Prospectus Supplement dated November 21, 2000 (To Prospectus dated November 21,
2000)
$388,141,000 (APPROXIMATE)
SALOMON MORTGAGE LOAN TRUST, SERIES 2000-BOA1
MORTGAGE PASS-THROUGH CERTIFICATES
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
BANK OF AMERICA, N.A.
ORIGINATOR AND MASTER SERVICER
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-9 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 4 IN THE PROSPECTUS.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
--------------------------------------------------------------------------------
OFFERED
CERTIFICATES The trust created for the Series 2000-BoA1 certificates
will hold a pool of one- to four-family residential first
lien mortgage loans. The trust will issue five classes of
offered certificates. You can find a list of these
classes, together with their initial certificate principal
balances or notional amounts and pass-through rates, on
page S-9 of this prospectus supplement. Credit enhancement
for all of the offered certificates will be provided in
the form of subordination.
UNDERWRITING Salomon Smith Barney Inc., as underwriter, will offer to
the public the offered certificates at varying prices to
be determined at the time of sale. The proceeds to the
depositor from the sale of the underwritten certificates
will be 100.75% of the aggregate initial certificate
principal balance of the offered certificates, plus
accrued interest in the case of the offered certificates.
See "Method of Distribution."
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.
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.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
<S> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT........................................................................................S-3
RISK FACTORS............................................................................................................S-9
USE OF PