactions relating to the purchase, sale and holding of pass-through
certificates underwritten by the Underwriter such as the Offered Certificates,
and the servicing and operation of asset pools such as the Mortgage Pool,
provided that certain conditions are satisfied. The purchase of the Offered
Certificates by, on behalf of or with the Plan Assets of any Plan may qualify
for exemptive relief under the Exemption. However, the Exemption contains a
number of conditions which must be met for the Exemption to apply (as described
in the Prospectus), including the requirement that any such Plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
A fiduciary of a Plan contemplating purchasing an Offered Certificate must make
its own determination that the conditions set forth in the Exemption will be
satisfied with respect to such Offered Certificates.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (a) that such Offered Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied. Any Plan fiduciary that proposes to cause a Plan to purchase a
Certificate should consult with its counsel with respect to the potential
applicability to such investment of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to the proposed investment.
For further information regarding the ERISA considerations of investing in the
Certificates, see "ERISA Considerations" in the Prospectus.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Class A Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), Clearstream or
Euroclear. The Global Securities will be tradable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
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TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Clearstream Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of a
30- day month or the actual number of days in such accrual period, as
applicable, and a year assumed to consist of 360 days. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Clearstream Participant's or
Euroclear Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream Participants
or Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their
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<PAGE>
customary procedures for transactions in which Global Securities are to be
transferred by the respective clearing system, through the respective
Depositary, to a DTC Participant. The seller will send instructions to
Clearstream or Euroclear through a Clearstream Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of a 30-day month or the actual number of days in such accrual
period, as applicable, and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Clearstream Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Clearstream or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8 OR FORM W-8BEN). Beneficial owners
of Global Securities that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding). If the information shown on Form W-8 or Form
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<PAGE>
W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within 30 days of
such change. After December 31, 2000, only Form W-8BEN will be acceptable.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM 4224
OR FORM W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of a Trade or Business in the
United States) or Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States). After December 31, 2000, only Form
W-8ECI will be acceptable.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001 OR FORM W-8BEN). Non-U.S. Persons that are Certificate Owners
residing in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate) or Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form 1001 or Form W-8BEN may be filed by the Certificate Owners or
his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
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<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
Depositor
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS
PROSPECTUS.
The securities will represent obligations of a trust fund only and will not
represent ownership interests in or obligations of any other entity.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
THE SECURITIES:
Salomon Brothers Mortgage Securities VII, Inc., as depositor, will sell the
securities, which may be in the form of mortgage pass-through certificates or
mortgage-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o the ownership of certain trust fund assets, or
o debt obligations secured by certain trust fund assets.
Each series of securities will include one or more classes. Each class of
securities of any series will represent the right, which right may be senior to
the rights of one or more of the other classes of the securities, to receive a
specified portion of future payments of principal and interest on the assets in
the related trust fund. A series may include one or more classes of securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. A series may include two or more classes
of securities that differ as to the timing, sequential order or amount of
distributions of principal or interest or both. The related prospectus
supplement will specify each of these features.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust fund
will primarily include any or all of the following:
o various types of one- to four-family residential first and junior
lien mortgage loans, multifamily residential mortgage loans,
cooperative apartment loans or manufactured housing conditional
sales contracts and installment loan agreements, or beneficial
interests therein,
o pass-through or participation certificates issued or guaranteed by
the Government National Mortgage Association, the Federal National
Mortgage Association or the Federal Home Loan
Mortgage Corporation,
o pass-through or participation certificates or other
mortgage-backed securities issued or guaranteed by private
entities, or
o funding agreements secured by any of the above described assets.
The assets of the trust fund for a series of securities may also include pool
insurance policies, letters of credit, reserve funds or other types of credit
support, or any combination thereof, and currency or interest rate exchange
agreements and other financial assets, or any combination thereof.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the securities may be made through one or more different methods,
including through underwriters as described in "Methods of Distribution" in the
related prospectus supplement. All certificates will be distributed by, or sold
through underwriters managed by:
SALOMON SMITH BARNEY
The date of this Prospectus is November 8, 1999.
<PAGE>
TABLE OF CONTENTS
Important Notice About Information in this Prospectus
and each Accompanying Prospectus Supplement....................................3
Risk Factors...................................................................4
The Trust Funds...............................................................15
The Mortgage Loans.........................................................15
Agency Securities..........................................................21
Private Mortgage-Backed Securities.........................................27
Funding Agreements.........................................................29
Use of Proceeds...............................................................30
Yield Considerations..........................................................30
Maturity and Prepayment Considerations........................................31
The Depositor.................................................................33
Mortgage Loan Program.........................................................33
Underwriting Standards.....................................................33
Qualifications of Originators and Mortgage Loan
Sellers....................................................................35
Representations by or on behalf of Mortgage
Loan Sellers; Repurchases..................................................35
Description of the Securities.................................................37
General....................................................................38
Assignment of Trust Fund Assets............................................40
Deposits to Certificate Account............................................44
Payments on Mortgage Loans.................................................44
Payments on Agency Securities and Private
Mortgage-Backed Securities.................................................46
Distributions..............................................................47
Available Distribution Amount..............................................47
Interest on the Securities.................................................48
Principal of the Securities................................................48
Pre-Funding Account........................................................49
Allocation of Losses.......................................................50
Advances in Respect of Delinquencies.......................................50
Reports to Securityholders.................................................51
Collection and Other Servicing Procedures..................................52
Sub-Servicing..............................................................54
Realization Upon Defaulted Mortgage Loans..................................55
Retained Interest; Servicing or Administration
Compensation and Payment of Expenses.......................................56
Evidence as to Compliance..................................................57
Certain Matters Regarding the Master Servicer
and the Depositor..........................................................58
Events of Default and Rights Upon Event of
Default....................................................................59
Amendment..................................................................62
Termination................................................................63
Optional Purchase of Defaulted Mortgage
Loans......................................................................64
Duties of the Trustee......................................................64
The Trustee................................................................64
Description of Credit Support.................................................64
Subordination..............................................................65
Letter of Credit...........................................................66
Mortgage Pool Insurance Policy.............................................67
Special Hazard Insurance Policy............................................69
Bankruptcy Bond............................................................71
Financial Guarantee Insurance..............................................71
Reserve Fund...............................................................72
Cash Flow Agreements.......................................................72
Description of Primary Insurance Policies.....................................72
Primary Mortgage Insurance Policies........................................72
Primary Hazard Insurance Policies..........................................73
FHA Insurance..............................................................74
VA Guarantees..............................................................75
Certain Legal Aspects of Mortgage Loans.......................................75
General....................................................................76
Single-Family Loans and Multifamily Loans..................................76
Leases and Rents...........................................................76
Cooperative Loans..........................................................77
Contracts..................................................................78
Foreclosure on Mortgages...................................................80
Foreclosure on Mortgaged Properties Located
in the Commonwealth of Puerto Rico.........................................81
Foreclosure on Cooperative Shares..........................................82
Repossession with respect to Contracts.....................................83
Louisiana Law..............................................................84
Rights of Redemption with respect to Single-
Family Properties and Multifamily Properties...............................84
Notice of Sale; Redemption Rights with respect
to Manufactured Homes......................................................85
Anti-Deficiency Legislation and Other Limitations
on Lenders.................................................................85
Junior Mortgages...........................................................87
Consumer Protection Laws with respect to
Contracts..................................................................87
Other Limitations..........................................................88
Enforceability of Certain Provisions.......................................89
Subordinate Financing......................................................90
Applicability of Usury Laws................................................91
Alternative Mortgage Instruments...........................................91
Formaldehyde Litigation with respect to
Contracts..................................................................92
Soldiers' and Sailors' Civil Relief Act of 1940............................93
Environmental Legislation..................................................93
Forfeitures in Drug and RICO Proceedings...................................94
Negative Amortization Loans................................................94
Federal Income Tax Consequences...............................................95
General....................................................................95
REMICs.....................................................................96
Notes.....................................................................114
Grantor Trust Funds.......................................................115
Partnership Trust Funds...................................................126
State and Other Tax Consequences.............................................132
ERISA Considerations.........................................................133
Representation from Plans Investing in Notes
with "Substantial Equity Features" or Certain
Securities................................................................138
Tax Exempt Investors......................................................139
Consultation with Counsel.................................................139
Legal Investment.............................................................139
Methods of Distribution......................................................141
Legal Matters................................................................142
Financial Information........................................................142
Rating.......................................................................142
Available Information........................................................142
Reports to Securityholders...................................................143
Incorporation of Certain Information by
Reference....................................................................143
Index of Principal Definitions...............................................144
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IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that
series. If the prospectus supplement contains information about a
particular series that differs from the information contained in
this prospectus, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement. The information in this prospectus is
accurate only as of the date of this prospectus.
Beginning with the section titled "The Trust Funds", certain capitalized terms
are used in this prospectus to assist you in understanding the terms of the
securities. The capitalized terms used in this prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page 144
in this prospectus.
---------------------------
If you require additional information, the mailing address of our principal
executive offices is 390 Greenwich Street, 4th Floor, New York, New York 10013,
Attention: Secretary and the telephone number is (212) 816-6000. For other means
of acquiring additional information about us or a series of securities, see
"Incorporation of Certain Information by Reference" beginning on page 143 of
this prospectus.
---------------------------
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RISK FACTORS
The offered securities are not suitable investments for all investors. In
particular, you should not purchase the offered securities unless you understand
and are able to bear the prepayment, credit, liquidity and market risks
associated with such securities.
You should carefully consider, among other things, the following factors in
connection with the purchase of the securities offered hereby:
THE SECURITIES WILL HAVE LIMITED LIQUIDITY
There can be no assurance that a resale market for the securities of any
series will develop following the issuance and sale of any series of securities.
Even if a resale market does develop, it may not provide securityholders with
liquidity of investment or continue for the life of the securities of any
series. The prospectus supplement for any series of securities may indicate that
an underwriter specified therein intends to establish a secondary market in such
securities, however no underwriter will be obligated to do so. The securities
offered hereby will not be listed on any securities exchange.
THE SECURITIES WILL BE LIMITED OBLIGATIONS OF THE RELATED TRUST FUND AND NOT OF
ANY OTHER PARTY
Unless the applicable prospectus supplement provides otherwise, the
securities of each series will be payable solely from the assets of the related
trust fund, including any applicable credit support, and will not have any
claims against the assets of any other trust fund or recourse to any other
party. The securities will not represent an interest in or obligation of the
depositor, the master servicer or any of their respective affiliates. Unless the
applicable prospectus supplement provides otherwise, the only obligations of the
foregoing entities with respect to the securities, any mortgage loan or any
other trust fund asset will be the repurchase or substitution obligations (if
any) of the depositor pursuant to certain limited representations and warranties
made with respect to the mortgage loans or other trust fund assets and the
master servicer's servicing obligations under the related servicing agreement,
(including, if and to the extent described in the related prospectus supplement,
its limited obligation to make certain advances in the event of delinquencies on
the mortgage loans).
Unless otherwise specified in the related prospectus supplement, neither
the securities nor the underlying mortgage loans or other trust fund assets will
be guaranteed or insured by any governmental agency or instrumentality, by the
depositor, the master servicer or any of their respective affiliates or by any
other person. Although payment of principal and interest on agency securities
will be guaranteed as described herein and in the related prospectus supplement
by GNMA, Fannie Mae or Freddie Mac, the securities of any series including
agency securities will not be so guaranteed.
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CREDIT SUPPORT WILL BE LIMITED; THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES ON
THE TRUST FUND ASSETS MAY RESULT IN LOSSES ALLOCATED TO THE SECURITIES
Credit support is intended to reduce the effect of delinquent payments or
losses on the underlying trust fund assets on those classes of securities that
have the benefit of the credit support. With respect to each series of
securities, credit support will be provided in limited amounts, in one or more
of the forms referred to herein. Regardless of the form of credit support
provided, the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such credit support may provide only very limited coverage as to
certain types of losses or risks, and may provide no coverage as to certain
other types of losses or risks. In the event losses exceed the amount of
coverage provided by any credit support or losses of a type not covered by any
credit support occur, such losses will be borne by the holders of the related
securities (or certain classes thereof). SEE "DESCRIPTION OF CREDIT SUPPORT".
THE PAYMENT PERFORMANCE OF THE SECURITIES WILL BE RELATED TO THE PAYMENT
PERFORMANCE OF THE MORTGAGE LOANS IN THE RELATED TRUST FUNDS; GREATER RISK OF
LOSS IS ASSOCIATED WITH CERTAIN MORTGAGE LOANS
The securities will be directly or indirectly backed by mortgage loans
and/or manufactured housing, conditional sales contracts and installment loan
agreements. Certain mortgage loans may have a greater likelihood of delinquency
and foreclosure, and a greater likelihood of loss in the event thereof. In the
event that the mortgaged properties fail to provide adequate security for the
mortgage loans included in a trust fund, any resulting losses, to the extent not
covered by credit support, will be allocated to the related securities in the
manner described in the related prospectus supplement and consequently would
adversely affect the yield to maturity on such securities. The depositor cannot
assure you that the values of the mortgaged properties have remained or will
remain at the appraised values on the dates of origination of the related
mortgage loans. You should consider the following risks associated with certain
mortgage loans which may be included in the trust fund related to your security:
NEGATIVELY AMORTIZING LOANS. In the case of mortgage loans that are subject
to negative amortization, the principal balances of such mortgage loans could be
increased to an amount equal to or in excess of the value of the underlying
mortgaged properties, thereby increasing the likelihood of default. To the
extent that such losses are not covered by any reserve fund or instrument of
credit support in the related trust fund, holders of securities of the series
evidencing interests in such mortgage loans will bear all risk of loss resulting
from default by mortgagors and will have to look primarily to the value of the
mortgaged properties for recovery of the outstanding principal and unpaid
interest on the defaulted mortgage loans.
BUYDOWN MORTGAGE LOANS. Buydown mortgage loans are subject to temporary
buydown plans pursuant to which the monthly payments made by the mortgagor
during the early years of such mortgage loan will be less than the scheduled
monthly payments on the mortgage loan, the resulting difference to be made up
from (i) an amount contributed by the borrower, the seller of the mortgaged
property or another source and placed in a custodial account, (ii) investment
earnings on the amount, if any, contributed by the borrower, or (iii) additional
buydown funds to be contributed over time by the mortgagor's employer or another
source. Generally, the mortgagor under each buydown mortgage loan will be
qualified at the applicable lower monthly payment. Accordingly, the repayment of
a buydown mortgage loan is dependent on the ability of the mortgagor to make
larger
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level monthly payments after the buydown funds have been depleted and, for
certain buydown mortgage loans, during the initial buydown period. The inability
of a mortgagor to make such larger monthly payments could lead to losses on such
mortgage loans, and to the extent not covered by credit support, may adversely
affect the yield to maturity on the related securities.
BALLOON LOANS. Certain mortgage loans, particularly those secured by
multifamily properties, may not be fully amortizing (or may not amortize at all)
over their terms to maturity and, thus, will require substantial payments of
principal and interest (that is, balloon payments) at their stated maturity.
Mortgage loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related mortgaged property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties and, in
the case of multifamily properties, the financial condition and operating
history of the mortgagor and the related mortgaged property, tax laws and rent
control laws.
NON-OWNER-OCCUPIED PROPERTIES. It is anticipated that some or all of the
mortgage loans included in any trust fund, particularly mortgage loans secured
by multifamily properties, will be nonrecourse loans or loans for which recourse
may be restricted or unenforceable. As to those mortgage loans, recourse in the
event of mortgagor default will be limited to the specific real property and
other assets, if any, that were pledged to secure the mortgage loan. However,
even with respect to those mortgage loans that provide for recourse against the
mortgagor and its assets generally, there can be no assurance that enforcement
of such recourse provisions will be practicable, or that the other assets of the
mortgagor will be sufficient to permit a recovery in respect of a defaulted
mortgage loan in excess of the liquidation value of the related mortgaged
property.
MULTIFAMILY LOANS. Mortgage loans made on the security of multifamily
properties may entail risks of delinquency and foreclosure, and risks of loss in
the event thereof, that are greater than similar risks associated with loans
made on the security of single family properties. The ability of a borrower to
repay a loan secured by an income-producing property typically is dependent
primarily upon the successful operation of such property rather than upon the
existence of independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of mortgage loans secured by multifamily properties may be
greater than for a pool of mortgage loans secured by single family properties of
comparable aggregate unpaid principal balance because the pool of mortgage loans
secured by multifamily properties is likely to consist of a smaller number of
higher balance loans.
NON-CONFORMING LOANS. Non-conforming mortgage loans are mortgage loans that
do not qualify for purchase by government sponsored agencies such as the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac") due to credit characteristics that to not satisfy
such Fannie Mae and Freddie Mac guidelines, including mortgagors whose
creditworthiness and repayment ability do not satisfy such Fannie Mae and
Freddie Mac underwriting guidelines and mortgagors who may have a record of
credit write-offs,
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outstanding judgments, prior bankruptcies and other derogatory credit items.
Accordingly, non-conforming mortgage loans are likely to experience rates of
delinquency, foreclosure and loss that are higher, and that may be substantially
higher, than mortgage loans originated in accordance with Fannie Mae or Freddie
Mac underwriting guidelines. The principal differences between conforming
mortgage loans and non-conforming mortgage loans include the applicable
loan-to-value ratios, the credit and income histories of the related mortgagors,
the documentation required for approval of the related mortgage loans, the types
of properties securing the mortgage loans, the loan sizes and the mortgagors'
occupancy status with respect to the mortgaged properties. As a result of these
and other factors, the interest rates charged on non-conforming mortgage loans
are often higher than those charged for conforming mortgage loans. The
combination of different underwriting criteria and higher rates of interest may
also lead to higher delinquency, foreclosure and losses on non-conforming
mortgage loans as compared to conforming mortgage loans.
HIGH LTV LOANS. Mortgage loans with loan-to-value ratios in excess of 80%
and as high as 125% and not insured by primary mortgage insurance policies are
designated by the depositor as "high LTV loans". High LTV loans with combined
loan-to-value ratios in excess of 100% may have been originated with a limited
expectation of recovering any amounts from the foreclosure of the related
mortgaged property and are underwritten with an emphasis on the creditworthiness
of the related borrower. If such mortgage loans go into foreclosure and are
liquidated, there may be no amounts recovered from the related mortgaged
property unless the value of the property increases or the principal amount of
the related senior liens have been reduced such as to reduce the current
combined loan-to-value ratio of the related mortgage loan to below 100%. Any
such losses, to the extent not covered by credit enhancement, may affect the
yield to maturity of the related securities.
JUNIOR LIEN MORTGAGE LOANS. Certain of the trust funds may contain mortgage
loans secured by junior liens and the related senior liens may not be included
in the trust fund. An overall decline in the residential real estate market
could adversely affect the values of the mortgaged properties securing the
mortgage loans with junior liens such that the outstanding principal balances,
together with any senior financing thereon, exceeds the value of the mortgaged
properties. Since mortgage loans secured by junior liens are subordinate to the
rights of the beneficiaries under the related senior deeds of trust or senior
mortgages, such a decline would adversely affect the position of the related
junior beneficiary or junior mortgagee before having such an effect on the
position of the related senior beneficiaries or senior mortgagees. A rise in
interest rates over a period of time, the general condition of the mortgaged
property and other factors may also have the effect of reducing the value of the
mortgaged property from the value at the time the junior lien mortgage loan was
originated. As a result, the loan-to-value ratio may exceed the ratio in effect
at the time the mortgage loan was originated. Such an increase may reduce the
likelihood that, in the event of a default by the related mortgagor, liquidation
or other proceeds will be sufficient to satisfy the junior lien mortgage loan
after satisfaction of any senior liens and the payment of any liquidation
expenses.
Other factors may affect the prepayment rate of junior lien mortgage loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien mortgage loans
may experience a higher rate of prepayments that traditional senior lien
mortgage loans. In addition, any future limitations on the rights of borrowers
to deduct interest payments on junior lien mortgage loans for federal income tax
purposes may further increase the rate of prepayments on such junior lien
mortgage loans.
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PUERTO RICO AND GUAM LOANS. The risk of loss on mortgage loans secured by
properties located in Puerto Rico and Guam may be greater than on mortgage loans
that are made to mortgagors who are United States residents and citizens or that
are secured by properties located in the United States. In particular, the
procedure for the foreclosure of a real estate mortgage under the laws of the
Commonwealth of Puerto Rico varies from the procedures generally applicable in
each of the fifty states of the United States which may affect the satisfaction
of the related mortgage loan. In addition, the depositor is not aware of any
historical prepayment experience with respect to mortgage loans secured by
properties located in Puerto Rico or Guam and, accordingly, prepayments on such
loans may not occur at the same rate or be affected by the same factors as other
mortgage loans.
Certain of the types of loans which may be included in a trust fund may involve
additional uncertainties not present in traditional types of loans. You should
carefully consider the prospectus supplement describing the mortgage loans which
are to be included in the trust fund related to your security and the risks
associated with such mortgage loans.
DECLINING PROPERTY VALUES AND GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
MAY PRESENT A GREATER RISK OF LOSS
An investment in securities such as the securities which represent, in
general, interests in mortgage loans and/or manufactured housing, conditional
sales contracts and installment loan agreements may be affected by, among other
things, a decline in real estate values and changes in the borrowers' financial
condition. The depositor cannot assure you that values of the mortgaged
properties have remained or will remain at the appraised values on the dates of
origination of the related mortgage loans. If the residential real estate market
should experience an overall decline in property values such that the
outstanding balances of the mortgage loans, and any secondary financing on the
mortgaged properties, in a particular trust fund become equal to or greater than
the value of the mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. Mortgaged properties subject to high
loan-to-value ratios are at greater risk since such properties initially have
less equity than mortgaged properties with low loan-to-value ratios and
therefore a decline in property values could dissipate equity more quickly.
Delinquencies, foreclosures and losses due to declining values of mortgaged
properties, especially those with high loan-to-value ratios, would cause losses
to the trust fund and, to the extent not covered by credit support, would
adversely affect your yield to maturity on the securities.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The mortgage loans underlying certain series of securities may
be concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration.
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VARYING UNDERWRITING STANDARDS OF UNAFFILIATED MORTGAGE LOAN SELLERS MAY PRESENT
A GREATER RISK OF LOSS
Mortgage loans to be included in a trust fund will have been purchased by
the depositor, either directly or indirectly from mortgage loan sellers. Such
mortgage loans will generally have been originated in accordance with
underwriting standards acceptable to the depositor and generally described
herein under "Mortgage Loan Program--Underwriting Standards" as more
particularly described in the underwriting criteria included in the related
prospectus supplement. Nevertheless, in some cases, particularly those involving
unaffiliated mortgage loan sellers, the depositor may not be able to establish
the underwriting standards used in the origination of the related mortgage
loans. In those cases, the related prospectus supplement will include a
statement to such effect and will reflect what, if any, re-underwriting of the
related mortgage loans was completed by the depositor or any of its affiliates.
To the extent the mortgage loans cannot be re-underwritten or the underwriting
criteria cannot be verified, the mortgage loans might suffer losses greater than
they would had they been directly underwritten by the depositor or an affiliate
thereof. Any such losses, to the extent not covered by credit support, may
adversely affect the yield to maturity of the related securities.
NONPERFECTION OF SECURITY INTERESTS IN MANUFACTURED HOMES MAY RESULT IN
LOSSES
Any conditional sales contracts and installment loan agreements with
respect to manufactured homes (each, a "Contract") included in a trust fund will
be secured by a security interest in a manufactured home. Perfection of security
interests in manufactured homes and enforcement of rights to realize upon the
value of the manufactured homes as collateral for the Contracts are subject to a
number of federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a manufactured home will vary from
state to state. In the event the master servicer fails, due to clerical errors
or otherwise, to take the appropriate steps to perfect such a security interest,
the trustee may not have a first priority security interest in the manufactured
home securing a Contract. Additionally, courts in many states have held that
manufactured homes may, under certain circumstances, become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
The failure to properly perfect a valid, first priority security interest in a
manufactured home securing a Contract could lead to losses that, to the extent
not covered by credit support, may adversely affect the yield to maturity of the
related securities.
FORECLOSURE OF MORTGAGE LOANS MAY RESULT IN LIMITATIONS OR DELAYS IN RECOVERY
AND LOSSES ALLOCATED TO THE RELATED SECURITIES
Even assuming that the mortgaged properties provide adequate security for
the mortgage loans, substantial delays can be encountered in connection with the
liquidation of defaulted mortgage loans and corresponding delays in the receipt
of related proceeds by the securityholders could occur. An action to foreclose
on a mortgaged property securing a mortgage loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
mortgaged property. In the event of a default by a mortgagor, these
restrictions, among other things, may impede the ability of the master servicer
to foreclose on or sell the mortgaged property or to obtain liquidation proceeds
sufficient to repay all amounts due on the
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related mortgage loan. The master servicer will be entitled to deduct from
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated mortgage loan and not yet repaid,
including payments to prior lienholders, accrued servicing fees, legal fees and
costs of legal action, real estate taxes, and maintenance and preservation
expenses. In the event that any mortgaged properties fail to provide adequate
security for the related mortgage loans and insufficient funds are available
from any applicable credit support, securityholders could experience a loss on
their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
MORTGAGED PROPERTIES ARE SUBJECT TO CERTAIN ENVIRONMENTAL RISKS AND THE COST OF
ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES ON THE RELATED MORTGAGE LOANS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. A lender also risks such liability on foreclosure of the
mortgage on such property. In addition, the presence of hazardous or toxic
substances, or the failure to properly remediate such property, may adversely
affect the owner's or operator's ability to sell such property. Although the
incidence of environmental contamination of residential properties is less
common than that for commercial properties, mortgage loans contained in a trust
fund may be secured by mortgaged properties in violation of environmental laws,
ordinances or regulations. The master servicer is generally prohibited from
foreclosing on a mortgaged property unless it has taken adequate steps to ensure
environmental compliance with respect to such mortgaged property. However, to
the extent the master servicer errs and forecloses on mortgaged property that is
subject to environmental law violations, and to the extent a mortgage loan
seller does not provide adequate representations and warranties against such
violations, or is unable to honor such obligations, including the obligation to
repurchase a mortgage loan upon the breach of a representation or warranty, a
trust fund could experience losses which, to the extent not covered by credit
support, could adversely affect the yield to maturity on the related securities.
LIMITED NATURE OF RATINGS OF THE SECURITIES; DOWNGRADING OF A SECURITY MAY
ADVERSELY AFFECT THE LIQUIDITY OR MARKET VALUE OF SUCH SECURITY
It is a condition to the issuance of the securities that each series of
securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any security, and
accordingly, there can be no assurance to you that the ratings assigned to any
security on the date on which such security is originally issued will not be
lowered or withdrawn by a rating agency at any time thereafter. The rating(s) of
any series of securities by any applicable rating agency may be lowered
following the initial issuance thereof as a result of the downgrading of the
obligations of any
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applicable credit support provider, or as a result of losses on the related
mortgage loans in excess of the levels contemplated by such rating agency at the
time of its initial rating analysis. Neither the depositor, the master servicer
nor any of their respective affiliates will have any obligation to replace or
supplement any credit support, or to take any other action to maintain any
rating(s) of any series of securities. In the event any rating is revised or
withdrawn, the liquidity or the market value of the related security may be
adversely affected.
FAILURE OF THE MORTGAGE LOAN SELLER TO REPURCHASE OR REPLACE A MORTGAGE LOAN MAY
RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Each mortgage loan seller will have made representations and warranties in
respect of the mortgage loans sold by such mortgage loan seller and evidenced by
a series of securities. In the event of a breach of a mortgage loan seller's
representation or warranty that materially adversely affects the interests of
the securityholders in a mortgage loan, unless otherwise specified in the
related prospectus supplement, the related mortgage loan seller will be
obligated to cure the breach or repurchase or, if permitted, replace such
mortgage loan as described below. However, there can be no assurance that a
mortgage loan seller will honor its obligation to cure, repurchase or, if
permitted, replace any mortgage loan as to which such a breach of a
representation or warranty arises. A mortgage loan seller's failure or refusal
to honor its repurchase obligation could lead to losses that, to the extent not
covered by credit support, may adversely affect the yield to maturity of the
related securities.
In instances where a mortgage loan seller is unable, or disputes its
obligation, to purchase affected mortgage loans, the master servicer may
negotiate and enter into one or more settlement agreements with such mortgage
loan seller that could provide for, among other things, the purchase of only a
portion of the affected mortgage loans. Any such settlement could lead to losses
on the mortgage loans which would be borne by the related securities. Neither
the depositor nor the master servicer will be obligated to purchase a mortgage
loan if a mortgage loan seller defaults on its obligation to do so, and no
assurance can be given that the mortgage loan sellers will carry out such
purchase obligations. Such a default by a mortgage loan seller is not a default
by the depositor or by the master servicer. Any mortgage loan not so purchased
or substituted for shall remain in the related trust fund and any losses related
thereto shall be allocated to the related credit support, to the extent
available, and otherwise to one or more classes of the related series of
securities.
All of the representations and warranties of a mortgage loan seller in
respect of a mortgage loan will have been made as of the date on which such
mortgage loan was purchased from the mortgage loan seller by or on behalf of the
depositor; the date as of which such representations and warranties were made
will be a date prior to the date of initial issuance of the related series of
securities. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related series of securities. Accordingly, the mortgage loan
seller's purchase obligation (or, if specified in the related prospectus
supplement, limited replacement option) will not arise if, during the period
commencing on the date of sale of a mortgage loan by the mortgage loan seller,
an event occurs that would have given rise to such an obligation had the event
occurred prior to sale of the affected mortgage loan. The occurrence of events
during this period that are not covered by a mortgage loan seller's purchase
obligation could lead to losses that, to the extent not covered by credit
support, may adversely affect the yield to maturity of the related securities.
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BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY OF THE SECURITIES
Because transfers and pledges of securities registered in the name of a
nominee of the Depository Trust Company ("DTC") can be effected only through
book entries at DTC through participants, the liquidity of the secondary market
for DTC registered securities may be reduced to the extent that some investors
are unwilling to hold securities in book entry form in the name of DTC and the
ability to pledge DTC registered securities may be limited due to the lack of a
physical certificate. Beneficial owners of DTC registered securities may, in
certain cases experience delay in the receipt of payments of principal and
interest since payments will be forwarded by the related trustee to DTC who will
then forward payment to the participants who will thereafter forward payment to
beneficial owners. In the event of the insolvency of DTC or a participant in
whose name DTC registered securities are recorded, the ability of beneficial
owners to obtain timely payment and (if the limits of applicable insurance
coverage is otherwise unavailable) ultimate payment of principal and interest on
DTC registered securities may be impaired.
THE YIELD TO MATURITY ON YOUR SECURITIES WILL DEPEND ON A VARIETY OF FACTORS
INCLUDING PREPAYMENTS
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying mortgage loans in the
trust fund or, if the trust fund is comprised of underlying
securities, on the mortgage loans backing the underlying
securities;
o how payments of principal are allocated among the classes of
securities of that series as specified in the related prospectus
supplement;
o if any party has an option to terminate the related trust fund
early, the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund; and
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor, master servicer or mortgage loan seller.
Prepayments on mortgage loans are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. The rate of prepayment of the mortgage loans
included in or underlying the assets in each trust fund may affect the yield to
maturity of the securities. In general, if you purchase a class of offered
securities at a price higher than its outstanding principal balance and
principal distributions on such class occur faster than you anticipate at the
time of purchase, the yield will be lower than you anticipate. Conversely, if
you purchase a class of offered securities at a price lower than its outstanding
principal balance and principal distributions on that class occur more slowly
than you anticipate at the time of purchase, the yield will be lower than you
anticipate.
The yield to maturity on certain types of classes of securities including
Strip Securities (as defined herein), Accrual Securities (as defined herein),
securities with an interest rate which
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fluctuates inversely with an index or certain other classes in a series
including more than one class of securities, may be relatively more sensitive to
the rate of prepayment on the related mortgage loans than other classes of
securities and, if applicable, to the occurrence of an early retirement of the
securities.
To the extent amounts in any pre-funding account have not been used to
purchase additional mortgage loans, holders of the securities may receive an
additional prepayment.
SEE "YIELD CONSIDERATIONS" AND "MATURITY AND PREPAYMENT CONSIDERATIONS"
HEREIN.
EXERCISE OF OPTIONAL TERMINATION RIGHT WILL AFFECT THE YIELD TO MATURITY ON THE
RELATED SECURITIES
If so specified in the related prospectus supplement, certain parties will
have the option to purchase, in whole but not in part, the securities specified
in the related prospectus supplement in the manner set forth in the related
prospectus supplement. Upon the purchase of such securities or at any time
thereafter, at the option of the party entitled to such termination, the assets
of the trust fund may be sold, thereby effecting a retirement of the securities
and the termination of the trust fund, or the securities so purchased may be
held or resold.
The prospectus supplement for each series of securities will set forth the
party that may, at its option, purchase the assets of the related trust fund if
the aggregate principal balance of the mortgage loans and/or other trust fund
assets in the trust fund for that series is less than the percentage specified
in the related prospectus supplement of the aggregate principal balance of such
mortgage loans and/or other trust fund assets at the cut-off date for that
series (the "Clean-up Call"). Such percentage will be between 25% and 0%. The
exercise of such right will effect the early retirement of the securities of
that series. The prospectus supplement for each series of securities will set
forth the price to be paid by the terminating party and the amounts that the
holders of such securities will be entitled to receive upon such early
retirement.
In addition to the repurchase of the assets in the related trust fund
as described above, the related prospectus supplement may permit that, a holder
of a non-offered class of securities (the "Call Class") will have the right,
solely at its discretion, to terminate the related trust fund on any
distribution date after the 12th distribution date following the date of initial
issuance of the related series of securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the securities
of such series. Any such call will be of the entire trust fund at one time;
multiple calls with respect to any series of securities will not be permitted.
In such case, the holders of the related securities offered hereby will be paid
a price equal to 100% of the principal balance of such securities offered hereby
as of the day of such purchase plus accrued interest thereon at the applicable
interest rate during the related period on which interest accrues on such
securities (the "Call Price"). Further, the Call Class must remit to the related
trustee for distribution to the securityholders funds equal to the Call Price.
If such funds are not deposited with the related trustee, the securities will
remain outstanding. There will not be any additional remedies available to
securityholders. In addition, in the case of a trust fund for which a REMIC (as
defined herein) election or elections have been made, such termination will
constitute a "qualified liquidation" under Section 860F of the Internal Revenue
Code. In connection with a call by the Call Class, the final payment to the
securityholders will be made upon surrender of the related securities to the
trustee. Once the securities have been surrendered and paid in full, there will
not be any continuing liability from the securityholders or from the trust fund
to securityholders.
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A trust fund may also be terminated and the certificates retired upon
the master servicer's determination, if applicable and based upon an opinion of
counsel, that the REMIC status of the trust fund has been lost or that a
substantial risk exists that such status will be lost for the then current
taxable year.
The termination of a trust fund and the early retirement of securities by
any party may adversely affect the yield to holders of certain classes of such
related securities.
ERISA CONSIDERATIONS
If you are buying the offered securities on behalf of an individual
retirement account, Keogh plan or employee benefit plan, special rules may apply
to you. These rules are described in general in this prospectus under the
caption "ERISA Considerations." However, due to the complexity of regulations
that govern such plans, if you are subject to the Employment Retirement Income
Security Act of 1974, as amended ("ERISA") you are urged to consult your own
counsel regarding any consequences under ERISA of the acquisition, ownership and
disposition of the securities of any series offered hereby.
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates (as defined herein) will be
required to report on their federal income tax returns as ordinary income their
pro rata share of the taxable income of the REMIC (as defined herein),
regardless of the amount or timing of their receipt of cash payments, as
described in "Federal Income Tax Consequences--REMICs". Accordingly, under
certain circumstances, holders of offered securities that constitute REMIC
Residual Certificates may have taxable income and tax liabilities arising from
such investment during a taxable year in excess of the cash received during such
period. The requirement that holders of REMIC Residual Certificates report their
pro rata share of the taxable income and net loss of the REMIC will continue
until the certificate balances of all classes of securities of the related
series have been reduced to zero, even though holders of REMIC Residual
Certificates have received full payment of their stated interest and principal.
A portion (or, in certain circumstances, all) of such Certificateholder's share
of the REMIC taxable income may be treated as "excess inclusion" income to such
holder which (i) generally, will not be subject to offset by losses from other
activities, (ii) for a tax-exempt holder, will be treated as unrelated business
taxable income and (iii) for a foreign holder, will not qualify for exemption
from withholding tax. Individual holders of REMIC Residual Certificates may be
limited in their ability to deduct servicing fees and other expenses of the
REMIC. In addition, REMIC Residual Certificates are subject to certain
restrictions on transfer. Because of the special tax treatment of REMIC Residual
Certificates, the taxable income arising in a given year on a REMIC Residual
Certificate will not be equal to the taxable income associated with investment
in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the REMIC
Residual Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics.
ADDITIONAL RISK FACTORS WILL BE SET FORTH IN THE PROSPECTUS SUPPLEMENT RELATED
TO A SERIES OF SECURITIES
The prospectus supplement relating to a series of offered securities will
set forth additional risk factors pertaining to the characteristics or behavior
of the assets to be included in a particular trust fund and, if applicable,
certain legal aspects of such trust fund assets as well as any risk factors
pertaining to the investment in a particular class of offered securities.
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THE TRUST FUNDS
Each series of Mortgage Pass-Through Certificates (the "Certificates") will
represent in the aggregate the entire beneficial ownership interest in, and each
series of Mortgage-Backed Notes (the "Notes"; the Certificates and the Notes,
together, the "Securities") will represent indebtedness of certain assets
deposited into a trust fund (the "Trust Fund" or the "Trust Fund Assets"). The
Trust Fund for any series of Securities will consist of (a) a segregated pool (a
"Mortgage Pool") of various types of one- to four-family residential first and
junior lien mortgage loans, multifamily residential mortgage loans, cooperative
apartment loans or manufactured housing conditional sales contracts and
installment loan agreements (collectively, the "Mortgage Loans"), or beneficial
interests therein, (b) pass-through or participation certificates issued or
guaranteed by the Government National Mortgage Association ("GNMA"), Fannie Mae
or Freddie Mac (any such certificates, "Agency Securities"), (c) pass-through or
participation certificates or other mortgage-backed securities issued or
guaranteed by private entities ("Private Mortgage-Backed Securities") or (d)
funding agreements secured by Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities (each, a "Funding Agreement"), or any combination
thereof, together with other assets described herein. All Trust Fund Assets will
have been purchased by the Depositor on or before the date of initial issuance
of the related Securities.
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans may consist of mortgage loans secured by first or junior
liens on by one- to four-family residential properties ("Single Family
Properties" and the related loans, "Single Family Loans"), mortgage loans
secured by rental apartments or projects (including apartment buildings owned by
cooperative housing corporations) containing five or more dwelling units
("Multifamily Properties" and the related loans, "Multifamily Loans"), mortgage
loans secured by shares in a private cooperative housing corporation (a
"Cooperative" and the related loans, "Cooperative Loans") that give the owner
thereof the right to occupy a particular dwelling unit (each, a "Cooperative
Unit") in the Cooperative or conditional sales contracts and installment loan
agreements with respect to new or used Manufactured Homes (as defined herein,
and the related contracts or agreements, the "Contracts"), or beneficial
interests therein, or real property acquired upon foreclosure or comparable
conversion of such Mortgage Loans. The Single-Family Properties, Cooperative
shares (together with the right to occupy a particular Cooperative Unit
evidenced thereby) and Manufactured Homes (collectively, the "Mortgaged
Properties") may be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. The
Mortgaged Properties may include leasehold interests in residential properties,
the title to which is held by third party lessors. The term of any such
leasehold will exceed the term of the Mortgage Note by at least five years.
Each Mortgage Loan will have been originated by a person (the "Originator")
not affiliated with Salomon Brothers Mortgage Securities VII, Inc. (the
"Depositor"). Each Mortgage Loan will be selected by the Depositor for inclusion
in a Mortgage Pool from among those purchased, either directly or indirectly, on
or before the date of initial issuance of the related Securities, from a prior
holder thereof (a "Mortgage Loan Seller"), which prior holder may not be the
Originator thereof and may be an affiliate of the Depositor. SEE "MORTGAGE LOAN
PROGRAM--UNDERWRITING STANDARDS".
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have individual principal
balances at origination of not less than $25,000 or more than $5,000,000, (ii)
have monthly payments due on the first day of each month,
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(iii) have original terms to maturity of not more than 40 years and (iv) be one
of the following types of mortgage loans:
(1) Fully amortizing Mortgage Loans with a fixed rate of interest (an
"Interest Rate") and level monthly payments to maturity;
(2) Fully amortizing Mortgage Loans with an Interest Rate adjusted
periodically (with corresponding adjustments in the amount of monthly
payments) to equal the sum (which may be rounded) of a fixed percentage
amount and an index ("ARM Loans"), as described in the related Prospectus
Supplement;
(3) ARM Loans that provide for an election, at the borrower's option,
to convert the adjustable Interest Rate to a fixed interest rate, as
described in the related Prospectus Supplement;
(4) ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal balance
of the loan at its then applicable Interest Rate over its remaining term;
(5) Fully amortizing Mortgage Loans with a fixed Interest Rate and
level monthly payments, or payments of interest only, during the early
years of the term, followed by periodically increasing monthly payments of
principal and interest for the duration of the term or for a specified
number of years, as described in the related Prospectus Supplement;
(6) Fixed Interest Rate Mortgage Loans providing for level payment of
principal and interest on the basis of an assumed amortization schedule and
a balloon payment at the end of a specified term; and
(7) Another type of Mortgage Loan described in the related Prospectus
Supplement.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans secured by junior liens, and the related senior
liens ("Senior Liens") may not be included in the Mortgage Pool. The primary
risk to holders of Mortgage Loans secured by junior liens is the possibility
that adequate funds will not be received in connection with a foreclosure of the
related Senior Liens to satisfy fully both the Senior Liens and the Mortgage
Loan. In the event that a holder of a Senior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure or similar sale will be applied first
to the payment of court costs and fees in connection with the foreclosure,
second to real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the Mortgage
Loan, if such proceeds are sufficient, before the Trust Fund as holder of the
junior lien receives any payments in respect of the Mortgage Loan. If the Master
Servicer were to foreclose on any Mortgage Loan, it would do so subject to any
related Senior Liens. In order for the debt related to the Mortgage Loan to be
paid in full at such sale, a bidder at the foreclosure sale of such Mortgage
Loan would have to bid an amount sufficient to pay off all sums due under the
Mortgage Loan and the Senior Liens or purchase the Mortgaged Property subject to
the Senior Liens. In the event that such proceeds from a foreclosure or similar
sale of the related Mortgaged Property are insufficient to satisfy all Senior
Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of
the junior lien, and, accordingly, holders of one or more classes of the
Securities bear (i) the risk of delay in distributions while a deficiency
judgment against the borrower is obtained and
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(ii) the risk of loss if the deficiency judgment is not realized upon. Moreover,
deficiency judgments may not be available in certain jurisdictions. In addition,
a junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because the average outstanding principal balance of the Mortgage Loans is
smaller relative to the size of the average outstanding principal balance of the
loans in a typical pool of first priority mortgage loans, liquidation proceeds
may also be smaller as a percentage of the principal balance of a Mortgage Loan
than would be the case in a typical pool of first priority mortgage loans.
Unless otherwise specified in the related Prospectus Supplement, the
following requirements as to the Loan-to-Value Ratio of each Mortgage Loan of
the type described above shall apply. The "Loan-to-Value Ratio" of a Mortgage
Loan at any given time is the ratio (expressed as a percentage) of the then
outstanding principal balance of the Mortgage Loan, plus, in the case of a
Mortgage Loan secured by a junior lien, the outstanding principal balance of the
related Senior Liens, to the Value of the related Mortgaged Property. The Value
of a Single-Family Property, Multifamily Property or Cooperative Unit, other
than with respect to Refinance Loans, is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
loan and (b) the sales price for such property. "Refinance Loans" are mortgage
loans made to refinance existing loans. The Value of the Mortgaged Property
securing a Refinance Loan is the appraised value thereof determined in an
appraisal obtained at the time of origination of the Refinance Loan. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Value is no greater than the sum of a fixed percentage of the list
price of the unit actually billed by the manufacturer to the dealer (exclusive
of freight to the dealer site) including "accessories" identified in the invoice
(the "Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. Unless otherwise specified in the
related Prospectus Supplement, with respect to a used Manufactured Home, the
Value is the least of the sale price, the appraised value, and the National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
A Mortgaged Property may have been subject to secondary financing at
origination of the Mortgage Loan, but, unless otherwise specified in the related
Prospectus Supplement, the total amount of primary and secondary financing at
the time of origination of the Mortgage Loan did not produce a combined
Loan-to-Value Ratio in excess of (i) 90% in the case of a Mortgage Loan secured
by an owner-occupied primary residence or (ii) 80% in the case of a Mortgage
Loan secured by a vacation or second home.
If so provided in the related Prospectus Supplement certain or all of the
Single Family Loans may have Loan-to-Value Ratios in excess of 80% and as high
as 125% that are not insured by primary mortgage insurance policies (such
Mortgage Loans, "High LTV Loans").
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With respect to each Mortgaged Property, unless otherwise provided in the
related Prospectus Supplement, the borrower will have represented that the
dwelling is either (a) an owner-occupied primary residence or (b) a vacation or
second home that (i) is not part of a mandatory rental pool and (ii) is suitable
for year-round occupancy. With respect to a vacation or second home, no income
derived from the property will be considered for underwriting purposes.
Unless otherwise specified in the related Prospectus Supplement, the
aggregate principal balance on the Cut-off Date of Mortgage Loans secured by
condominium units will not exceed 30% of the aggregate principal balance of the
Mortgage Loans in the related Mortgage Pool. A Mortgage Loan secured by a
condominium unit will not be included in a Mortgage Pool unless, at the time of
sale of such Mortgage Loan by the Mortgage Loan Seller, certain representations
and warranties as to the condominium project are made by the Mortgage Loan
Seller or an affiliate thereof or by such other person acceptable to the
Depositor having knowledge regarding the subject matter of such representations
and warranties. Unless otherwise specified in the related Prospectus Supplement,
such Mortgage Loan Seller, or another party on its behalf, will have made the
following representations and warranties. If a condominium project is subject to
developer control or to incomplete phasing or add-ons, at least 70% of the units
have been sold to bona fide purchasers and are occupied as primary residences or
vacation or second homes. If a condominium project has been controlled by the
unit owners (other than the developer) for less than two years and is not
subject to incomplete phasing or add-ons, at least 70% of the units have been
sold to bona fide purchasers and at least 60% of the units are occupied as
primary residences or vacation or second homes. The foregoing percentages may be
modified in the case of a particular project upon proof of demonstrated market
acceptance but in no event will any such percentage be reduced below 51%. If a
condominium project has been controlled by the unit owners (other than the
developer) for at least two years, has all common elements completed and is not
subject to phasing or add-ons, the Mortgage Loan Seller, or another party on its
behalf, must represent and warrant, unless otherwise specified in the related
Prospectus Supplement, that the marketability of the project has been proven and
that at least 90% of the units have been sold to bona fide purchasers. SEE
"MORTGAGE LOAN PROGRAM--REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN
SELLERS; REPURCHASES" HEREIN FOR A DESCRIPTION OF CERTAIN OTHER REPRESENTATIONS
MADE BY OR ON BEHALF OF MORTGAGE LOAN SELLERS AT THE TIME MORTGAGE LOANS ARE
SOLD.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Mortgage Loans subject to temporary buydown plans ("Buydown
Mortgage Loans"), pursuant to which the monthly payments made by the borrower in
the early years of the Mortgage Loan (the "Buydown Period") will be less than
the scheduled monthly payments on the Mortgage Loan, the resulting difference to
be made up from (i) an amount contributed by the borrower, the seller of the
Mortgaged Property, or another source (such amount, exclusive of investment
earnings thereon, being hereinafter referred to as "Buydown Funds") and placed
in a custodial account and (ii) unless otherwise specified in the Prospectus
Supplement, investment earnings on the Buydown Funds. SEE "DESCRIPTION OF THE
SECURITIES--PAYMENTS ON MORTGAGE LOANS. Generally, the borrower under each
Buydown Mortgage Loan will be qualified at the applicable Buydown Mortgage Rate.
Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the
ability of the borrower to make larger level monthly payments after the Buydown
Funds have been depleted and, for certain Buydown Mortgage Loans, during the
Buydown Period. SEE "MORTGAGE LOAN PROGRAM--UNDERWRITING STANDARDS" FOR A
DISCUSSION OF LOSS AND DELINQUENCY CONSIDERATIONS RELATING TO BUYDOWN MORTGAGE
LOANS.
Except in the case of High LTV Loans and as otherwise specified in the
related Prospectus Supplement, each Mortgage Loan having a Loan-to-Value Ratio
at origination in excess of 80%, is required to be covered by a primary mortgage
guaranty insurance policy insuring against default on
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such Mortgage Loan as to at least the principal amount thereof exceeding 75% of
the Value of the Mortgaged Property at origination of the Mortgage Loan. Such
insurance must remain in force at least until the Mortgage Loan amortizes to a
level that would produce a Loan-to-Value Ratio lower than 80%. SEE "DESCRIPTION
OF PRIMARY INSURANCE POLICIES--PRIMARY MORTGAGE INSURANCE POLICIES".
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans, Agency Securities, Private
Mortgage-Backed Securities or Funding Agreements contained in the related Trust
Fund, including (i) the aggregate outstanding principal balance, the largest,
smallest and average outstanding principal balance of the Trust Fund Assets as
of the applicable Cut-off Date, and, with respect to Mortgage Loans secured by a
junior lien, the amount of the related Senior Liens, (ii) the type of property
securing the Mortgage Loans (e.g., one- to four-family houses, multifamily
residential dwellings, shares in Cooperatives and the related proprietary leases
or occupancy agreements, condominium units and other attached units, new or used
Manufactured Homes and vacation and second homes), (iii) the original terms to
maturity of the Mortgage Loans, (iv) the earliest origination date and latest
maturity date, (v) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, or, with respect to Mortgage
Loans secured by a junior lien, the aggregate principal balance of Mortgage
Loans having combined Loan-to-Value Ratios exceeding 80%, (vi) the Interest
Rates or range of Interest Rates borne by the Mortgage Loans or mortgage loans
underlying the Agency Securities, Private Mortgage-Backed Securities or Funding
Agreements, (vii) the geographical distribution of the Mortgage Loans on a
state-by-state basis, (viii) the number and aggregate principal balance of
Buydown Mortgage Loans, if any, (ix) the weighted average Retained Interest, if
any, (x) with respect to ARM Loans, the adjustment dates, the highest, lowest
and weighted average margin, and the maximum Interest Rate variation at the time
of any adjustment and over the life of the ARM Loan, and (xi) with respect to
Mortgage Loans of the type described in (5) above, whether such loans provide
for payments of interest only for any period and the frequency and amount by
which, and the term during which, monthly payments adjust. If specific
information respecting the Trust Fund Assets is not known to the Depositor at
the time Securities are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed, together with the related Pooling and Servicing Agreement or
Trust Agreement, with respect to each series of Certificates, or the related
Servicing Agreement, Trust Agreement and Indenture, with respect to each series
of Notes, as part of a report on Form 8-K with the Securities and Exchange
Commission within fifteen days after such initial issuance.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the respective dates of origination
of the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the rates of delinquencies,
foreclosures or repossessions and losses could be higher than those now
generally experienced by institutional lenders. Manufactured Homes are less
likely to experience appreciation in value and more likely to experience
depreciation in value over time than other types of housing properties. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the rates of
delinquencies, foreclosures or repossessions and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by Credit Support,
such losses will be borne, at least in part, by the holders of one or more
classes of the Securities of the related series offered hereby.
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The Depositor will cause the Mortgage Loans comprising each Trust Fund to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other loan servicing institutions pursuant to
a Pooling and Servicing Agreement or Servicing Agreement among the Depositor,
itself and the Trustee, and will receive a fee for such services. See "Mortgage
Loan Program" and "Description of the Securities". With respect to Mortgage
Loans serviced by the Master Servicer through a Sub- Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Pooling and Servicing Agreement or Servicing Agreement as if the Master Servicer
alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties regarding
the Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will
be without recourse. SEE "DESCRIPTION OF THE SECURITIES-ASSIGNMENT OF TRUST FUND
ASSETS".
The obligations of the Master Servicer with respect to the Mortgage Loans
will consist principally of its contractual servicing obligations under the
related Pooling and Servicing Agreement or Servicing Agreement (including its
obligation to enforce certain purchase and other obligations of Sub-Servicers or
Mortgage Loan Sellers, or both, as more fully described herein under "Mortgage
Loan Program--Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" and "Description of the Securities--Sub-Servicing" and
"--Assignment of Trust Fund Assets") and, unless otherwise provided in the
related Prospectus Supplement, its obligation to make certain cash advances in
the event of delinquencies in payments on or with respect to the Mortgage Loans
in amounts described herein under "Description of the Securities--Advances in
respect of Delinquencies". Any obligation of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
SINGLE-FAMILY LOANS
The Single-Family Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by first mortgages or first deeds of trust (the
"Mortgages") creating a first lien on the Single-Family Properties. The
Single-Family Properties will consist of one- to four-family residences,
including detached and attached dwellings, townhouses, rowhouses, individual
condominium units, individual units in planned-unit developments and individual
units in de minimis planned-unit developments. Single-Family loans may be
conventional loans, FHA-insured loans or VA-guaranteed loans as specified in the
related Prospectus Supplement.
MULTIFAMILY LOANS
The Multifamily Loans will be evidenced by Mortgage Notes secured by
Mortgages creating a first lien on the Multifamily Properties. The Multifamily
Properties will consist of rental apartments or projects (including apartment
buildings owned by cooperative housing cooperatives) containing five or more
dwelling units. Multifamily Properties may include high-rise, mid-rise and
garden apartments. Multifamily Loans may be conventional loans or FHA insured
loans as specified in the related Prospectus Supplement.
COOPERATIVE LOANS
The Cooperative Loans will be evidenced by promissory notes (the
"Cooperative Notes") secured by security interests in shares issued by
Cooperatives and in the related proprietary leases
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or occupancy agreements granting exclusive rights to occupy specific CooperativE
Units in the related buildings.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The Manufactured Homes securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under this chapter."
AGENCY SECURITIES
The Agency Securities evidenced by a series of Certificates will consist of
(i) Mortgage Participation Certificates issued and guaranteed as to timely
payment of interest and, unless otherwise specified in the related Prospectus
Supplement, ultimate payment of principal by the Federal Home Loan Mortgage
Corporation ("Freddie Mac Certificates"), (ii) Guaranteed Mortgage Pass-Through
Certificates issued and guaranteed as to timely payment of principal and
interest by the Federal National Mortgage Association ("Fannie Mae
Certificates"), (iii) fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association ("GNMA Certificates"), (iv) stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the principal distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all such
distributions) on certain Freddie Mac, Fannie Mae or GNMA Certificates and,
unless otherwise specified in the Prospectus Supplement, guaranteed to the same
extent as the underlying securities, (v) another type of guaranteed pass-through
certificate issued or guaranteed by GNMA, Fannie Mae or Freddie Mac and
described in the related Prospectus Supplement or (vi) a combination of such
Agency Securities. All GNMA Certificates will be backed by the full faith and
credit of the United States. No Freddie Mac or Fannie Mae Certificates will be
backed, directly or indirectly, by the full faith and credit of the United
States.
The Agency Securities may consist of pass-through securities issued under
Freddie Mac's Cash or Guarantor Program, the GNMA I Program, the GNMA II Program
or another program specified in the Prospectus Supplement. The payment
characteristics of the Mortgage Loans underlying the Agency Securities will be
described in the related Prospectus Supplement.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GNMA is a wholly-owned corporate instrumentality of the United States with
the United States Department of Housing and Urban Development. Section 306(g) of
Title II of the National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and interest
on certificates which represent an interest in a pool of mortgage loans insured
by FHA under the Housing Act, or Title V of the Housing Act of 1949 ("FHA
Loans"), or
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partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944,
as amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at
anytime sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES
Each GNMA Certificate held in a Trust Fund (which may be issued under
either the GNMA I program or the GNMA II program) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by Fannie Mae as a seller-servicer of FHA Loans and/or VA Loans. The
mortgage loans underlying the GNMA Certificates will consist of FHA Loans and/or
VA Loans. Each such mortgage loan is secured by a one- to four-family
residential property. GNMA will approve the issuance of each such GNMA
Certificate in accordance with a guaranty agreement (a "Guaranty Agreement")
between GNMA and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA
Issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each such GNMA Certificate, even if the payments
received by the GNMA Issuer on the FHA Loans or VA Loans underlying each such
GNMA Certificate are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
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All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a series of Certificates may be held in
book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). The common stock of Freddie Mac is owned by the Federal Home
Loan Banks. Freddie Mac was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The
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principal activity of Freddie Mac currently consists of the purchase of first
lien conventional mortgage loans or participation interests in such mortgage
loans and the sale of the mortgage loans or participations so purchased in the
form of mortgage securities, primarily Freddie Mac Certificates. Freddie Mac is
confined to purchasing, so far as practicable, mortgage loans that it deems to
be of such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans (a "Freddie Mac Certificate group"). Freddie Mac Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A Freddie Mac
Certificate may be issued under either Freddie Mac's Cash Program or Guarantor
Program.
Mortgage loans underlying the Freddie Mac Certificates held in a Trust Fund
will consist of mortgage loans with original terms to maturity of between 10 and
30 years. Each such mortgage loan must meet the applicable standards set forth
in the Freddie Mac Act. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate group. Under
the Guarantor Program, any such Freddie Mac Certificate group may include only
whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable Certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac Certificate group represented by such Freddie
Mac Certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac Certificate collection by such holder of all
principal on the underlying mortgage loans, without any offset or deduction, to
the extent of such holder's pro rata share thereof, but does not, except if and
to the extent specified in the Prospectus Supplement for a series of
Certificates, guarantee the timely payment of scheduled principal. Under Freddie
Mac's Gold PC Program, Freddie Mac guarantees the timely payment of principal
based on the difference between the pool factor, published in the month
preceding the month of distribution and the pool factor published in such month
of distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac Certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each mortgagor, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan
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Bank. The obligations of Freddie Mac under its guarantee are obligations solely
of Freddie Mac and are not backed by, nor entitled to, the full faith and credit
of the United States. If Freddie Mac were unable to satisfy such obligations,
distributions to holders of Freddie Mac Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Freddie Mac Certificates would be affected
by delinquent payments and defaults on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which such payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the pass-through rate on the Freddie Mac Certificate. Under such
program, Freddie Mac purchases groups of whole mortgage loans from sellers at
specified percentages of their unpaid principal balances, adjusted for accrued
or prepaid interest, which when applied to the interest rate of the mortgage
loans and participations purchased, results in the yield (expressed as a
percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a Freddie Mac Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a Freddie Mac Certificate group based upon their yield to Freddie Mac rather
than on the interest rate on the underlying mortgage loans. Under Freddie Mac's
Guarantor Program, the pass-through rate on a Freddie Mac Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's management
and guaranty income as agreed upon between the seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the Freddie Mac Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac Certificates sold by Freddie Mac
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders thereof in accordance with such holders'
instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
Fannie Mae is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (the "Charter Act"). Fannie Mae was originally established in 1938 as a
United States government agency to provide supplemental liquidity to the
mortgage market and was transformed into a stockholder-owned and privately-
managed corporation by legislation enacted in 1968.
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Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, Fannie
Mae helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
FANNIE MAE CERTIFICATES
Fannie Mae Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by Fannie Mae. Each mortgage loan must meet the applicable standards of the
Fannie Mae purchase program. Mortgage loans comprising a pool are either
provided by Fannie Mae from its own portfolio or purchased pursuant to the
criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held in a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be between either 8 to
15 years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a Fannie Mae Certificate is equal to the lowest interest
rate of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option (pursuant to which the mortgagee or other
servicers assumes the entire risk of foreclosure losses), the annual interest
rates on the mortgage loans underlying a Fannie Mae Certificate will be between
50 basis points and 250 basis points greater than in its annual pass-through
rate and under a special servicing option (pursuant to which Fannie Mae assumes
the entire risk for foreclosure losses), the annual interest rates on the
mortgage loans underlying a Fannie Mae Certificate will generally be between 55
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the Prospectus Supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae Certificate
that it will distribute amounts representing such holder's proportionate share
of scheduled principal and interest payments at the applicable pass-through rate
provided for by such Fannie Mae Certificate on the underlying mortgage loans,
whether or not received, and such holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations of
Fannie Mae under its guarantees are obligations solely of Fannie Mae and are not
backed by, nor entitled to, the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any agency thereof is obligated to finance Fannie
Mae's operations or to assist Fannie Mae in any other manner. If Fannie Mae were
unable to satisfy its obligations, distributions to holders of Fannie Mae
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Fannie Mae Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment
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mortgage loans or mortgage loans secured by multifamily projects) are available
in book-entry form only. Distributions of principal and interest on each Fannie
Mae Certificate will be made by Fannie Mae on the 25th day of each month to the
persons in whose name the Fannie Mae Certificate is entered in the books of the
Federal Reserve Banks (or registered on the Fannie Mae Certificate register in
the case of fully registered Fannie Mae Certificates) as of the close of
business on the last day of the preceding month. With respect to Fannie Mae
Certificates issued in book-entry form, distributions thereon will be made by
wire, and with respect to fully registered Fannie Mae Certificates,
distributions thereon will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain Freddie Mac, Fannie Mae or GNMA Certificates. The
underlying securities will be held under a trust agreement by Freddie Mac,
Fannie Mae or GNMA, each as trustee, or by another trustee named in the related
Prospectus Supplement. Freddie Mac, Fannie Mae or GNMA will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES
If specified in the related Prospectus Supplement, a Trust Fund may include
other mortgage pass-through certificates issued or guaranteed by GNMA, Fannie
Mae or Freddie Mac. The characteristics of any such mortgage pass-through
certificates will be described in such Prospectus Supplement. If so specified, a
combination of different types of Agency Securities may be held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL
Private Mortgage-Backed Securities may consist of (a) mortgage
participations or pass-through certificates evidencing an undivided interest in
a pool of mortgage loans or (b) collateralized mortgage obligations secured by
mortgage loans. Private Mortgage-Backed Securities will have been issued
pursuant to a pooling and servicing agreement, an indenture or similar agreement
(a "PMBS Agreement"). The seller/servicer of the underlying mortgage loans will
have entered into the PMBS Agreement with the trustee under such PMBS Agreement
(the "PMBS Trustee"). The PMBS Trustee or its agent, or a custodian, will
possess the mortgage loans underlying such Private Mortgage-Backed Security.
Mortgage loans underlying a Private Mortgage-Backed Security will be serviced by
a servicer (the "PMBS Servicer") directly or by one or more subservicers who may
be subject to the supervision of the PMBS Servicer. The PMBS Servicer will be a
Fannie Mae or Freddie Mac approved servicer and, if FHA Loans underlie the
Private Mortgage-Backed Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
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the purpose of among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate
of the Depositor. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buy-down loans, adjustable rate mortgage loans, or loans
having balloon or other special payment features. Such Mortgage Loans may be
secured by single family property, multifamily property, manufactured homes or
by an assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the related shares issued by such
Cooperative. Except as otherwise specified in the related Prospectus Supplement,
(i) no mortgage loan will have had a Loan-to-Value Ratio at origination in
excess of 95% (except in the case of High LTV Loans), (ii) each single family
loan secured by a mortgaged property having a loan-to-value ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy
(except in the case of High LTV Loans), (iii) each mortgage loan will have had
an original term to stated maturity of not less than 5 years and not more than
40 years, (iv) no mortgage loan that was more than 30 days delinquent as to the
payment of principal or interest will have been eligible for inclusion in the
assets under the related PMBS Agreement, (v) each mortgage loan (other than a
cooperative loan) will be required to be covered by a standard hazard insurance
policy (which may be a blanket policy) and (vi) each mortgage loan (other than a
cooperative loan or a Contract secured by a manufactured home) will be covered
by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES
Credit support in the form of reserve funds, subordination of other private
mortgage-backed securities issued under the PMBS Agreement, letters of credit,
insurance policies or other types of credit support may be provided with respect
to the mortgage loans underlying the Private Mortgage- Backed Securities or with
respect to the Private Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION
The Prospectus Supplement for a series for which the Trust Fund includes
Private Mortgage- Backed Securities will specify (i) the aggregate approximate
principal amount and type of the Private Mortgage-Backed Securities to be
included in the Trust Fund, (ii) certain characteristics of the
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mortgage loans which comprise the underlying assets for the Private
Mortgage-Backed Securities including (A) the payment features of such mortgage
loans, (B) the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity, (C) the servicing
fee or range of servicing fees with respect to the mortgage loans and (D) the
minimum and maximum stated maturities of the underlying mortgage loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Mortgage-Backed Securities, (v) the pass-through or certificate rate
of the Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the mortgage loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the term on which the underlying
mortgage loans for such Private Mortgage-Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and (x) the terms on which mortgage loans may
be substituted for those originally underlying the Private Mortgage-Backed
Securities.
FUNDING AGREEMENTS
If specified in the Prospectus Supplement for a series, the Depositor may
enter into a funding agreement with a limited-purpose subsidiary or affiliate of
a Mortgage Loan Seller (a "Finance Company") pursuant to which (i) the Depositor
will lend the net proceeds of the sale of the Securities to such Finance
Company, (ii) the Finance Company will pledge Trust Fund Assets owned by it to
secure the loan from the Depositor, and (iii) the Depositor will assign the
Funding Agreement, as so secured, to the Trust Fund for a series (a "Funding
Agreement"). No Finance Company will be authorized to engage in any business
activities other than the financing and sale of Trust Fund Assets.
Pursuant to a Funding Agreement (i) the Depositor will lend a Finance
Company the proceeds from the sale of a series of Securities and such Finance
Company will pledge to the Depositor as security therefor Trust Fund Assets
having an aggregate unpaid principal balance as of any date of determination
equal to at least the amount of the loan, and (ii) the Finance Company will
agree to repay such loan by causing payments on the Trust Fund Assets to be made
to the Trustee as assignee of the Depositor in such amounts as are necessary
(together with payments from the related Reserve Fund or other funds or
accounts) to pay accrued interest on such loan and to amortize the entire
principal amount of such loan. A Finance Company is not obligated to provide
additional collateral to secure the loan pursuant to a Funding Agreement
subsequent to the issuance of the Securities of the series by the Trust Fund.
Unless the Depositor, the Master Servicer or other entity designated in the
Prospectus Supplement exercises its option to terminate the Trust Fund and
retire the Securities of a series, or a Finance Company defaults under its
Funding Agreement, such Finance Company's loan may not be prepaid other than as
a result of prepayments on the pledged Trust Fund Assets. If the Finance
Company, nevertheless, were to attempt to prepay its loan, the loan would not be
deemed prepaid in full unless the Finance Company paid the Depositor an amount
sufficient to enable the Depositor to purchase other Trust Fund Assets
comparable in yield and maturity to the Finance Company's Trust Fund Assets
pledged under the Funding Agreement. The Trustee then could either (i) purchase
such other Trust Fund Assets and substitute them for the Trust Fund Assets
pledged by the Finance Company, to the extent that such purchase and
substitution did not adversely affect the
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tax treatment of the related series, or (ii) deposit the amount of the Finance
Company's prepayment in the Certificate Account.
In the event of a default under a Funding Agreement, the Trustee will have
recourse to the related Finance Company for the benefit of the holders of the
Securities, including the right to foreclose upon the Trust Fund Assets securing
that Funding Agreement. The participating Finance Companies will be
limited-purpose finance entities and, therefore, it is unlikely that a
defaulting Finance Company will have any significant assets except those pledged
to the Trust Fund for the series and those that secure other mortgage-backed
securities and collateralized mortgage obligations. The Trustee has no recourse
to assets pledged to secure other securities except to the limited extent that
funds generated by such assets exceed the amount required to pay those
securities and are released from the lien securing such other securities and
returned to a Finance Company. For that reason, prospective purchasers of
Securities should make their investment decisions on the basis that the
Securities of a series have rights solely with respect to the assets transferred
to the Trust Fund for that series of Securities.
In the event of a default under a Funding Agreement and the sale by the
Trustee of the Trust Fund Assets securing the obligations of the Finance Company
under the Funding Agreement, the Trustee may distribute principal in an amount
equal to the unpaid principal balance of the Trust Fund Assets so liquidated
ratably among all classes of Securities within the series, or in such other
manner as may be specified in the related Prospectus Supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects that it will
make additional sales of securities similar to the Securities from time to time,
but the timing and amount of offerings of Securities will depend on a number of
factors, including the volume of Trust Fund Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
Unless otherwise provided in the related Prospectus Supplement, each
monthly interest payment on a Trust Fund Asset is calculated as one-twelfth of
the applicable Interest Rate multiplied by the unpaid principal balance thereof.
Interest to be distributed on each Distribution Date to the holders of the
various classes of Securities (other than certain classes of Strip Securities)
of each series will be similarly calculated for the applicable period, as
one-twelfth of the applicable Security Interest Rate multiplied by the
outstanding Principal Balance thereof, except as provided below with respect to
prepayments. In the case of Strip Securities with no or, in certain cases, a
nominal Principal Balance, such distributions of interest will be in an amount
(as to any Distribution Date, "Stripped Interest") described in the related
Prospectus Supplement.
The effective yield to Securityholders will be lower than the yield
otherwise produced by the applicable Security Interest Rate (or, as to a Strip
Security, the distributions of Stripped Interest thereon) and purchase price,
because although interest accrued on each Trust Fund Asset during each month is
due and payable on the first day of the following month (unless otherwise
provided in the related Prospectus Supplement), the distribution of interest on
the Securities will not be made until the Distribution Date occurring in the
month following the month of accrual of interest in the case of Mortgage Loans,
and in later months in the case of Agency Securities, Private Mortgage-
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Backed Securities or Funding Agreements and in the case of a series of
Securities having Distribution Dates occurring at intervals less frequently than
monthly.
Unless otherwise specified in the related Prospectus Supplement, when a
principal prepayment in full is made on a Mortgage Loan or a mortgage loan
underlying a Private Mortgage-Backed Security, the borrower is charged interest
only for the period from the due date of the preceding monthly payment up to the
date of such prepayment, instead of for a full month. Accordingly, the effect of
principal prepayments in full during any month will be to reduce the aggregate
amount of interest collected that is available for distribution to
Securityholders. If so provided in the related Prospectus Supplement, certain of
the Mortgage Loans or the mortgage loans underlying a Private Mortgage-Backed
Security may contain provisions limiting prepayments hereof or requiring the
payment of a prepayment penalty upon prepayment in full or in part. Unless
otherwise specified in the related Prospectus Supplement, partial principal
prepayments are applied on the first day of the month following receipt, with no
resulting reduction in interest payable for the period in which the partial
principal prepayment is made. Unless specified otherwise in the related
Prospectus Supplement, neither the Trustee, the Master Servicer nor the
Depositor will be obligated to fund shortfalls in interest collections resulting
from prepayments. Holders of Agency Securities are entitled to a full month's
interest in connection with prepayments in full of the underlying mortgage
loans. Full and partial principal prepayments collected during the applicable
Prepayment Period will be available for distribution to Securityholders on the
related Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, a "Prepayment Period" in respect of any Distribution Date will
commence on the first day of the month in which the preceding Distribution Date
occurs (or, as to the first Prepayment Period, the day after the Cut-off Date)
and will end on the last day of the month prior to the month in which the
related Distribution Date occurs. SEE "MATURITY AND PREPAYMENT CONSIDERATIONS"
AND "DESCRIPTION OF THE SECURITIES--GENERAL".
In addition, if so specified in the related Prospectus Supplement, a
holder of a non-offered class of Securities (the "Call Class") will have the
right, solely at its discretion, to terminate the related Trust Fund on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
Such termination would result in the concurrent retirement of all outstanding
Securities of the related series and would decrease the average lives of such
Securities, perhaps significantly. The earlier after the Closing Date that such
termination occurs, the greater would be such effect.
The Prospectus Supplement for each series of Securities may set forth
additional information regarding yield considerations.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the Trust Fund Assets in a particular
Trust Fund will vary depending upon the type of mortgage loans underlying or
comprising the Trust Fund Assets in such Trust Fund. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Trust
Fund Assets in the related Trust Fund. Unless otherwise specified in the related
Prospectus Supplement, all of the Single-Family Loans, Cooperative Loans and
Contracts and all of the mortgage loans underlying the Agency Securities,
Private Mortgage-Backed Securities and Funding Agreements may be prepaid without
penalty in full or in part at any time. If so provided in the related Prospectus
Supplement, certain of the Mortgage Loans may contain provisions
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prohibiting prepayment for a specified period after the origination date (a
"Lockout Period" and the date of expiration thereof, a "Lockout Date"),
prohibiting partial prepayments entirely or prohibiting prepayment in full or in
part without a prepayment penalty.
The prepayment experience on the mortgage loans underlying or comprising
the Trust Fund Assets in a Trust Fund will affect the weighted average life of
the related series of Securities. Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security until
each dollar of principal of such security will be repaid to the investor. The
weighted average life of the Securities of a series will be influenced by the
rate at which principal on the mortgage loans underlying or comprising the Trust
Fund Assets included in the related Trust Fund is paid, which payments may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments, in whole or in part, and liquidations due to
default and hazard or condemnation losses). The rate of prepayment with respect
to fixed rate mortgage loans has fluctuated significantly in recent years. In
general, if interest rates fall below the Interest Rates on the mortgage loans
underlying or comprising the Trust Fund Assets, the rate of prepayment would be
expected to increase. There can be no assurance as to the rate of prepayment of
the mortgage loans underlying or comprising the Trust Fund Assets in any Trust
Fund. The Depositor is not aware of any publicly available statistics relating
to the principal prepayment experience of diverse portfolios of mortgage loans
over an extended period of time. All statistics known to the Depositor that have
been compiled with respect to prepayment experience on mortgage loans indicates
that while some mortgage loans may remain outstanding until their stated
maturities, a substantial number will be paid prior to their respective stated
maturities. The Depositor is not aware of any historical prepayment experience
with respect to mortgage loans secured by properties located in Puerto Rico or
Guam and, accordingly, prepayments on such loans may not occur at the same rate
or be affected by the same factors as other mortgage loans.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, the terms
of the mortgage loans (as affected by the existence of lockout provisions,
due-on-sale and due-on-encumbrance clauses and prepayment fees), the quality of
management of the mortgaged properties, possible changes in tax laws and the
availability of mortgage funds, may affect prepayment experience. Unless
otherwise provided in the related Prospectus Supplement, all Mortgage Loans,
mortgage loans underlying Private Mortgage- Backed Securities or mortgage loans
secured by Funding Agreements will contain due-on-sale provisions permitting the
lender to accelerate the maturity of such mortgage loan upon sale or certain
transfers by the borrower of the underlying Mortgaged Property. The Multifamily
Loans may contain due-on-encumbrance provisions (permitting the lender to
accelerate the maturity of the Multifamily Loan upon further encumbrance by the
borrower of the underlying Multifamily Property). Conventional mortgage loans
that underlie Freddie Mac Certificates and Fannie Mae Certificates may contain,
and in certain instances must contain, such due-on-sale provisions. FHA Loans,
VA Loans and other mortgage loans underlying GNMA Certificates contain no such
clause and may be assumed by the purchaser of the mortgaged property. Thus, the
rate of prepayments on FHA Loans, VA Loans and other mortgage loans underlying
GNMA Certificates may be lower than that of conventional Mortgage Loans bearing
comparable interest rates.
With respect to a series of Securities evidencing interests in the Trust
Fund including Mortgage Loans, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale clause or due-on-encumbrance clause, to the extent it has knowledge
of the conveyance or encumbrance or the proposed conveyance or encumbrance of
the underlying Mortgaged Property and reasonably believes that it is entitled to
do so under applicable law; provided, however, that the Master Servicer will not
take any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "Description of the
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Securities--Collection and Other Servicing Procedures" and "Certain Legal
Aspects of Mortgage Loans--Enforceability of Certain Provisions" and
"--Prepayment Charges and Prepayments" for a description of certain provisions
of each Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans. See "Description of the
Securities--Termination" for a description of the possible early termination of
any series of Securities. See also "Mortgage Loan Program--Representations by or
on behalf of Mortgage Loan Sellers; Repurchases" and "Description of the
Securities--Assignment of Trust Fund Assets" for a description of the obligation
of the Mortgage Loan Sellers, the Master Servicer and the Depositor to
repurchase Mortgage Loans under certain circumstances. In addition, if the
applicable Agreement for a series of Securities provides for a Pre-Funding
Account or other means of funding the transfer of additional Mortgage Loans to
the related Trust Fund, as described under "Description of the
Securities--Pre-Funding Account" herein, and the Trust Fund is unable to acquire
such additional Mortgage Loans within any applicable time limit, the amounts set
aside for such purpose may be applied as principal payments on one or more
classes of Securities of such series.
THE DEPOSITOR
Salomon Brothers Mortgage Securities VII, Inc (the "Depositor") was
incorporated in the State of Delaware on January 27, 1987 as an indirect
wholly-owned subsidiary of Salomon Smith Barney Holdings Inc and is an affiliate
of Salomon Smith Barney Inc. The Depositor was organized for the purpose of
serving as a private secondary mortgage market conduit. The Depositor maintains
its principal office at 390 Greenwich Street, 4th Floor, New York, New York
10013. Its telephone number is (212) 816-6000.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will be purchased by the Depositor, either directly or
indirectly, from the Mortgage Loan Sellers. The Mortgage Loans so acquired by
the Depositor will have been originated by the Originators in accordance with
the underwriting criteria specified below under "Underwriting Standards".
UNDERWRITING STANDARDS
All Mortgage Loans will have been subject to underwriting standards
acceptable to the Depositor and applied as described below. Each Mortgage Loan
Seller, or another party on its behalf, will represent and warrant that Mortgage
Loans purchased by or on behalf of the Depositor from it have been originated by
the related Originators in accordance with such underwriting standards.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards are applied by the Originators to evaluate the borrower's
credit standing and repayment ability, and the value and adequacy of the
Mortgaged Property as collateral. Initially, a prospective borrower is required
to fill out a detailed application regarding pertinent credit information. As
part of the description of the borrower's financial condition, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment and whether it is expected
that the borrower will continue such employment in the
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future. If a prospective borrower is self-employed, the borrower is required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the borrower
has demand or savings accounts. In the case of a Multifamily Loan, the borrower
is also required to provide certain information regarding the related
Multifamily Property, including a current rent schedule, the type and length of
leases and pro forma operating income statements. In addition, the Depositor
will consider the location of the Multifamily Property, the availability of
competitive lease space and rental income of comparable properties in the
relevant market area, the overall economy and demographic features of the
geographic area and the mortgagor's prior experience in owning and operating
properties similar to the Multifamily Properties.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
Manufactured Homes, as described under "The Trust Funds". Each appraiser is
selected in accordance with predetermined guidelines established for appraisers.
The appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. With respect to
properties other than Multifamily Properties, the appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. With respect to
Multifamily Properties, the appraisal must specify whether an income analysis, a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a property's cash flow, expenses, capitalization and
other operational information in determining the property's value. The market
approach to value analyzes the prices paid for the purchase of similar
properties in the property's area, with adjustments made for variations between
these other properties and the property being appraised. The cost approach
requires the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans and Contracts, once all applicable
employment, credit and property information is received, a determination is made
as to whether the prospective borrower has sufficient monthly income available
(i) to meet the borrower's monthly obligations on the proposed mortgage loan
(determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the home (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. Unless otherwise provided in the
related Prospectus Supplement, the underwriting standards to be applied to the
Single Family Loans will be generally similar to the traditional underwriting
guidelines used by Fannie Mae and Freddie Mac which are in effect at the time of
origination of each Single Family Loan, except that the ratios at origination of
the amounts described in (i) and (ii) above to the applicant's stable monthly
gross income may exceed in certain cases the then applicable Fannie Mae and
Freddie Mac guidelines, but such ratios in general may not exceed 33% and 38%,
respectively, of the applicant's stable monthly gross income. Such underwriting
standards may be varied in appropriate cases.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related mortgagor. Such Mortgage Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
Mortgaged Property.
In the case of a Single Family Loan or Multifamily Loan secured by a
leasehold interest in a residential property, the title to which is held by a
third party lessor, the Mortgage Loan Seller, or
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another party on its behalf, is required to warrant, among other things, that
the remaining term of the lease and any sublease be at least five years longer
than the remaining term of the Mortgage Loan.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a residential property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The underwriting standards to be applied
to the Mortgage Loans in all states (including anti-deficiency states) require
that the value of the property being financed, as indicated by the appraisal,
currently supports and is anticipated to support in the future the outstanding
principal balance of the Mortgage Loan.
With respect to any FHA Loan the Mortgage Loan Seller is required to
represent that the FHA Loan complies with the applicable underwriting policies
of the FHA. See "Description of Primary Insurance Policies--FHA Insurance". With
respect to any VA Loan, the Mortgage Loan Seller is required to represent that
the VA Loan complies with the applicable underwriting policies of the VA. SEE
"DESCRIPTION OF PRIMARY INSURANCE POLICIES-VA GUARANTEE".
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the Master Servicer or, if applicable, a
significant Sub-Servicer will be provided in the related Prospectus Supplement.
Certain of the types of loans that may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the borrower. These types of
Mortgage Loans are underwritten on the basis of a judgment that borrowers will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a borrower's income may not be sufficient to make loan
payments as such payments increase. Unless otherwise specified in the related
Prospectus Supplement, the Multifamily Loans will be nonrecourse loans, as to
which, in the event of mortgagor default, recourse may only be had against the
specific Multifamily Property pledged to secure that Multifamily Loan, and not
against the mortgagor's assets.
QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Originator and Mortgage Loan Seller will be required to satisfy the
qualifications set forth herein. Each Originator must be an institution
experienced in originating and servicing conventional mortgage loans in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate and service those loans. Each Originator
and Mortgage Loan Seller must be a seller/servicer approved by either Fannie Mae
or Freddie Mac. Each Originator and Mortgage Loan Seller must be a HUD- approved
mortgagee or an institution the deposit accounts in which are insured by the
Bank Insurance Fund ("BIF") or Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation (the "FDIC"). In addition, with
respect to FHA Loans or VA Loans, each Originator must be approved to originate
such Mortgage Loans by the FHA or VA, as applicable. In addition, each
Originator and Mortgage Loan Seller must satisfy certain criteria as to
financial stability evaluated on a case by case basis by the Depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REPURCHASES
Each Mortgage Loan Seller, or a party on its behalf, will have made
representations and warranties in respect of the Mortgage Loans sold by such
Mortgage Loan Seller. Such representations and warranties include, among other
things: (i) that any required hazard insurance
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was effective at the origination of each Mortgage Loan, and that each such
policy remained in effect on the date of purchase of the Mortgage Loan from the
Mortgage Loan Seller by or on behalf of the Depositor; (ii) that, in the case of
Single-Family Loans and Multifamily Loans, either (A) title insurance insuring
(subject only to permissible title insurance exceptions) the lien status of the
Mortgage was effective at the origination of each Mortgage Loan and such policy
remained in effect on the date of purchase of the Mortgage Loan from the
Mortgage Loan Seller by or on behalf of the Depositor or (B) if the Mortgaged
Property securing any Mortgage Loan is located in an area where such policies
are generally not available, there is in the related mortgage file an attorney's
certificate of title indicating (subject to such permissible exceptions set
forth therein) the first lien status of the mortgage; (iii) that the Mortgage
Loan Seller had good title to each Mortgage Loan and each Mortgage Loan was
subject to no offsets, defenses, counterclaims or rights of rescission except to
the extent that any buydown agreement described herein may forgive certain
indebtedness of a borrower; (iv) that each Mortgage constituted a valid first
lien on, or security interest in, the Mortgaged Property (subject only to
permissible title insurance exceptions and Senior Liens, if any) and that the
Mortgaged Property was free from damage and was in good repair; (v) that there
were no delinquent tax or assessment liens against the Mortgaged Property; (vi)
that each Mortgage Loan was current as to all required payments; and (vii) that
each Mortgage Loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects. If a person other than a Mortgage Loan Seller makes any of the
foregoing representations and warranties on behalf of such Mortgage Loan Seller,
the identity of such person will be specified in the related Prospectus
Supplement. Any person making representations and warranties on behalf of a
Mortgage Loan Seller shall be an affiliate thereof or such other person
acceptable to the Depositor having knowledge regarding the subject matter of
such representations and warranties.
All of the representations and warranties made by or on behalf of a
Mortgage Loan Seller in respect of a Mortgage Loan will have been made as of the
date on which such Mortgage Loan Seller sold the Mortgage Loan to or on behalf
of the Depositor. A substantial period of time may have elapsed between such
date and the date of initial issuance of the series of Securities evidencing an
interest in such Mortgage Loan. Unless otherwise specified in the related
Prospectus Supplement, in the event of a breach of any such representation or
warranty, the Mortgage Loan Seller will be obligated to cure such breach or
repurchase or replace the affected Mortgage Loan as described below. Since the
representations and warranties made by or on behalf of such Mortgage Loan Seller
do not address events that may occur following the sale of a Mortgage Loan by
such Mortgage Loan Seller, it will have a cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to the date of
such sale. A Mortgage Loan Seller would have no such obligations if the relevant
event that causes such breach occurs after the date of such sale. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any series of
Securities if anything has come to the Depositor's attention that would cause it
to believe that the representations and warranties made in respect of such
Mortgage Loan will not be accurate and complete in all material respects as of
the date of initial issuance of the related series of Securities.
The only representations and warranties to be made for the benefit of
holders of Securities in respect of any Mortgage Loan relating to the period
commencing on the date of sale of such Mortgage Loan by the Mortgage Loan Seller
to or on behalf of the Depositor will be certain limited representations of the
Depositor and of the Master Servicer described below under "Description of the
Securities--Assignment of Trust Fund Assets". If the Master Servicer is also a
Mortgage Loan Seller with respect to a particular series, such representations
will be in addition to the representations and warranties made by the Master
Servicer in its capacity as a Mortgage Loan Seller.
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The Master Servicer and/or Trustee will promptly notify the relevant
Mortgage Loan Seller of any breach of any representation or warranty made by or
on behalf of it in respect of a Mortgage Loan that materially and adversely
affects the value of such Mortgage Loan or the interests therein of the
Securityholders. If such Mortgage Loan Seller cannot cure such breach within 60
days from the date on which the Mortgage Loan Seller was notified of such
breach, then such Mortgage Loan Seller will be obligated to repurchase such
Mortgage Loan from the Trustee within 90 days from the date on which the
Mortgage Loan Seller was notified of such breach, at the Purchase Price
therefor. As to any Mortgage Loan, unless otherwise specified in the related
Prospectus Supplement, the "Purchase Price" is equal to the sum of (i) the
unpaid principal balance thereof, (ii) unpaid accrued interest on the Stated
Principal Balance (as defined below) at the Net Interest Rate from the date as
to which interest was last paid to the end of the calendar month in which the
relevant purchase is to occur, (iii) any unpaid servicing fees and certain
unreimbursed servicing expenses payable or reimbursable to the Master Servicer
with respect to such Mortgage Loan, (iv) any unpaid Retained Interest with
respect to such Mortgage Loan, (v) any Realized Losses, as described below under
"Description of the Securities--Allocation of Losses", incurred with respect to
such Mortgage Loan, and (vi) if applicable, any expenses reasonably incurred or
to be incurred by the Master Servicer or the Trustee in respect of the breach or
defect giving rise to a purchase obligation. Unless otherwise provided in the
related Prospectus Supplement, a Mortgage Loan Seller, rather than repurchase a
Mortgage Loan as to which a breach has occurred, will have the option, within a
specified period after initial issuance of the related series of Securities, to
cause the removal of such Mortgage Loan from the Trust Fund and substitute in
its place one or more other Mortgage Loans, in accordance with the standards
described below under "Description of the Securities--Assignment of the Mortgage
Loans". The Master Servicer will be required under the applicable Pooling and
Servicing Agreement or Servicing Agreement to use its best efforts to enforce
such obligations of the Mortgage Loan Seller for the benefit of the Trustee and
the holders of the Securities, following the practices it would employ in its
good faith business judgment were it the owner of such Mortgage Loan. This
repurchase or substitution obligation will constitute the sole remedy available
to holders of Securities or the Trustee for a breach of representation by a
Mortgage Loan Seller. SEE "DESCRIPTION OF THE SECURITIES--GENERAL".
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts, including
advances by the Master Servicer, allocable to principal that are distributed to
Securityholders on or before the date of determination, and as further reduced
to the extent that any Realized Loss (as defined below) thereon has been (or, if
it had not been covered by any form of Credit Support, would have been)
allocated to one or more classes of Securities on or before the date of
determination.
Neither the Depositor nor the Master Servicer will be obligated to purchase
or substitute for a Mortgage Loan if a Mortgage Loan Seller defaults on its
obligation to do so, and no assurance can be given that Mortgage Loan Sellers
will carry out such obligations with respect to Mortgage Loans. To the extent
that a breach of the representations and warranties of a Mortgage Loan Seller
may also constitute a breach of a representation made by the Depositor, the
Depositor may have a repurchase or substitution obligation as described below
under "Description of the Securities--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
The Securities will be issued in series. Each series of Certificates
evidencing interests in a Trust Fund consisting of Mortgage Loans will be issued
pursuant to an agreement (the "Pooling and
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Servicing Agreement") among the Depositor, the Master Servicer (if the Depositor
is not acting as Master Servicer) and the Trustee named in the Prospectus
Supplement. Each series of Notes evidencing indebtedness of a Trust Fund
consisting of Mortgage Loans will be issued pursuant to an indenture (the
"Indenture") between the related Issuer (the "Issuer") and the Trustee named in
the Prospectus Supplement. Such Trust Fund will be created pursuant to a trust
agreement (the "Owner Trust Agreement") between the Depositor and the Owner
Trustee. The Issuer will be the Depositor or an owner trust established by it
for the purpose of issuing such series of Notes. Where the Issuer is an owner
trust, the ownership of the Trust Fund will be evidenced by certificates (the
"Equity Certificates") issued under the Owner Trust Agreement. Each series of
Securities evidencing interests in a Trust Fund consisting exclusively of Agency
Securities or Private Mortgage-Backed Securities will be issued pursuant to a
Trust Agreement between the Depositor and the Trustee (each Trust Agreement,
Owner Trust Agreement, Indenture, Servicing Agreement or Pooling and Servicing
Agreement, an "Agreement"). The provisions of each Agreement will vary depending
upon the nature of the Securities to be issued thereunder and the nature of the
related Trust Fund. Various forms of Pooling and Servicing Agreement, Servicing
Agreement, Owner Trust Agreement, Trust Agreement and Indenture have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the related Agreements for each Trust
Fund and the related Prospectus Supplement. As used herein with respect to any
series, the term "Certificate" or the term "Note" refers to all of the
Certificates or Notes of that series, whether or not offered hereby and by the
related Prospectus Supplement, unless the context otherwise requires.
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the Trust Fund created pursuant to
the related Agreement. The Notes of each series (including any class of Notes
not offered hereby) will be issued in fully registered form only and will
represent indebtedness of the Trust Fund created pursuant to the related
Agreement. If so provided in the Prospectus Supplement, any class of Securities
of any series may be represented by a certificate or note (the "DTC Registered
Securities") registered in the name of a nominee of The Depository Trust Company
("DTC"). The interests of beneficial owners of such Securities will be
represented by such entries on the records of participating members of DTC.
Definitive certificates or notes will be available for such Securities only
under limited circumstances as provided in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each Trust Fund
will consist of (i) such Trust Fund Assets, or interests therein, exclusive of
any portion of interest payments (the "Retained Interest") on a Trust Fund Asset
retained by the Depositor or any previous owner thereof, as from time to time
are subject to the related Agreement; (ii) such assets as from time to time are
identified as deposited in the Certificate Account or any other account
maintained for the benefit of the Securityholders; (iii) with respect to Trust
Funds that include Mortgage Loans, (a) property acquired on behalf of
Securityholders by foreclosure, deed in lieu of foreclosure or repossession and
any revenues received thereon; (b) the rights of the Depositor under any hazard
insurance policies, FHA insurance policies, VA guarantees and primary mortgage
insurance policies, as described under "Description of Primary Insurance
Policies"; (c) the rights of the Depositor under the agreement or agreements
pursuant to which it acquired the Mortgage Loans in such Trust Fund; and (d) the
rights of the Trustee in any cash advance reserve fund or surety bond as
described under "Advances in respect of Delinquencies" and (iv) any letter of
credit, mortgage
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pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund or other type of credit support provided with respect to the related
series, as described under "Description of Credit Support". Subject to any
limitations described in the related Prospectus Supplement, the Securities will
be transferable and exchangeable for like Securities of the same class and
series in authorized denominations at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. No service charge will be made
for any registration of exchange or transfer of Securities, but the Depositor or
the Trustee or any agent thereof may require payment of a sum sufficient to
cover any tax or other governmental charge.
Each series of Securities may consist of either (i) a single class of
Securities evidencing the entire beneficial ownership of or indebtedness of the
related Trust Fund; (ii) two or more classes of Securities evidencing the entire
beneficial ownership of or indebtedness of the related Trust Fund, one or more
classes of which ("Senior Securities") will be senior in right of payment to one
or more of the other classes ("Subordinate Securities") to the extent described
in the related Prospectus Supplement (any such series, a "Senior/Subordinate
Series"); or (iii) other types of classes of Securities, as described in the
related Prospectus Supplement. A series may include one or more classes of
Securities entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions or (ii) interest distributions, with
disproportionate, nominal or no principal distributions ("Strip Securities").
With respect to any series of Notes, the Equity Certificates, insofar as they
represent the beneficial ownership interest in the Issuer, will be subordinate
to the related Notes. In addition, a series may include two or more classes of
Securities which differ as to timing, sequential order, priority of payment,
security interest rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the Mortgage Pool, which series may include one or more classes of Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance thereof on each
Distribution Date, as hereinafter defined, in the manner described in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, partial or full protection against certain Mortgage Loan defaults
and losses may be provided to a series of Securities or to one or more classes
of Securities in such series in the form of subordination of one or more other
classes of Securities in such series or by one or more other types of credit
support, such as a letter of credit, reserve fund, insurance policy or a
combination thereof (any such coverage, "Credit Support"). SEE "DESCRIPTION OF
CREDIT SUPPORT".
Each class of Securities (other than certain Strip Securities) will have a
stated principal amount (a "Principal Balance") and, unless otherwise provided
in the related Prospectus Supplement, will be entitled to payments of interest
thereon based on a fixed, variable or adjustable interest rate (a "Security
Interest Rate"). The Security Interest Rate of each Security offered hereby will
be stated in the related Prospectus Supplement as the "Pass-Through Rate" with
respect to a Certificate and the "Note Interest Rate" with respect to a Note.
SEE "INTEREST ON THE SECURITIES" AND "PRINCIPAL OF THE SECURITIES" BELOW. The
specific percentage ownership interest of each class of Securities and the
minimum denomination for each Security will be set forth in the related
Prospectus Supplement.
As to each series of Certificates, one or more elections may be made to
treat the related Trust Fund or designated portions thereof as a "real estate
mortgage investment conduit" or "REMIC" as defined in the Internal Revenue Code
of 1986 (the "Code"). The related Prospectus Supplement will specify whether a
REMIC election is to be made and the terms and conditions applicable to the
making of a REMIC election, as well as any material federal income tax
consequences to Securityholders not otherwise described herein. If such an
election is made with respect to a series of Certificates, one of the classes of
Certificates comprising such series will be designated as evidencing all
"residual interests" in the related REMIC as defined under the Code. All other
classes
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of Certificates in such a series will constitute "regular interests" in the
related REMIC as defined in the Code. As to each series of Certificates with
respect to which a REMIC election is to be made, the Master Servicer or the
Trustee will be obligated to take all actions required in order to comply with
applicable laws and regulations and, unless otherwise provided in the related
Prospectus Supplement, will be obligated to pay any Prohibited Transaction Taxes
or Contribution Taxes arising out of a breach of its obligations with respect to
such compliance without any right of reimbursement therefor from the Trust Fund
or from any Securityholder. Unless otherwise provided in the related Prospectus
Supplement, a Prohibited Transaction Tax or Contribution Tax resulting from any
other cause will be charged against the related Trust Fund, resulting in a
reduction in amounts otherwise distributable to Securityholders. SEE "FEDERAL
INCOME TAX CONSEQUENCES--REMICS-- PROHIBITED TRANSACTIONS TAX AND OTHER TAXES".
As to each series, the Securities of each class offered hereby will be
rated in one of the four highest rating categories by one or more nationally
recognized statistical rating organizations (each, a "Rating Agency").
ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of any series of Securities, the Depositor will
cause the Mortgage Loans comprising the Mortgage Pool included in the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans after the close of business on the first day of the month of
formation of the related Trust Fund (the "Cut-off Date"), other than principal
and interest due on or before the Cut-off Date and other than any Retained
Interest. The Trustee will, concurrently with such assignment, deliver the
Securities to the Depositor in exchange for the Trust Fund. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the related Pooling
and Servicing Agreement or Servicing Agreement. Such schedule will include
information as to the outstanding principal balance of each Mortgage Loan after
application of payments due on the Cut-off Date, as well as information
regarding the Interest Rate, the Net Interest Rate, the Retained Interest, if
any, the current scheduled monthly payment of principal and interest, the
maturity of the Mortgage Note, the Value of the Mortgaged Property, the
Loan-to-Value Ratio at origination and certain other information with respect to
the Mortgage Loans. As to any Mortgage Loan, the "Net Interest Rate" is equal to
the Interest Rate minus the sum of the rates at which the servicing fees and the
Retained Interest, if any, are calculated.
In addition, the Depositor will, with respect to each Mortgage Loan,
deliver or cause to be delivered to the Trustee (or to the custodian hereinafter
referred to):
(1) With respect to each Single-Family Loan and Multifamily Loan, the
Mortgage Note endorsed, without recourse, to the order of the Trustee, the
Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case the
Depositor will deliver or cause to be delivered a copy of such Mortgage
together with its certificate that the original of such Mortgage was
delivered to such recording office) and an assignment of the Mortgage to
the Trustee in recordable form. Unless otherwise provided in the related
Prospectus Supplement, the Depositor will promptly cause the assignment of
each related Mortgage Loan to be recorded in the appropriate public office
for real property records, except in the State of California or in other
states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interest in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor,
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the Master Servicer, the relevant Mortgage Loan Seller or any other prior
holder of the Mortgage Loan.
(2) With respect to each Cooperative Loan, the Cooperative Note, the
original security agreement, the proprietary lease or occupancy agreement,
the related stock certificate and related stock powers endorsed in blank,
and a copy of the original filed financing statement together with an
assignment thereof to the Trustee in a form sufficient for filing. Unless
otherwise provided in the related Prospectus Supplement, the Depositor will
promptly cause the assignment and financing statement of each related
Cooperative Loan to be filed in the appropriate public office, except in
states where in the opinion of counsel acceptable to the Trustee, such
filing is not required to protect the Trustee's interest in the Cooperative
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan
Seller or any prior holder of the Cooperative Loan.
(3) With respect to each Contract, the original Contract endorsed,
without recourse, to the order of the Trustee and copies of documents and
instruments related to the Contract and the security interest in the
Manufactured Home securing the Contract, together with a blanket assignment
to the Trustee of all Contracts in the related Trust Fund and such
documents and instruments. In order to give notice of the right, title and
interest of the Securityholders to the Contracts, the Depositor will cause
to be executed and delivered to the Trustee a UCC-1 financing statement
identifying the Trustee as the secured party and identifying all Contracts
as collateral.
With respect to any Mortgage Loan secured by a Mortgaged Property located
in Puerto Rico (a "Puerto Rico Mortgage Loan"), the Mortgages with respect to
such Mortgage Loans either (i) secure a specific obligation for the benefit of a
specified person (a "Direct Puerto Rico Mortgage") or (ii) secure an instrument
transferable by endorsement (an "Endorsable Puerto Rico Mortgage"). Endorsable
Puerto Rico Mortgages do not require an assignment to transfer the related lien.
Rather, transfer of such mortgages follows an effective endorsement of the
related Mortgage Note and, therefore, delivery of the assignment referred to in
paragraph (1) above would be inapplicable. Direct Puerto Rico Mortgages,
however, require an assignment to be recorded with respect to any transfer of
the related lien and such assignment would be delivered to the Trustee.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within 45 days after receipt thereof, and the Trustee
(or such custodian) will hold such documents in trust for the benefit of the
Securityholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Mortgage Loan Seller. If the Mortgage Loan Seller cannot
cure the omission or defect within 60 days after receipt of such notice, the
Mortgage Loan Seller will be obligated, within 90 days of receipt of such
notice, to repurchase the related Mortgage Loan from the Trustee at the Purchase
Price or substitute for such Mortgage Loan. There can be no assurance that a
Mortgage Loan Seller will fulfill this repurchase or substitution obligation.
Although the Master Servicer is obligated to use its best efforts to enforce
such obligation to the extent described above under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases",
neither the Master Servicer nor the Depositor will be obligated to repurchase or
substitute for such Mortgage Loan if the Mortgage Loan Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
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With respect to the Mortgage Loans in a Mortgage Pool, the Depositor will
make representations and warranties as to the types and geographical
concentration of such Mortgage Loans and as to the accuracy in all material
respects of certain identifying information furnished to the Trustee in respect
of each such Mortgage Loan (e.g., original Loan-to-Value Ratio, principal
balance as of the Cut-off Date, Interest Rate, Net Interest Rate and maturity).
In addition, unless otherwise specified in the related Prospectus Supplement,
the Depositor will represent and warrant that, as of the Cut-off Date for the
related series of Securities, no Mortgage Loan was currently more than 30 days
delinquent as to payment of principal and interest and no Mortgage Loan was more
than 30 days delinquent more than once during the previous 12 months. Upon a
breach of any such representation of the Depositor that materially and adversely
affects the value of a Mortgage Loan or the interests of the Securityholders
therein, the Depositor will be obligated either to cure the breach in all
material respects, repurchase the Mortgage Loan at the Purchase Price or
substitute for such Mortgage Loan as described below.
Unless otherwise provided in the related Prospectus Supplement, if the
Depositor discovers or receives notice of any breach of its representations or
warranties with respect to a Mortgage Loan, the Depositor may, rather than
repurchase the Mortgage Loan as provided above, remove such Mortgage Loan from
the Trust Fund (a "Deleted Mortgage Loan") and substitute in its place one or
more Mortgage Loans (each, a "Substitute Mortgage Loan"), but only if (i) with
respect to a Trust Fund for which a REMIC election is to be made, such
substitution is effected within two years of the date of initial issuance of the
Certificates (plus permissible extensions) or (ii) with respect to a Trust Fund
for which no REMIC election is to be made, such substitution is effected within
120 days of the date of initial issuance of the Securities. Except as otherwise
provided in the related Prospectus Supplement, any Substitute Mortgage Loan
will, on the date of substitution, (i) have an outstanding principal balance,
after deduction of all scheduled payments due in the month of substitution, not
in excess of (and not more than $10,000 less than) the outstanding principal
balance, after deduction of all unpaid scheduled payments due as of the date of
substitution, of the Deleted Mortgage Loan, (ii) have an Interest Rate not less
than (and not more than 1% greater than) the Interest Rate of the Deleted
Mortgage Loan, (iii) have a Net Interest Rate equal to the Net Interest Rate of
the Deleted Mortgage Loan, (iv) have a remaining term to maturity not greater
than (and not more than one year less than) that of the Deleted Mortgage Loan
(v) have a Lockout Date, if applicable, not earlier than the Lockout Date on the
Deleted Mortgage Loan and (vi) comply with all of the representations and
warranties set forth in the Agreement as of the date of substitution. In
connection with any substitution, an amount equal to the difference between the
Purchase Price of the Deleted Mortgage Loan and the outstanding principal
balance of the Substitute Mortgage Loan (after deduction of all scheduled
payments due in the month of substitution), together with one month's interest
at the applicable Net Interest Rate on such balance, will be deposited in the
Certificate Account and distributed to Securityholders on the first Distribution
Date following the Prepayment Period in which the substitution occurred. In the
event that one mortgage loan is substituted for more than one Deleted Mortgage
Loan, or more than one mortgage loan is substituted for one or more Deleted
Mortgage Loans, then the amount described in clause (i) will be determined on
the basis of aggregate principal balances, the rates described in clauses (ii)
and (iii) with respect to Deleted Mortgage Loans will be determined on the basis
of weighted average Interest Rates and Net Interest Rates, as the case may be,
and the terms described in clause (iv) will be determined on the basis of
weighted average remaining terms to maturity and the Lockout Dates described in
clause (v) will be determined on the basis of weighted average Lockout Dates.
With respect to any series as to which credit support is provided by means
of a mortgage pool insurance policy, in addition to making the representations
and warranties described above, the Depositor or the related Mortgage Loan
Seller (or another party on behalf of the related Mortgage Loan Seller), as
specified in the related Prospectus Supplement, will represent and warrant to
the
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Trustee that no action has been taken or failed to be taken, no event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the Securities which has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
mortgage insurance policy, FHA insurance policy, mortgage pool insurance policy,
special hazard insurance policy or bankruptcy bond, irrespective of the cause of
such failure of coverage but excluding any failure of an insurer to pay by
reason of the insurer's own breach of its insurance policy or its financial
inability to pay (such representation being referred to herein as the
"insurability representation"). SEE "DESCRIPTION OF PRIMARY INSURANCE POLICIES"
AND "DESCRIPTION OF CREDIT SUPPORT" HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR INFORMATION REGARDING THE EXTENT OF COVERAGE UNDER THE
AFOREMENTIONED INSURANCE POLICIES. Upon a breach of the insurability
representation which materially and adversely affects the interests of the
Securityholders in a Mortgage Loan, the Depositor or the Mortgage Loan Seller,
as the case may be, will be obligated either to cure the breach in all material
respects or to purchase such Mortgage Loan at the Purchase Price, subject to the
limitations specified in the related Prospectus Supplement. The related
Prospectus Supplement may provide that the performance of an obligation to
repurchase Mortgage Loans following a breach of an insurability representation
will be ensured in the manner specified therein.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute Mortgage Loans as
described above constitutes the sole remedy available to the Securityholders or
the Trustee for any breach of the above described representations.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling and Servicing Agreement or Servicing Agreement.
Upon a breach of any such representation of the Master Servicer which materially
and adversely affects the interests of the Securityholders, the Master Servicer
will be obligated to cure the breach in all material respects.
ASSIGNMENT OF AGENCY SECURITIES
The Depositor will cause the Agency Securities to be registered in the name
of the Trustee or its nominee, and the Trustee concurrently will execute,
countersign and deliver the Securities. Each Agency Security will be identified
in a schedule appearing as an exhibit to the related Agreement, which will
specify as to each Agency Security the original principal amount and outstanding
principal balance as of the Cut-off Date, the annual pass-through rate (if any)
and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES
The Depositor will cause Private Mortgage-Backed Securities to be
registered in the name of the Trustee. The Trustee (or the custodian) will have
possession of any certificated Private Mortgage- Backed Securities. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will not
be in possession of or be assignee of record of any underlying assets for a
Private Mortgage-Backed Security. SEE "THE TRUST FUNDS--PRIVATE MORTGAGE-BACKED
SECURITIES" HEREIN. Each Private Mortgage-Backed Security will be identified in
a schedule appearing as an exhibit to the related Agreement which will specify
the original principal amount, outstanding principal balance as of the Cut-off
Date, annual pass-through rate or interest rate and maturity date for each
Private Mortgage-Backed Security conveyed to the Trustee.
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ASSIGNMENT OF FUNDING AGREEMENTS
The Depositor will cause Funding Agreements to be registered in the name of
the Trustee. The Trustee (or the custodian) will have possession of any Funding
Agreement. Unless otherwise specified in the related Prospectus Supplement, the
Trustee will be in possession of or be assignee of record of any underlying
assets for Funding Agreements. See "The Trust Funds--Funding Agreements" herein.
Each Funding Agreement will be identified in a schedule appearing as an exhibit
to the related Agreement which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each underlying asset secured by the
Funding Agreements.
DEPOSITS TO CERTIFICATE ACCOUNT
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Trust Fund
Assets (collectively, the "Certificate Account"), which must be either (i)
maintained with a bank or trust company, and in a manner, satisfactory to the
Rating Agency or Agencies rating any class of Securities of such series or (ii)
an account or accounts the deposits in which are insured by the BIF or the SAIF
(to the limits established by the FDIC) and the uninsured deposits in which are
otherwise secured such that the Securityholders have a claim with respect to the
funds in the Certificate Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the institution with which the
Certificate Account is maintained. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other high-quality investments specified in the related Pooling and Servicing
Agreement or the related Servicing Agreement and Indenture ("Permitted
Investments"). A Certificate Account may be maintained as an interest bearing or
a non-interest bearing account, or the funds held therein may be invested
pending each succeeding Distribution Date in Permitted Investments. Unless
otherwise provided in the related Prospectus Supplement, any interest or other
income earned on funds in the Certificate Account will be paid to the Master
Servicer or the Trustee or their designee as additional compensation. The
Certificate Account may be maintained with an institution that is an affiliate
of the Master Servicer or the Trustee, provided that such institution meets the
standards set forth above. If permitted by the Rating Agency or Agencies and so
specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of pass-through certificates and
may, if applicable, contain other funds respecting payments on mortgage loans
belonging to the Master Servicer or serviced or master serviced by it on behalf
of others.
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
Certificate Accounts set forth above or such other standards as may be
acceptable to the Master Servicer (collectively, the "Sub-Servicing Account").
The Sub-Servicer is required to credit to the related Sub-Servicing Account on a
daily basis the amount of all proceeds of Mortgage Loans received by the
Sub-Servicer, less its servicing compensation. The Sub-Servicer shall remit to
the Master Servicer by wire transfer of immediately available funds all funds
held in the Sub-Servicing Account with respect to each Mortgage Loan on the
monthly remittance date or dates specified in the related Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will deposit or cause to be deposited in the
Certificate Account for each Trust Fund including Mortgage Loans on a daily
basis, unless otherwise provided in the related
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Pooling and Servicing Agreement or the related Servicing Agreement and Indenture
and described in the related Prospectus Supplement, the following payments and
collections received, or advances made, by the Master Servicer or on its behalf
subsequent to the Cut-off Date (other than payments due on or before the Cut-off
Date, and exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the
Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net
of any portion thereof retained by the Master Servicer or by a Sub-Servicer
as its servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies and any special
hazard insurance policy (to the extent such proceeds are not applied to the
restoration of the property or released to the mortgagor in accordance with
the normal servicing procedures of the Master Servicer or the related
Sub-Servicer, subject to the terms and conditions of the related Mortgage
and Mortgage Note), any primary mortgage insurance policy, any FHA
insurance policy, any VA guarantee, any bankruptcy bond and any mortgage
pool insurance policy (collectively, "Insurance Proceeds") and all other
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation
Proceeds"), together with the net proceeds on a monthly basis with respect
to any Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of Credit";
(v) any advances made as described below under "Advances in
respect of
Delinquencies";
(vi) if applicable, all amounts required to be transferred to the
Certificate Account from a reserve fund, as described below under
"Description of Credit
Support--Reserve Funds";
(vii) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account as described
below;
(viii) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Mortgage Loan Seller as described under "Mortgage Loan
Program-Representations by or on behalf of Mortgage Loan Sellers;
Repurchases" or "--Assignment of Trust Fund Assets" above, exclusive of the
Retained Interest, if any, in respect of such Mortgage Loan, and all
proceeds of any Mortgage Loan repurchased as described under "Termination"
below;
(ix) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(x) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account.
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With respect to each Buydown Mortgage Loan, the Master Servicer, or a
Sub-Servicer, will deposit related Buydown Funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for Certificate
Accounts set forth above (a "Buydown Account"). Unless otherwise specified in
the related Prospectus Supplement, the terms of all Buydown Mortgage Loans
provide for the contribution of Buydown Funds in an amount not less than either
(i) the total payments to be made from such funds pursuant to the related
buydown plan or (ii) if such Buydown Funds are present valued, that amount that,
together with investment earnings thereon at a specified rate, compounded
monthly, will support the scheduled level of payments due under the Buydown
Mortgage Loan. Neither the Master Servicer, the Sub-Servicer nor the Depositor
will be obligated to add to such Buydown Funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any such insufficiency is not recoverable from the
borrower, distributions to Securityholders will be affected. With respect to
each Buydown Mortgage Loan, the Master Servicer will deposit in the Certificate
Account the amount, if any, of the Buydown Funds (and, if applicable, investment
earnings thereon) for each Buydown Mortgage Loan that, when added to the amount
due from the borrower on such Buydown Mortgage Loan, equals the full monthly
payment which would be due on the Buydown Mortgage Loan if it were not subject
to the buydown plan.
Unless otherwise specified in the related Prospectus Supplement, in the
event a Buydown Mortgage Loan is prepaid in full or liquidated, the related
Buydown Funds will be applied as follows. If the mortgagor on a Buydown Mortgage
Loan prepays such loan in its entirety during the Buydown Period, the Master
Servicer will withdraw from the Buydown Account and remit to the mortgagor in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a mortgagor during the Buydown Period
together with Buydown Funds will result in a prepayment in full, the Master
Servicer will withdraw from the Buydown Account for deposit in the Certificate
Account the Buydown Funds and investment earnings thereon, if any, which
together with such prepayment will result in a prepayment in full. If the
mortgagor defaults during the Buydown Period with respect to a Buydown Mortgage
Loan and the Mortgaged Property is sold in liquidation (either by the Master
Servicer or the insurer under any related insurance policy), the Master Servicer
will withdraw from the Buydown Account the Buydown Funds and all investment
earnings thereon, if any, for deposit in the Certificate Account or remit the
same to the insurer if the Mortgaged Property is transferred to such insurer and
such insurer pays all of the loss incurred in respect of such default. In the
case of any such prepaid or defaulted Buydown Mortgage Loan the Buydown Funds in
respect of which were supplemented by investment earnings, the Master Servicer
will withdraw from the Buydown Account and either deposit in the Certificate
Account or remit to the borrower, depending upon the terms of the buydown plan,
any investment earnings remaining in the related Buydown Account.
Any Buydown Funds, and any investment earnings thereon, deposited in the
Certificate Account in connection with a full prepayment of the related Mortgage
Loan will be deemed to reduce the amount that would be required to be paid by
the borrower to repay fully the related Mortgage Loan if the Mortgage Loan were
not subject to the buydown plan.
PAYMENTS ON AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The Agency Securities and Private Mortgage-Backed Securities included in a
Trust Fund will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The Trustee will
deposit or cause to be deposited into the Certificate Account for each Trust
Fund including Agency Securities and Private Mortgage-Backed Securities as and
when received, unless otherwise provided in the related Agreement, all
distributions received by the Trustee with respect to the related Agency
Securities and Private Mortgage-Backed Securities
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(other than payments due on or before the Cut-off Date and exclusive of any
trust administration fee and amounts representing the Retained Interest, if
any).
DISTRIBUTIONS
Distributions allocable to principal and interest on the Securities of each
series will be made by or on behalf of the Trustee each month on each date as
specified in the related Prospectus Supplement (each such date, a "Distribution
Date") commencing with the month following the month in which the applicable
Cut-off Date occurs. Except as otherwise specified in the related Prospectus
Supplement, distributions will be made to the persons in whose names the
Securities are registered at the close of business on the last business day of
the month preceding the month in which the Distribution Date occurs (the "Record
Date"), and the amount of each distribution will be determined as of the close
of business on the date specified in the related Prospectus Supplement (the
"Determination Date"). All distributions with respect to each class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding Securities in such class. Payments to the holders of Securities of
any class on each Distribution Date will be made to the Securityholders of the
respective class of record on the next preceding Record Date (other than in
respect of the final distribution), based on the aggregate fractional undivided
interests in that class represented by their respective Securities. Payments
will be made either by wire transfer in immediately available funds to the
account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has so notified the Depositor or its
designee no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register (the
"Security Register"); provided, however, that the final distribution in
retirement of the Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Depositor or its agent
specified in the notice to Securityholders of such final distribution. With
respect to each series of Certificate or Notes, the Security Register will be
referred to as the "Certificate Register" or "Note Register", respectively.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related
Certificate Account as of the corresponding Determination Date, exclusive
of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period" with
respect to any Distribution Date will commence on the second day of the
month in which the immediately preceding Distribution Date occurs, or
the day after the Cut-off Date in the case of the first Due Period, and
will end on the first day of the month of the related Distribution
Date),
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
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(c) all amounts in the Certificate Account that are due or
reimbursable to the Depositor, the Trustee, a Mortgage Loan Seller, a
Sub-Servicer or the Master Servicer or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Certificate Account;
(iii) all advances with respect to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Certificate Account
as of the corresponding Determination Date, any amounts collected under,
from or in respect of any Credit Support with
respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
INTEREST ON THE SECURITIES
Each class of Securities (other than certain classes of Strip Securities)
may have a different Security Interest Rate, which may be a fixed, variable or
adjustable Security Interest Rate. The related Prospectus Supplement will
specify the Security Interest Rate for each class, or, in the case of a variable
or adjustable Security Interest Rate, the method for determining the Security
Interest Rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
With respect to each series of Securities and each Distribution Date, the
"Accrued Security Interest" distributable on each Security, other than certain
classes of Strip Securities, will be equal to one month's interest on the
outstanding Principal Balance thereof immediately prior to the Distribution
Date, at the applicable Security Interest Rate, subject to the following. With
respect to each series of Certificates or Notes, the Accrued Security Interest
will be referred to as the "Accrued Certificate Interest" or "Accrued Note
Interest", respectively. As to each Strip Security with no or, in certain cases,
a nominal Principal Balance, the Accrued Security Interest with respect to any
Distribution Date will be on the basis of a notional amount and equal one
month's Stripped Interest. Unless otherwise specified in the related Prospectus
Supplement, the Accrued Security Interest on each Security of a series will be
reduced in the event of shortfalls in collections of interest resulting from
prepayments on Mortgage Loans, with that shortfall allocated among all of the
Securities of that series in the manner specified in the related Prospectus
Supplement. SEE "YIELD CONSIDERATIONS".
PRINCIPAL OF THE SECURITIES
Unless the related Prospectus Supplement provides otherwise, each Security
will have a "Principal Balance" which, at any time, will equal the maximum
amount that the holder will be entitled to receive in respect of principal out
of the future cash flow on the Trust Fund Assets and other assets included in
the related Trust Fund. The Principal Balance of each Security offered hereby
will be stated in the related Prospectus Supplement as the "Certificate
Principal Balance" with respect to a Certificate and the "Note Balance" with
respect to a Note. With respect to each
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such Security, distributions generally will be applied to undistributed accrued
interest thereon, and thereafter to principal. The outstanding Principal Balance
of a Security will be reduced to the extent of distributions of principal
thereon, and in the case of Securities evidencing an interest in Mortgage Loans,
by the amount of any Realized Losses, as defined below, allocated thereto.
Unless the related Prospectus Supplement provides otherwise, the initial
aggregate Principal Balance of all classes of Securities of a series will equal
the outstanding aggregate principal balance of the related Trust Fund Assets as
of the applicable Cut-off Date. The initial aggregate Principal Balance of a
series and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Distribution Date to the class
or classes of Securities entitled thereto until the Principal Balance of such
class has been reduced to zero. With respect to a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, distributions
allocable to principal of a class of Securities will be based on the percentage
interest in the related Trust Fund evidenced by such class (with respect to the
Senior Securities, the "Senior Percentage"), which in turn will be based on the
Principal Balance of such class as compared to the Principal Balance of all
classes of Securities of such series. Distributions of principal of any class of
Securities will be made on a pro rata basis among all of the Securities of such
class. Strip Securities with no Principal Balance will not receive distributions
of principal.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the related Agreement
may provide for the transfer by the Mortgage Loan Seller of additional Mortgage
Loans to the related Trust Fund after the Closing Date. Such additional Mortgage
Loans will be required to conform to the requirements set forth in the related
Agreement or other agreement providing for such transfer, and will generally be
underwritten to the same standards as the Mortgage Loans initially included in
the Trust Fund. As specified in the related Prospectus Supplement, such transfer
may be funded by the establishment of a Pre-Funding Account (a "Pre-Funding
Account"). If a Pre-Funding Account is established, all or a portion of the
proceeds of the sale of one or more classes of Securities of the related series
will be deposited in such account to be released as additional Mortgage Loans
are transferred. A Pre-Funding Account will be required to be maintained as an
eligible account under the related agreement, all amounts therein will be
required to be invested in Permitted Investments and the amount held therein
shall at no time exceed 25% of the aggregate outstanding principal balance of
the Securities. The related Agreement or other agreement providing for the
transfer of additional Mortgage Loans will generally provide that all such
transfers must be made within 3 months after the Closing Date, and that amounts
set aside to fund such transfers (whether in a Pre- Funding Account or
otherwise) and not so applied within the required period of time will be deemed
to be principal prepayments and applied in the manner set forth in such
Prospectus Supplement.
The Depositor will be required to provide data regarding the additional
Mortgage Loans to the Rating Agencies and the security insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by such
parties. Transfer of the additional Mortgage Loans will be further conditioned
upon confirmation by the Rating Agencies that the addition of such Mortgage
Loans to the Trust Fund will not result in the downgrading of the Securities or,
in the case of a series guaranteed or supported by a security insurer, will not
adversely affect the capital requirements of such security insurer. Finally, a
legal opinion to the effect that the conditions to the transfer of the
additional Mortgage Loans have been satisfied.
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ALLOCATION OF LOSSES
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale or otherwise (a "Liquidated Loan"), the amount of the
Realized Loss incurred in connection with such liquidation will equal the
excess, if any, of the unpaid principal balance of the Liquidated Loan
immediately prior to liquidation, over the aggregate amount of Liquidation
Proceeds derived from such liquidation remaining after application of such
proceeds to unpaid accrued interest on the Liquidated Loan and to reimburse the
Master Servicer or any Sub-Servicer for related unreimbursed servicing expenses.
With respect to certain Mortgage Loans the principal balances of which have been
reduced in connection with bankruptcy proceedings, the amount of such reduction
(a "Deficient Valuation") also will be treated as a Realized Loss. As to any
series of Securities other than a Senior/Subordinate Series, unless specified
otherwise in the related Prospectus Supplement, any Realized Loss not covered as
described under "Description of Credit Support" will be allocated among all of
the Securities on a pro rata basis.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing interests in a Trust
Fund consisting of Mortgage Loans, other than a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will advance on or before each Distribution Date its own funds or funds
held in the Certificate Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal and interest (net of related servicing fees
and Retained Interest) that were due during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
good faith determination that such advances will be reimbursable from Related
Proceeds (as defined below). SEE "DESCRIPTION OF PRIMARY INSURANCE POLICIES" AND
"DESCRIPTION OF CREDIT SUPPORT".
With respect to any Senior/Subordinate Series, unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will advance on each
Distribution Date its own funds or funds held in the Certificate Account which
are not included in the Available Distribution Amount for such Distribution
Date, in an aggregate amount equal to the lesser of (a) the total of all amounts
required to be distributed on each class of Senior Securities and Strip
Securities, if any, on such Distribution Date which remain after applying
towards such payment the entire Available Distribution Amount, including funds
otherwise payable to the Subordinate Securityholders but excluding such advance,
and (b) the aggregate of payments of principal and interest (net of related
servicing fees and Retained Interest) that were due during the related Due
Period and were delinquent on the related Determination Date. Alternatively, for
a Senior/Subordinate Series, the Master Servicer may be obligated to make
advances in the manner provided in the preceding paragraph. In either case, the
Master Servicer will, unless the related Prospectus Supplement provides
otherwise, be obligated to make such advances regardless of recoverability from
the related Mortgage Loans to the extent that the Principal Balance of the
Subordinate Securities is greater than zero. Thereafter, such advances are
required to be made only to the extent they are deemed by the Master Servicer to
be recoverable from Related Proceeds, unless otherwise specified in the related
Prospectus Supplement. SEE "DESCRIPTION OF PRIMARY INSURANCE POLICIES" AND
"DESCRIPTION OF CREDIT SUPPORT".
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
funds will be reimbursable only out of related recoveries on the Mortgage Loans
(including amounts received under any form of Credit Support) respecting which
such advances were made (as to any Mortgage Loan, "Related Proceeds") and, in
the case of a Senior/Subordinate
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Series, out of any amounts otherwise distributable on the Subordinate Securities
of such series; provided, however, that any such advance will be reimbursable
from any amounts in the Certificate Account to the extent that the Master
Servicer shall determine that such advance (a "Nonrecoverable Advance") is not
ultimately recoverable from Related Proceeds and, in the case of a
Senior/Subordinate Series, the Principal Balance of the Subordinate Securities
has been reduced to zero. If advances have been made by the Master Servicer from
excess funds in the Certificate Account, the Master Servicer will replace such
funds in the Certificate Account on any future Distribution Date to the extent
that funds in the Certificate Account on such Distribution Date are less than
payments required to be made to Securityholders on such date. If so specified in
the related Prospectus Supplement, the obligations of the Master Servicer to
make advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement. In addition, if so specified in the Pooling and
Servicing Agreement, the Master Servicer may finance amounts necessary to make
advances and pledge the right to reimbursement in respect thereof.
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;
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(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 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.
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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.
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
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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, 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
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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 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
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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. In addition,
if so specified in the Pooling and Servicing Agreement, the Master Servicer may
finance amounts necessary to make servicing expenses and pledge the right to
reimbursement in respect thereof.
If the Master Servicer or its designee recovers Insurance Proceeds with
respect to any defaulted Mortgage Loan, the Master Servicer will be entitled to
withdraw or cause to be withdrawn from the Certificate Account out of such
proceeds, prior to distribution thereof to Securityholders, amounts representing
its normal servicing compensation on such Mortgage Loan, unreimbursed servicing
expenses incurred with respect to the Mortgage Loan and any unreimbursed
advances of delinquent monthly payments made with respect to the Mortgage Loan.
In the event that the Master Servicer has expended its own funds to restore
damaged property and such funds have not been reimbursed under any Insurance
Instrument, it will be entitled to withdraw from the Certificate Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Because Insurance Proceeds cannot exceed deficiency
claims and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the principal
balance of the defaulted Mortgage Loan together with accrued interest thereon at
the Net Interest Rate. In addition, when property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the outstanding principal balance of
the related Mortgage Loan together with accrued interest and expenses, it may be
expected that, if retention of any such amount is legally permissible, the
insurer will exercise its right under any related mortgage pool insurance policy
to purchase such property and realize for itself any excess proceeds. See
"Description of Primary Insurance Policies" and "Description of Credit Support".
With respect to collateral securing a Cooperative Loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant Cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing the Cooperative
Loan. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on Cooperatives".
This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring such approval could limit the
number of potential purchasers for those shares and otherwise limit the Master
Servicer's ability to sell, and realize the value of, those shares.
RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF
EXPENSES
The Prospectus Supplement for a series of Securities will specify whether
there will be any Retained Interest in the Trust Fund Assets, and, if so, the
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A Retained Interest in a Trust Fund Asset represents a specified portion of the
interest payable thereon. The Retained Interest will be deducted from borrower
payments as received and will not be part of the related Trust Fund. Any partial
recovery of interest on a Mortgage Loan, after deduction of all applicable
servicing fees, will be allocated between Retained Interest (if any) and
interest at the Net Interest Rate on a pari passu basis.
The Master Servicer's (or in the case of a Trust Fund consisting of Agency
Securities or Private Mortgage-Backed Securities if specified in the related
Prospectus Supplement, the Trustee's)
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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 and late payment charges, to the
extent collected from mortgagors. Unless otherwise specified in the related
Prospectus Supplement, any interest or other income which may be earned on funds
held in the Certificate Account or any Sub-Servicing Account may be paid as
additional compensation to the Trustee, the Master Servicer or the
Sub-Servicers, as the case may be. Any Sub-Servicer will receive a portion of
the Master Servicer's primary compensation as its sub-servicing compensation.
With respect to a series of Securities consisting of Mortgage Loans, in
addition to amounts payable to any Sub-Servicer, the Master Servicer will pay
from its servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
The Master Servicer is entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans,
including under certain circumstances reimbursement of expenditures incurred by
it in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Securityholders to receive any
related Liquidation Proceeds. The Master Servicer is also entitled to
reimbursement from the Certificate Account for Advances. With respect to a
series of Securities relating to Agency Securities, the Trustee shall pay all
expenses incurred in administration thereof, subject to the limitations
described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement and each Servicing Agreement with
respect to a series of Securities consisting of Mortgage Loans, will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Freddie Mac, the servicing by or on
behalf of the Master Servicer of mortgage loans under servicing agreements
substantially similar to each other (including the related Pooling and Servicing
Agreement or Servicing Agreement) was conducted in compliance with the terms of
such agreements except for any significant exceptions or errors in records that,
in the opinion of the firm, either the Audit Program for Mortgages serviced for
Freddie Mac, or paragraph 4 of the Uniform Single Program for Mortgage Bankers,
requires it to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of mortgage loans by Sub-Servicers,
upon comparable statements for examinations conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for Freddie Mac (rendered within one
year of such statement) of firms of independent public accountants with respect
to the related Sub-Servicer.
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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 (the "Master Servicer") under each Pooling and
Servicing Agreement and each Servicing Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may be the
Depositor or an affiliate of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates.
Each Pooling and Servicing Agreement and each Servicing Agreement will
provide that the Master Servicer may resign from its obligations and duties
under the related Agreement only if such resignation, and the appointment of a
successor, will not result in a downgrading of any class of Securities or upon a
determination that its duties under the related Agreement are no longer
permissible under applicable law. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the related Agreement.
Each Pooling and Servicing Agreement and each Servicing Agreement will
further provide that neither the Master Servicer, the Depositor nor any
director, officer, employee, or agent of the Master Servicer or the Depositor
will be under any liability to the related Trust Fund or Securityholders for any
action taken, or for refraining from the taking of any action, in good faith
pursuant to the related Agreement, or for errors in judgment; provided, however,
that neither the Master Servicer, the Depositor nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Pooling and Servicing Agreement and each Servicing Agreement
will further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related Agreement or the Securities, other than any loss,
liability or expense is related to any specific Mortgage Loan or Mortgage Loans
(unless any such loss, liability or expense otherwise reimbursable pursuant to
the related Agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Pooling and Servicing Agreement and each Servicing
Agreement will provide that neither the Master Servicer nor the Depositor will
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its respective responsibilities under the related Agreement
and which in its opinion may involve it in any expense or liability. The Master
Servicer or the Depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties thereto and the interests of
the Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Securityholders, and the Master Servicer or the Depositor, as
the case may be, will be entitled to be reimbursed therefor and to charge the
Certificate Account. Except in the case of a series of
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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, Fannie Mae or Freddie Mac.
EVENTS OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Certificates that includes Mortgage Loans, Events of Default under each
Pooling and Servicing Agreement will consist of (i) any failure by the Master
Servicer to distribute or cause to be distributed to Securityholders, or to
remit to the Trustee for distribution to Certificateholders, any required
payment that continues unremedied for five days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Certificates evidencing not less than 25% of the Voting Rights; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for thirty days (fifteen days in the case of a failure to pay the
premium for any insurance instrument required to be maintained pursuant to the
Agreement) after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations.
So long as an Event of Default under a Pooling and Servicing Agreement
remains unremedied, the Depositor or the Trustee may, and at the direction of
holders of Certificates evidencing not less than 51% of the Voting Rights, the
Trustee shall, terminate all of the rights and obligations of the Master
Servicer under the Pooling and Servicing Agreement relating to such Trust Fund
and in and to the Mortgage Loans (other than any Retained Interest of the Master
Servicer), whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under such Agreement (except that
if the Trustee is prohibited by law from obligating itself to make advances
regarding delinquent mortgage loans, then the Trustee will not be so obligated)
and will be entitled to similar compensation arrangements. In the event that the
Trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Certificates entitled to at least 51% of the Voting Rights, it
shall appoint, or petition a court of competent jurisdiction for the appointment
of, a housing loan servicing institution acceptable to the Rating Agency with a
net worth at the time of such appointment of at least $15,000,000 (or such other
amount as may be provided in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the related Agreement.
No Certificateholder will have the right under any Pooling and Servicing
Agreement to institute any proceeding with respect thereto unless such holder
previously has given to the Trustee written
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notice of default and unless the holders of Certificates evidencing not less
than 25% of the Voting Rights have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity, and the Trustee for fifteen days has
neglected or refused to institute any such proceeding. The Trustee, however, is
under no obligation to exercise any of the trusts or powers vested in it by any
Pooling and Servicing Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Certificates covered by such Agreement, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, a "Servicing Default" under the related Servicing Agreement generally
will include: (i) any failure by the Master Servicer to make a required deposit
to the Certificate Account or, if the Master Servicer is so required, to
distribute to the holders of any class of Notes or Equity Certificates of such
series any required payment which continues unremedied for five business days
(or other period of time described in the related Prospectus Supplement) after
the giving of written notice of such failure to the Master Servicer by the
Trustee or the Issuer; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Servicing Agreement with respect to such series of Notes which continues
unremedied for 45 days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Issuer; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations
and (iv) any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Depositor or
the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $15,000,000
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.
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INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such series; (ii) failure to perform any other covenant of the Depositor
or the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such series having been incorrect in a material respect as of the time
made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, the Trustee or the holders of a majority
of the then aggregate outstanding amount of the Notes of such series may declare
the principal amount (or, if the Notes of that series are Accrual Securities,
such portion of the principal amount as may be specified in the terms of that
series, as provided in the related Prospectus Supplement) of all the Notes of
such series to be due and payable immediately. Such declaration may, under
certain circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, the Indenture provides that the Trustee will have a prior
lien on the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for payments to the Noteholders would be less than would otherwise be the case.
However, the Trustee may not institute a proceeding for the enforcement of its
lien except in connection with a proceeding for the enforcement of the lien of
the Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
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
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more than an amount equal to the unpaid principal amount thereof less the amount
of such discount that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have any
right under an Owner Trust Agreement or Indenture to institute any proceeding
with respect to such Agreement unless (a) such holder previously has given to
the Trustee written notice of default and the continuance thereof, (b) the
holders of Notes or Equity Certificates of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class (i) have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and (ii) have offered to the Trustee reasonable indemnity,
(c) the Trustee has neglected or refused to institute any such proceeding for 60
days after receipt of such request and indemnity and (d) no direction
inconsistent with such written request has been given to the Trustee during such
60 day period by the Holders of a majority of the Note Balances of such class.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the applicable Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Notes or Equity Certificates covered by such
Agreement, unless such holders have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
With respect to each series of Certificates, each related Pooling and
Servicing Agreement or Trust Agreement may be amended by the Depositor, the
Master Servicer, if any, and the Trustee, without the consent of any of the
holders of Certificates covered by the Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
holder of Certificates covered by the Agreement. Each Agreement may also be
amended by the Depositor, the Master Servicer, if any, and the Trustee, with the
consent of the holders of Certificates evidencing not less than 66% of the
Voting Rights, for any purpose; provided, however, that no such amendment may
(i) reduce in any manner the amount of or delay the timing of, payments received
on Trust Fund Assets which are required to be distributed on any Certificate
without the consent of the holder of such Certificate, (ii) adversely affect in
any material respect the interests of the holders of any class of Certificates
in a manner other than as described in (i), without the consent of the holders
of Certificates of such class evidencing not less than 66% of the aggregate
Voting Rights of such class or (iii) reduce the aforesaid percentage of Voting
Rights required for the consent to any such amendment without the consent of the
holders of all Certificates covered by such Agreement then outstanding. However,
with respect to any series of Certificates as to which a REMIC election is to be
made, the Trustee will not consent to any amendment of the Agreement unless it
shall first have received an opinion of counsel to the effect that such
amendment will not cause the Trust Fund to fail to qualify as a REMIC at any
time that the related Certificates are outstanding. The Voting Rights evidenced
by any Certificate will be the portion of the voting rights of all of the
Certificates in the related series allocated in the manner described in the
related Prospectus Supplement.
With respect to each series of Notes, each related Servicing Agreement or
Indenture may be amended by the parties thereto without the consent of any of
the holders of the Notes covered by such Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
holder of Notes covered by the Agreement. Each
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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 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
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Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Securities and until such date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the Securities
of such series. Any such call will be of the entire Trust Fund at one time;
multiple calls with respect to any series of Securities will not be permitted.
In such case, the holders of the Securities offered hereby will be paid a price
equal to 100% of the Principal Balance of the Securities offered hereby as of
the day of such purchase plus accrued interest thereon at the applicable
Security Interest Rate during the related period on which interest accrues on
such securities (the "Call Price"). Further, the Call Class must remit to the
related Trustee for distribution to the Securityholders funds equal to the Call
Price. If such funds are not deposited with the related Trustee, the Securities
will remain outstanding. There will not be any additional remedies available to
Securityholders. In addition, in the case of a Trust Fund for which a REMIC
election or elections have been made, such termination will constitute a
"qualified liquidation" under Section 860F of the Code. In connection with a
call by the Call Class, the final payment to the Securityholders will be made
upon surrender of the related Securities to the Trustee. Once the Securities
have been surrendered and paid in full, there will not be any continuing
liability from the Securityholders or from the Trust Fund to Securityholders.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer has the option to purchase from the Trust Fund any Mortgage Loan 90
days or more delinquent at a purchase price generally equal to the outstanding
principal balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest on such principal balance computed at the Interest
Rate.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
any Agreement, the Securities or any Mortgage Loan or related document and is
not accountable for the use or application by or on behalf of the Master
Servicer of any funds paid to the Master Servicer or its designee in respect of
the Securities or the Mortgage Loans, or deposited into or withdrawn from the
Certificate Account or any other account by or on behalf of the Master Servicer.
If no Event of
Default has occurred and is continuing, the Trustee is required to perform only
those duties specifically required under the related Agreement. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the related Agreement.
THE TRUSTEE
The Trustee or Indenture Trustee (each, a "Trustee") under each Pooling and
Servicing Agreement, Trust Agreement or Indenture will be named in the related
Prospectus Supplement. The Owner Trustee (the "Owner Trustee") for each series
of Notes will be named in the related Prospectus Supplement. The commercial
bank, national banking association or trust company serving as Trustee or Owner
Trustee may have normal banking relationships with the Depositor and its
affiliates and with the Master Servicer and its affiliates.
DESCRIPTION OF CREDIT SUPPORT
If so provided in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include Credit Support for such series or for one or
more classes of Securities comprising such Series, which Credit Support may
consist of any combination of the following separate components,
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any of which may be limited to a specified percentage of the aggregate principal
balance of the Mortgage Loans covered thereby or a specified dollar amount: (i)
coverage with respect to Realized Losses incurred on Liquidated Loans (the
"Defaulted Mortgage Amount"); (ii) coverage with respect to Special Hazard
Realized Losses, as defined below (the "Special Hazard Amount"); and (iii)
coverage with respect to certain actions that may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a Deficient Valuation or a
reduction by a bankruptcy court of the Interest Rate on a Mortgage Loan or an
extension of its maturity (collectively, the "Bankruptcy Amount"). As set forth
below and in the related Prospectus Supplement, such coverage may be provided by
subordination of one or more other classes of Securities, one or more insurance
policies, a bankruptcy bond, a letter of credit, a reserve fund or any
combination of the foregoing. The amount and type of any Credit Support with
respect to a series of Securities or with respect to one or more classes of
Securities comprising such series, and the obligors on such Credit Support, will
be set forth in the related Prospectus Supplement. See "Description of the
Securities".
SUBORDINATION
With respect to any Senior/Subordinate Series, in the event of any Realized
Losses on Mortgage Loans not in excess of the limitations described below, the
rights of the Subordinate Securityholders to receive distributions with respect
to the Mortgage Loans will be subordinate to the rights of the Senior
Securityholders to the extent described in the related Prospectus Supplement.
All Realized Losses will be allocated to the Subordinate Securities of the
related series (or, if such series includes more than one class of Subordinated
Securities, to the outstanding class of Subordinate Securities having the first
priority for allocation of Realized Losses and then to additional outstanding
classes of Subordinate Securities, if any), until the Principal Balance thereof
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
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prepayments of principal on any of the Mortgage Loans, the respective rights of
the holders of Securities of any series to future distributions would not
change. However, to the extent so provided in the related Prospectus Supplement,
holders of Senior Securities may be entitled to receive a disproportionately
larger amount of prepayments received, which will have the effect of
accelerating the amortization of the Senior Securities and increasing the
respective percentage interest in future distributions evidenced by the
Subordinate Securities in the related Trust Fund (with a corresponding decrease
in the Senior Percentage), as well as preserving the availability of the
subordination provided by the Subordinate Securities. In addition, as set forth
above, Realized Losses will be first allocated to Subordinate Securities by
reduction of the Principal Balance thereof, which will have the effect of
increasing the respective interest in future distributions evidenced by the
Senior Securities in the related Trust Fund.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate Securities
may be deposited into a reserve fund. Amounts held in any reserve fund may be
applied as described below under "Reserve Funds" and in the related Prospectus
Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above; any such variation will
be described in the related Prospectus
Supplement.
If so provided in the related Prospectus Supplement, the Credit Support for
the Senior Securities of a Senior/Subordinate Series may include, in addition to
the subordination of the Subordinate Securities of such series and the
establishment of a reserve fund, any of the other forms of Credit Support
described below. If any of such other forms of Credit Support described below is
maintained solely for the benefit of the Senior Securities of a
Senior/Subordinate Series, then the coverage described below as being provided
by such Credit Support with respect to a series of Securities may be limited to
the extent necessary to make required distributions on such Senior Securities or
as otherwise specified in the related Prospectus Supplement. If so provided 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
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interest), an amount which, together with all Liquidation Proceeds,
Insurance Proceeds, and other collections on such Liquidated Loan (net of
amounts payable or reimbursable therefrom to the Master Servicer for
related unpaid servicing fees and unreimbursed servicing expenses), will
equal the sum of (A) the unpaid principal balance of such Liquidated Loan
(plus accrued interest at the applicable Net Interest Rate) plus (B) the
amount of related servicing expenses, if any, not reimbursed to the Master
Servicer from Liquidation Proceeds, Insurance Proceeds and other
collections on such Liquidation Loan (which shall be paid to the Master
Servicer);
(ii) to the extent of any Special Hazard Amount, as to each
Mortgage Loan that is delinquent and as to which the Mortgaged Property has
suffered damage (other than physical damage caused by hostile or warlike
action in time of war or peace, by any weapons of war, by any insurrection
or rebellion, or by any nuclear reaction or nuclear radiation or nuclear
contamination whether controlled or uncontrolled, or by any action taken by
any governmental authority in response to any of the foregoing) and for
which any amounts paid or payable under the related primary hazard
insurance policy or any Special Hazard Insurance Policy are not sufficient
to pay either of the following amounts, an amount which, together with all
Insurance Proceeds paid or payable under the related primary hazard
insurance policy or any Special Hazard Insurance Policy (net, if such
proceeds are not to be applied to restore such Mortgaged Property, of all
amounts payable or reimbursable therefrom to the Master Servicer for
related unpaid servicing fees and unreimbursed servicing expenses), will be
equal to the lesser of (A) the amount required to restore such Mortgaged
Property and (B) the sum of (1) the unpaid principal balance of such
Mortgage Loan (plus accrued interest at the applicable Net Interest Rate)
plus (2) the amount of related servicing expenses, if any, not reimbursed
to the Master Servicer from Insurance Proceeds paid under the related
primary hazard insurance policy or any Special Hazard Insurance Policy; and
(iii) to the extent of any Bankruptcy Amount, with respect to any
Mortgage Loan that has been subject to bankruptcy proceedings as described
above, the amount of any debt service reduction or Deficient Valuation.
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
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in such fees and collateral being not more than the fees then charged and
collateral then required by such predecessor Letter of Credit Bank.
MORTGAGE POOL INSURANCE POLICY
As to any series of Securities to be covered by a Mortgage Pool Insurance
Policy with respect to any Defaulted Mortgage Amount, the Master Servicer will
exercise its best reasonable efforts to maintain or cause to be maintained the
Mortgage Pool Insurance Policy in full force and effect, unless coverage
thereunder has been exhausted through payment of claims. The Master Servicer
will agree to pay the premiums for each Mortgage Pool Insurance Policy on a
timely basis unless, as described in the related Prospectus Supplement, the
payment of such fees is otherwise provided.
The Master Servicer will present or cause to be presented claims to the
insurer under each Mortgage Pool Insurance Policy. Mortgage Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described below and, if applicable, in the related Prospectus Supplement.
Mortgage Pool Insurance Policies do not cover losses arising out of the
matters excluded from coverage under the primary mortgage insurance policy, or
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, irrespective of the reason therefor.
Mortgage Pool Insurance Policies in general provide that no claim may
validly be presented thereunder with respect to a Mortgage Loan unless (i) an
acceptable primary mortgage insurance policy, if the initial Loan-to-Value Ratio
of the Mortgage Loan exceeded 80%, has been kept in force until such
Loan-to-Value Ratio is reduced to 80%; (ii) premiums on the primary hazard
insurance policy have been paid by the insured and real estate taxes and
foreclosure, protection and preservation expenses have been advanced by or on
behalf of the insured, as approved by the insurer; (iii) if there has been
physical loss or damage to the Mortgaged Property, it has been restored to its
physical condition at the time the Mortgage Loan became insured under the
Mortgage Pool Insurance Policy, subject to reasonable wear and tear; and (iv)
the insured has acquired good and merchantable title to the Mortgaged Property,
free and clear of all liens and encumbrances, except permitted encumbrances,
including any right of redemption by or on behalf 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
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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 Freddie Mac, Fannie Mae, or any successor entity, and
having a claims-paying ability acceptable to the Rating Agency or Agencies), the
Master Servicer will use its best reasonable efforts to obtain or cause to be
obtained from another Qualified Insurer a replacement insurance policy
comparable to the Mortgage Pool Insurance Policy with a total coverage equal to
the then outstanding coverage of such Mortgage Pool Insurance Policy; provided,
however, that, unless otherwise provided in the related Prospectus Supplement,
if the cost of the replacement policy is greater than the cost of such Mortgage
Pool Insurance Policy, the coverage of the replacement policy may be reduced to
the level such that its premium rate does not exceed the premium rate on such
Mortgage Pool Insurance Policy. However, in the event that the insurer ceases to
be a Qualified Insurer solely because it ceases to be approved as an insurer by
Freddie Mac, Fannie Mae, or any successor entity, the Master Servicer will
review, or cause to be reviewed, the financial condition of the insurer with a
view towards determining whether recoveries under the Mortgage Pool Insurance
Policy are jeopardized for reasons related to the financial condition of the
insurer. If the Master Servicer determines that recoveries are so jeopardized,
it will exercise its best reasonable efforts to obtain from another Qualified
Insurer a replacement policy as described above, subject to the same cost
limitation.
Because each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the insurer, such policy will not provide coverage against
hazard losses. As set forth below, the primary hazard insurance policies
covering the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is covered, may
afford recoveries that are significantly less than the full replacement cost of
such losses. Further, a special hazard insurance policy (or a Letter of Credit
to the extent of the Special Hazard Amount) will not cover all risks, and the
coverage thereunder will be limited in amount. Certain hazard risks will, as a
result, be uninsured and will therefore be borne by Securityholders.
SPECIAL HAZARD INSURANCE POLICY
As to any series of Securities to be covered by an Insurance Instrument
that does not cover any Special Hazard Amount, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will exercise its best
reasonable efforts to maintain or cause to be maintained a Special Hazard
Insurance Policy in full force and effect covering the Special Hazard Amount,
unless coverage thereunder has been exhausted through payment of claims;
provided, however, that the
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Master Servicer is under no obligation to maintain such policy in the event that
any Insurance Instrument covering such series as to any Defaulted Mortgage
Amount is no longer in effect. The Master Servicer will agree to pay the
premiums on each Special Hazard Insurance Policy on a timely basis unless, as
described in the related Prospectus Supplement, payment of such premiums is
otherwise provided for.
Each Special Hazard Insurance Policy will, subject to the limitations
described below, protect holders of Securities of the related series from (i)
loss by reason of damage to Mortgaged Properties caused by certain hazards
(including earthquakes and mudflows) not insured against under the primary
hazard insurance policies or a flood insurance policy if the property is in a
designated flood area and (ii) loss from partial damage caused by reason of the
application of the co-insurance clause contained in the primary hazard insurance
policies. Special Hazard Insurance Policies will not cover losses occasioned by
normal wear and tear, war, civil insurrection, certain governmental actions,
errors in design, nuclear or chemical reaction or contamination, faulty
workmanship or materials (except under certain circumstances), flood (if the
property is located in a designated flood area) and certain other risks.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
will provide that, when there has been damage to property securing a defaulted
Mortgage Loan acquired by the insured and to the extent the damage is not
covered by the related primary hazard insurance policy or flood insurance
policy, the insurer will pay the lesser of (i) the cost of repair to the
property and (ii) upon transfer of the property to the insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of the
property by foreclosure, deed in lieu of foreclosure or repossession, plus
accrued interest to the date of claim settlement and certain expenses incurred
by or on behalf of the Master Servicer with respect to the property. The amount
of coverage under the Special Hazard Insurance Policy will be reduced by the sum
of (a) the unpaid principal balance plus accrued interest and certain expenses
paid by the insurer, less any net proceeds realized by the insurer from the sale
of the property, plus (b) any amount paid as the cost of repair of the property.
Restoration of the property with the proceeds described under clause (i) of
the immediately preceding paragraph will satisfy the condition under a Credit
Insurance Instrument that the property be restored before a claim thereunder may
be validly presented with respect to the defaulted Mortgage Loan secured by such
property. The payment described under clause (ii) of the immediately preceding
paragraph will render unnecessary presentation of a claim in respect of such
Mortgage Loan under a Credit Insurance Instrument as to any Defaulted Mortgage
Amount. Therefore, so long as the Credit Insurance Instrument remains in effect,
the payment by the insurer of either of the above alternative amounts will not
affect the total insurance proceeds paid to 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
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property, and a claim payment is payable within a specified number of days
(typically, 30 days) after a claim is accepted by the insurer. Special Hazard
Insurance Policies provide that no claim may be paid unless primary hazard
insurance policy premiums, flood insurance premiums (if the property is located
in a federally designated flood area) and, as approved by the insurer, real
estate property taxes, property protection and preservation expenses and
foreclosure or repossession costs have been paid by or on behalf of the insured,
and unless the insured has maintained the primary hazard insurance policy and,
if the property is located in a federally designated flood area, flood
insurance, as required by the Special Hazard Insurance Policy.
If a Special Hazard Insurance Policy is cancelled or terminated for any
reason (other than the exhaustion of total policy coverage), the Master Servicer
will use its best reasonable efforts to obtain or cause to be obtained from
another Insurer a replacement policy comparable to such Special Hazard Insurance
Policy with a total coverage that is equal to the then existing coverage of such
Special Hazard Insurance Policy; provided, however, that, unless otherwise
provided in the related Prospectus Supplement, if the cost of the replacement
policy is greater than the cost of such Special Hazard Insurance Policy, the
coverage of the replacement policy may be reduced to a level such that its
premium rate does not exceed the premium rate on such Special Hazard Insurance
Policy.
Since each Special Hazard Insurance Policy is designed to permit full
recoveries as to any Defaulted Mortgage Amount under a Credit Insurance
Instrument in circumstances in which such recoveries would otherwise be
unavailable because property has been damaged by a cause not insured against by
a primary hazard insurance policy and thus would not be restored, each Agreement
provides that, if the related Credit Insurance Instrument shall have lapsed or
terminated or been exhausted through payment of claims, the Master Servicer will
be under no further obligation to maintain the Special Hazard Insurance Policy.
BANKRUPTCY BOND
As to any series of Securities to be covered by a Bankruptcy Bond with
respect to any Bankruptcy Amount, the Master Servicer will exercise its best
reasonable efforts to maintain or cause to be maintained the Bankruptcy Bond in
full force and effect, unless coverage thereunder has been exhausted through
payment of claims. The Master Servicer will pay or cause to be paid the premiums
for each Bankruptcy Bond on a timely basis, unless, as described in the related
Prospectus Supplement, payment of such premiums is otherwise provided for.
Subject to the limit of the dollar amount of coverage provided, each Bankruptcy
Bond will cover certain losses resulting from an extension of the maturity of a
Mortgage Loan, or a reduction by the bankruptcy court of the principal balance
of or the Interest Rate on a Mortgage Loan, and the unpaid interest on the
amount of a principal reduction during the pendency of a proceeding under the
Bankruptcy Code. See "Certain Legal Aspects of Mortgage Loans--Foreclosure on
Mortgages" and "--Repossession with respect to Contracts".
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
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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.
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.
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As conditions precedent to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the borrower, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes, protection and preservation expenses and foreclosure
and related costs; (ii) in the event of any physical loss or damage to the
Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the primary mortgage insurance policy
(ordinary wear and tear excepted); and (iii) tender to the insurer good and
merchantable title to, and possession of, the Mortgaged Property.
PRIMARY HAZARD INSURANCE POLICIES
Each Agreement will require the Master Servicer to cause the borrower on
each Mortgage Loan to maintain a primary hazard insurance policy providing for
coverage of the standard form of fire insurance policy with extended coverage
customary in the state in which the Mortgaged Property is located. Unless
otherwise specified in the related Prospectus Supplement, such coverage will be
in general in an amount equal to the lesser of the principal balance owing on
such Mortgage Loan and the amount necessary to fully compensate for any damage
or loss to the improvements on the Mortgaged Property on a replacement cost
basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any primary hazard insurance policy and under any flood insurance
policy referred to below, or upon the extent to which information in this regard
is furnished by borrowers. All amounts collected by the Master Servicer under
any such policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Certificate Account. The Agreement provides that the Master Servicer may satisfy
its obligation to cause each borrower to maintain such a hazard insurance policy
by the Master Servicer's maintaining a blanket policy insuring against hazard
losses on the Mortgage Loans. If such blanket policy contains a deductible
clause, the Master Servicer will deposit in the Certificate Account all sums
that would have been deposited therein but for such clause. The Master Servicer
also is required to maintain a fidelity bond and errors and omissions policy
with respect to its officers and employees that provides coverage against losses
that may be sustained as a result of an officer's or employee's misappropriation
of funds or errors and omissions in failing to maintain insurance, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore 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
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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 Federal Housing Administration ("FHA") is responsible for administering
various federal programs, including mortgage insurance, authorized under The
Housing Act and the United States Housing Act of 1937, as amended. If so
provided in the related Prospectus Supplement, certain of the Mortgage Loans
will be insured by the FHA.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by
HUD/FHA and a HUD-approved co-insurer. Generally the term of such a mortgage
loan may be up to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also
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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 United States Department of Veterans Affairs (the "VA") is an Executive
Branch Department of the United States, headed by the Secretary of Veterans
Affairs. VA currently administers a variety of federal assistance programs on
behalf of eligible veterans and their dependents and beneficiaries. VA
administers a loan guaranty program pursuant to which VA guarantees a portion of
loans made to eligible veterans. If so provided in the Prospectus Supplement,
certain of the Mortgage Loans will be guaranteed by the VA.
Under the VA loan guaranty program, a VA Loan may be made to any eligible
veteran by an approved private sector mortgage lender. VA guarantees payment to
the holder of that loan of a fixed percentage of the loan indebtedness, up to a
maximum dollar amount, in the event of default by the veteran borrower. When a
delinquency is reported to VA and no realistic alternative to foreclosure is
developed by the loan holder or through VA's supplemental servicing of the loan,
VA determines, through an economic analysis, whether VA will (a) authorize the
holder to convey the property securing the VA Loan to the Secretary of Veterans
Affairs following termination or (b) pay the loan guaranty amount to the holder.
The decision as to disposition of properties securing defaulted VA Loans is made
on a case-by-case basis using the procedures set forth in 38 U.S.C. Section
3732(c), as amended.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by residential properties. Because such legal aspects
are governed in part by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans. SEE "THE TRUST FUNDS--THE MORTGAGE LOANS".
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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.
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
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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 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
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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.
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A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Mortgage Loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens. The proceeds received by the referee or trustee from
the sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
FORECLOSURE ON MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF PUERTO RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgage property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
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There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of such actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale
upon foreclosure of a mortgaged property that (a) is subject to a mortgage loan
that was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of such property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of such property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of such property. The mortgagor can claim this sum of money from the mortgagee
at any time prior to the public sale or up to one year after such sale. Such
payment would reduce the amount of sales proceeds available to satisfy the
Mortgage Loan and may increase the amount of the loss.
FORECLOSURE ON COOPERATIVE SHARES
The Cooperative shares and proprietary lease or occupancy agreement
owned by the tenant- stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the Cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement, and may be cancelled by the Cooperative for failure by the
tenant- stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the Cooperative apartment
building incurred by such tenant-stockholder. Typically, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the Cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the Cooperative to terminate such
lease or agreement in the event the tenant-stockholder fails to make payments or
defaults in the performance of covenants required thereunder. Typically, the
lender and the Cooperative enter into a recognition agreement that, together
with any lender protection provisions contained in the proprietary lease,
establishes the rights and obligations of both parties in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the Cooperative
apartment, subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
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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 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.
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(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 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
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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 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
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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.
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
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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 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
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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, in a
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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. Freddie Mac has
taken the position in its published mortgage servicing standards that, out of a
total of eleven "window period states", five states (Arizona, Michigan,
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of Window Period Loans. The Garn-St
Germain Act also sets forth nine specific instances in which a mortgage lender
covered by the Garn-St Germain Act (including federal savings and loan
associations and federal savings banks) may not exercise a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family
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transfers, certain transfers by operation of law, leases of fewer than three
years and the creation of a junior encumbrance. Regulations promulgated under
the Garn-St Germain Act also prohibit the imposition of a prepayment penalty
upon the acceleration of a loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a Mortgage
Loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, 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
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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.
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
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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 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,
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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 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
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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
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
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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 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
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indicated otherwise in the applicable Prospectus Supplement, references to
"Mortgage Loans" include Agency Securities, Private Mortgage-Backed Securities
and Funding Agreements.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt
& Wood, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes 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
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calendar quarter. The REMIC will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans may not be
treated entirely as assets described in the foregoing sections of the Code. If
so, the related Prospectus Supplement will describe the Mortgage Loans that may
not be so treated. The REMIC Regulations do provide, however, that cash received
from payments on Mortgage Loans held pending distribution is considered part of
the Mortgage Loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Certificates, Thacher Proffitt & Wood, counsel to the Depositor,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates 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
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rules applicable to REMIC Regular Certificates and certain other debt
instruments issued with original issue discount. Regulations have not been
issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor, nor the Master Servicer
will make any representation that the Mortgage Loans will in fact prepay at a
rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will
be the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest."
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such REMIC
Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary 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.
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In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns to the Certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held such REMIC Regular 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
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accrual period. The present value of the remaining distributions referred to in
the preceding sentence will be calculated (i) assuming that distributions on the
REMIC Regular Certificate will be received in future periods based on the
Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption, (ii)
using a discount rate equal to the original yield to maturity of the Certificate
and (iii) taking into account events (including actual prepayments) that have
occurred before the close of the accrual period. For these purposes, the
original yield to maturity of the Certificate will be calculated based on its
issue price and assuming that distributions on the Certificate will be made in
all accrual periods based on the Mortgage Loans being prepaid at a rate equal to
the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
that accrued with respect to such Certificate in prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
MARKET DISCOUNT
A Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, in the case of a REMIC Regular Certificate issued
without original issue discount, at a purchase price less than its remaining
stated principal amount, or in the case of a REMIC Regular Certificate issued
with original issue discount, at a purchase price less than its adjusted issue
price will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A 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
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OWNERS OF REMIC REGULAR CERTIFICATES--PREMIUM" BELOW. Each of these elections to
accrue interest, discount and premium with respect to a Certificate on a
constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate 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
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accrues on all market discount instruments acquired by such holder in that
taxable year or thereafter, the interest deferral rule described above will not
apply.
PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion
of such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC
Regular Certificates and noncorporate holders of the REMIC Regular Certificates
that acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
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
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transactions. See "--Prohibited Transactions Tax and Other Possible REMIC Taxes"
below. Rather, the taxable income or net loss of a REMIC is generally taken into
account by the holder of the REMIC Residual Certificates. Accordingly, the REMIC
Residual Certificates will be subject to tax rules that differ significantly
from those that would apply if the REMIC Residual Certificates were treated for
federal income tax purposes as direct ownership interests in the Mortgage Loans
or as debt instruments issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be 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
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Residual Certificateholders may exceed the cash distributions received by such
REMIC Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans,
bad debt losses with respect to the Mortgage Loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Trustee may be required to estimate the fair market value of such interests in
order to determine the basis of the REMIC in the Mortgage Loans and other
property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated
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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
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average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, excess inclusions (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
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,
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prospective purchasers should consider the possibility that a purported transfer
of such REMIC Residual Certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described rules
which would result in the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to- Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders
of the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. 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
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an individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, no deduction will be allowed for
such holder's allocable portion of servicing fees and other miscellaneous
itemized deductions of the REMIC, even though an amount equal to the amount of
such fees and other deductions will be included in such holder's gross income.
Accordingly, such REMIC Certificates may not be appropriate investments for
individuals, estates, or trusts, or pass-through entities beneficially owned by
one or more individuals, estates or trusts. Such prospective investors should
carefully consult with their own tax advisors prior to making an investment in
such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such 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
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exceed the amount of interest that would have accrued on the taxpayer's net
investment at 120% of the appropriate "applicable Federal rate" (which rate is
computed and published monthly by the IRS) at the time the taxpayer enters into
the conversion transaction, subject to appropriate reduction for prior inclusion
of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS 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
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that the Master Servicer or the Trustee, as the case may be, has sufficient
assets to do so, and provided further that such tax arises out of a breach of
the Master Servicer's or the Trustee's obligations, as the case may be, under
the related Pooling and Servicing Agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by the Master Servicer
or the Trustee will be charged against the related Trust Fund resulting in a
reduction in amounts payable to holders of the related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally 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).
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For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
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
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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.
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
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complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such Certificateholder). For
these purposes, "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision thereof
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which regulations have not yet been issued, a trust which was
in existence on August 20, 1996 (other than a trust treated as owned by the
grantor under subpart E of part I of subchapter J of chapter 1 of the Code), and
which was treated as a United States person on August 19, 1996, may elect to
continue to be treated as a United States person notwithstanding the previous
sentence. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
Unless otherwise stated in the related Prospectus Supplement, transfers
of REMIC Residual Certificates to investors that are not United States persons
will be prohibited under the related Pooling and Servicing Agreement.
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.
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STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code section 856(c)(4)(A) and interest on Notes will not be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise used the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "--REMICs
--Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related Prospectus Supplement with
respect to the proposed issuance of each series of Grantor Trust Certificates,
Thacher Proffitt & Wood, counsel to the Depositor, will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement and upon issuance of such Grantor Trust Certificates,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code and not as a partnership or an
association taxable as a corporation.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
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
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Mortgage Loans qualify for such treatment. In addition, counsel to the Depositor
will deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a
Grantor Trust Fund consisting of Mortgage Loans that are "loans . . . secured by
an interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code, and "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or Certificate of beneficial ownership therein) which . .
.[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Mortgage Loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. 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
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income reportable by holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in which
multiple classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding de minimis market discount. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates-Market
Discount" below. Under the stripped bond rules, the holder of a Grantor Trust
Fractional Interest Certificate (whether a cash or accrual method taxpayer) will
be required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust 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
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month (see "Sales of Grantor Trust Certificates") and the yield of such Grantor
Trust Fractional Interest Certificate to such holder. Such yield would be
computed at the rate (compounded based on the regular interval between payment
dates) that, if used to discount the holder's share of future payments on the
Mortgage Loans, would cause the present value of those future payments to equal
the price at which the holder purchased such Certificate. In computing yield
under the stripped bond rules, a Certificateholder's share of future payments on
the Mortgage Loans will not include any payments made in respect of any
ownership interest in the Mortgage Loans retained by the Depositor, the Master
Servicer, any subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, for taxable years beginning after August 5,
1997, Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997, whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to such Certificate and the portion of
the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption is
used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
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
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computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates-If Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY
Subject to the discussion below on original issue discount, if the
stripped bond rules do not apply to a Grantor Trust Fractional Interest
Certificate, the Certificateholder will be required to report its share of the
interest income on the Mortgage Loans in accordance with such
Certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Fractional Interest Certificate to the
extent it evidences an interest in Mortgage Loans issued with original issue
discount.
The original issue discount, if any, on the Mortgage Loans will equal
the difference between the stated redemption price of such Mortgage Loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below-market rate of interest or the acceleration or the deferral
of interest payments. The determination as to whether original issue discount
will be considered to be de 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.
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In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by such pools, it is intended to base information reports and returns to the IRS
and Certificateholders for taxable years beginning after August 5, 1997, on the
use of a prepayment assumption. However, in the case of certificates not backed
by such pools or with respect to taxable years beginning prior to August 5,
1997, it currently is not intended to base such reports and returns on the use
of a prepayment assumption. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
In addition to its regular reports, the Master Servicer or the Trustee,
except as provided in the related Prospectus Supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
such holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
MARKET DISCOUNT
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Mortgage Loan is considered to have been purchased at a "market discount," that
is, in the case of a Mortgage Loan issued without original issue discount, at a
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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.
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As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. To the extent the
Grantor Trust Strip Certificates represent an interest in any pool of debt
instruments the yield on which may be affected by reason of prepayments, those
provisions will apply to the Grantor Trust Strip Certificates for taxable years
beginning after August 5, 1997. It is unclear whether those provisions 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,
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are or may be excepted from such regulations. Like the OID Regulations, the
Contingent Payment Regulations do not specifically address securities, such as
the Grantor Trust Strip Certificates, that are subject to the stripped bond
rules of Section 1286 of the Code.
If the contingent payment rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the "noncontingent bond method". Under the "noncontingent bond method",
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment 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
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transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate" (which rate is computed and published
monthly by the IRS) at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction. Finally, a taxpayer may
elect to have net capital gain taxed at ordinary income rates rather than
capital gains rates in order to include such net capital gain in total net
investment income for that taxable year, for purposes of the rule that limits
the deduction of interest on indebtedness incurred to purchase or carry property
held for investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING
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,
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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 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.
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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 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.
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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.
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
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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 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
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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 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.
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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 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
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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.
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
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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 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
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Certificate or a Note with "substantial equity features"), and, because of the
factual nature of certain of the rules set forth in the DOL Regulations, Plan
Assets may be deemed to include an interest in the underlying assets of the
entity in which a Plan acquires an interest (such as the Trust Fund). Without
regard to whether the Notes are characterized as equity interests, the purchase,
sale and holding of Notes by or on behalf of a Plan could be considered to give
rise to a prohibited transaction if the Issuer, the Trustee or any of their
respective affiliates is or becomes a Party in Interest with respect to such
Plan. Neither Plans nor persons investing Plan Assets should acquire or hold
Securities in reliance upon the availability of any exception under the DOL
Regulations.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans, Agency Securities,
Private Mortgage-Backed Securities, Funding Agreements and other assets included
in the Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Securities by or on behalf of a Plan or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code unless a statutory or
administrative exemption is available.
The DOL issued an individual exemption, Prohibited Transaction Exemption
91-23 (56 Fed. Reg. 15936, April 18, 1991) (the "Exemption"), to Salomon Smith
Barney Inc. (formerly known as Smith Barney Inc.), which generally exempts from
the application of the prohibited transaction provisions of Section 406 of
ERISA, and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations", the term "Underwriter" shall include (a) Salomon
Smith Barney Inc., (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Salomon
Smith Barney Inc. and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Certificates by a Plan or
with Plan Assets must be on terms that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party. Second,
the Exemption only applies to Certificates evidencing rights and interests that
are not subordinated to the rights and interests evidenced by other Certificates
of the same trust. Third, the Certificates at the time of acquisition by a Plan
or with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
(collectively, the "Exemption Rating Agencies"). Fourth, the Trustee cannot be
an affiliate of any member of the "Restricted Group" which consists of any
Underwriter, the Depositor, the Trustee, the Master Servicer, any Sub-Servicer
and any obligor with respect to assets included in the Trust Fund 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
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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 (3) the
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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
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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:
(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."
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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) 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
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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.
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
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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
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement (the "1998 Policy
Statement") applicable to all depository institutions, setting forth guidelines
for investments in "high-risk mortgage securities". The 1998 Policy Statement
has been adopted by the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the National Credit Union Administration (the "NCUA")
and the Office of Thrift Supervision (the "OTS") with an effective date of May
26, 1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a depository institution to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. The 1998 Policy Statement eliminates former constraints on
investing in certain "high-risk" mortgage derivative products and substitutes
broader guidelines for evaluating and monitoring investment risk.
On December 1, 1998, the Office of Thrift Supervision (the "OTS") issued
Thrift Bulletin 13a, entitled, "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities" ("TB 13a"), which is applicable to
thrift institutions regulated by the OTS. TB 13a has an effective date of
December 1, 1998. One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to (i) conduct a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives and (ii) conduct a pre-purchase
price sensitivity analysis of any "complex security" or financial derivative.
For the purposes of TB 13a, "complex security" includes among other things any
collateralized mortgage obligation ("CMO") or REMIC security, other than any
"plain vanilla" mortgage pass-through security (that is, securities that are
part of a single class of securities in the related pool, that are non-callable
and do not have any special features). Accordingly, the offered securities may
be viewed as "complex securities". The OTS recommends that while a thrift
institution should conduct its own in-house pre-acquisition analysis, it may
rely on an analysis conducted by an independent third-party as long as
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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.
Prospective investors in the Securities, including in particular the
classes of Securities that do not constitute "mortgage related securities" for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR SUCH
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
SUCH INVESTOR.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Salomon Smith Barney Inc. ("Salomon
Smith Barney") acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Securities agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by Salomon Smith Barney acting as agent or in some cases as
principal with respect to Securities which it has previously purchased or agreed
to purchase. If Salomon Smith Barney acts as agent in the sale of Securities,
Salomon Smith Barney will receive a selling commission with respect to each
series of Securities, depending on market conditions, expressed as a percentage
of the aggregate principal balance of the related Mortgage Loans as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Salomon Smith
Barney elects to purchase Securities as principal, Salomon Smith Barney may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such series.
The Depositor will indemnify Salomon Smith Barney and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Salomon Smith Barney and any
underwriters may be required to make in respect thereof.
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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.
RATING
It is a condition to the issuance of any class of Securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by at least one Rating Agency.
Any such ratings on the Securities address the likelihood of receipt by
the holders thereof of all collections on the underlying mortgage assets to
which such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with such Securities, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any. Such
ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might differ
from those originally anticipated. As a result, Securityholders might suffer a
lower than anticipated yield, and, in addition, holders of Strip Securities in
extreme cases might fail to recoup their initial investments.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Depositor can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor,
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Chicago, Illinois 60661; New York Regional Office, Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web site (http:\\www.sec.gov). The Depositor does not intend to
send any financial reports to Securityholders (as defined herein).
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
Copies of Freddie Mac's most recent Offering Circular for Freddie Mac
Certificates, Freddie Mac's most recent Information Statement and any subsequent
information statement, any supplement to any information statement relating to
Freddie Mac and any quarterly report made available by Freddie Mac after
December 31, 1983 can be obtained by writing or calling the Freddie Mac Investor
Inquiry Department at 8200 Jones Branch Drive, Mail Stop 319, McLean, Virginia
22102 (800-336-3672). The Depositor did not participate in the preparation of
Freddie Mac's Offering Circular, Information Statement or any supplement and,
accordingly, makes no representation as to the accuracy or completeness of the
information set forth therein.
Copies of Fannie Mae's most recent Prospectus for Fannie Mae
Certificates are available from Fannie Mae's Mortgage Backed Securities Office,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-6547). Fannie Mae's
annual report and quarterly financial statements, as well as other financial
information, are available from Fannie Mae's Office of the Treasurer, 3900
Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000) or the Office of
the Vice President of Investor Relations, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016 (202-752-7000). The Depositor did not participate in the
preparation of Fannie Mae's Prospectus and, accordingly, makes no
representations as to the accuracy or completeness of the information set forth
therein.
REPORTS TO SECURITYHOLDERS
The Trustee will mail monthly reports concerning each Trust Fund to all
registered holders of Securities (the "Securityholders") of the related series.
With respect to each series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively. See
"Description of the Securities-Reports to Securityholders".
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
These are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the offering of Securities offered hereby evidencing interest
therein. The Depositor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the offering
of one or more classes of Securities offered hereby, a copy of any or all
documents or reports incorporated herein by reference, in each case to the
extent such documents or reports relate to one or more of such classes of such
offered Securities, other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Requests
to the Depositor should be directed in writing to its principal executive office
at 390 Greenwich Street, 4th Floor, New York, New York 10013, Attention:
Mortgage Finance, or by telephone at (212) 816-6000. The Depositor has
determined that its financial statements are not material to the offering of any
Securities offered hereby.
143
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
---- ----------
1998 Policy Statement ...............................................140
401(c) Regulations ..................................................138
Accrual Securities ...................................................39
Accrued Certificate Interest .........................................48
Accrued Note Interest ................................................48
Accrued Security Interest ............................................48
Agreement ............................................................38
ARM Loans ............................................................16
Available Distribution Amount ........................................47
Average Interest Rate ...............................................136
Bankruptcy Amount ....................................................65
BIF ..................................................................35
Buydown Account ......................................................46
Buydown Funds ........................................................18
Buydown Mortgage Loans ...............................................18
Buydown Period .......................................................18
Call Class ...................................................13, 31, 63
Call Price .......................................................13, 64
Cash Flow Agreement ..................................................72
Certificate ..........................................................38
Certificate Account ..................................................44
Certificate Principal Balance ........................................48
Certificate Register .................................................47
Certificateholders ...................................................52
Charter Act ..........................................................25
Class Exemptions ....................................................137
Clean-up Call ....................................................13, 63
Closing Date .........................................................98
Code .............................................................39, 95
Commission ..........................................................142
Committee Report .....................................................98
Contingent Payment Regulations ......................................123
Contracts ............................................................15
Contributions Tax ...................................................110
Cooperative ..........................................................15
Cooperative Loans ....................................................15
Cooperative Notes ....................................................20
Cooperative Unit .....................................................15
Credit Support .......................................................39
Cut-off Date .........................................................40
Defaulted Mortgage Amount ............................................65
Deficient Valuation ..................................................50
Deleted Mortgage Loan ................................................42
Depositor ........................................................15, 33
Determination Date ...................................................47
Distribution Date ....................................................47
DOL .................................................................133
DOL Regulations .....................................................133
DTC ..................................................................38
DTC Registered Securities ............................................38
Due Period ...........................................................47
Equity Certificates ..................................................38
ERISA ...............................................................133
ERISA Permitted Investments .........................................137
ERISA Plans .........................................................133
144
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
---- ----------
Event of Default .....................................................61
Excluded Plan .......................................................135
Exemption ...........................................................134
Exemption Rating Agencies ...........................................134
FDIC .................................................................35
FHA Loans ............................................................21
FHLMC .................................................................6
FHLMC Act ............................................................23
FHLMC Certificates ...................................................21
Finance Company ......................................................29
Financial Guarantee Insurance ........................................71
FNMA ..................................................................6
FNMA Certificates ....................................................21
FTC Rule .............................................................88
Funding Agreement ....................................................29
Garn-St Germain Act ..................................................89
GNMA Certificates ....................................................21
GNMA Issuer ..........................................................22
Grantor Trust Certificates ...........................................95
Grantor Trust Fractional Interest Certificate .......................115
Grantor Trust Fund ...................................................95
Grantor Trust Strip Certificate .....................................115
Guaranty Agreement ...................................................22
High LTV Loans .......................................................17
Holder-in-Due-Course .................................................88
Housing Act ..........................................................21
HUD ..................................................................74
Indenture ............................................................38
Insurance Instruments ................................................53
Insurance Proceeds ...................................................45
Interest Rate ........................................................16
IRS ..................................................................98
Issue Premium .......................................................105
Issuer ...............................................................38
Letter of Credit Bank ................................................66
Liquidated Loan ......................................................50
Liquidation Proceeds .................................................45
Loan-to-Value Ratio ..................................................17
Lockout Date .........................................................32
Lockout Period .......................................................32
Manufacturer's Invoice Price .........................................17
Mark-to-Market Regulations ..........................................108
Master Servicer ......................................................58
Mortgage Loan Seller .................................................15
Mortgage Notes .......................................................20
Mortgaged Properties .................................................15
Mortgages ............................................................20
Multifamily Loans ....................................................15
Multifamily Properties ...............................................15
NCUA ................................................................140
Net Interest Rate ....................................................40
New Withholding Regulations .........................................113
Nonrecoverable Advance ...............................................51
Note Principal Balance ...............................................48
Note Register ........................................................47
145
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
---- ----------
Noteholders ..........................................................52
OID Regulations ......................................................96
Originator ...........................................................15
OTS .................................................................140
Owner Trust Agreement ................................................38
Owner Trustee ........................................................64
Parties in Interest .................................................133
Permitted Investments ................................................44
Plan Assets .........................................................133
Plans ...............................................................133
PMBS Agreement .......................................................27
PMBS Issuer ..........................................................27
PMBS Servicer ........................................................27
PMBS Trustee .........................................................27
Pooling and Servicing Agreement ......................................37
Pre-Funding Account ..................................................49
Pre-Funding Limit ...................................................136
Pre-Funding Period ..................................................136
Prepayment Assumption ...........................................98, 118
Prepayment Period ....................................................31
Principal Balance ................................................39, 48
Prohibited Transactions Tax .........................................110
PTCE ................................................................137
PTCE 83-1 ...........................................................137
Purchase Price .......................................................37
Rating Agency ........................................................40
Record Date ..........................................................47
Related Proceeds .....................................................50
Relief Act ...........................................................92
REMIC ................................................................95
REMIC Certificates ...................................................95
REMIC Provisions .....................................................95
REMIC Regular Certificates ...........................................96
REMIC Regulations ....................................................96
REMIC Residual Certificates ..........................................96
Reserve Fund .........................................................71
Reserve Funds ........................................................66
Retained Interest ....................................................38
SAIF .................................................................35
Sales of Grantor Trust Certificates .................................118
Salomon Smith Barney ................................................141
Scheduled Principal Balance ..........................................65
Security Interest Rate ...............................................39
Security Register ....................................................47
Securityholders .................................................51, 143
Senior Liens .........................................................16
Senior Percentage ....................................................49
Senior Securities ....................................................39
Senior/Subordinate Series ............................................39
Servicing Default ....................................................60
Single Family Loans ..................................................15
Single Family Properties .............................................15
SMMEA ...............................................................140
Special Hazard Amount ................................................65
Special Hazard Realized Losses .......................................65
146
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
IN THE
TERM PROSPECTUS
---- ----------
Special Hazard Subordination Amount ..................................65
Stated Principal Balance .............................................37
Strip Securities .....................................................39
Stripped Interest ....................................................30
Sub-Servicer .........................................................54
Sub-Servicing Account ................................................44
Sub-Servicing Agreement ..............................................54
Subordinate Securities ...............................................39
Subsequent Mortgage Loans ...........................................136
Substitute Mortgage Loan .............................................42
Tax Favored Plans ...................................................133
Tax-Exempt Investor .................................................139
Tiered REMICs ........................................................97
Title V ..............................................................91
Title VIII ...........................................................92
Trustee ..............................................................64
UBTI ................................................................139
Underwriter .........................................................134
VA Loans .............................................................22
Window Period Loans ..................................................89
147
<PAGE>
$534,522,854 (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
UNION PLANTERS MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 2000-UP1
PROSPECTUS SUPPLEMENT
DATED AUGUST 28, 2000
UNION PLANTERS PMAC, INC.
MASTER SERVICER
UNION PLANTERS BANK, NATIONAL ASSOCIATION
MORTGAGE LOAN SELLER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES STATED ON
THEIR COVER PAGES.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Offered Certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until November 28,
2000.
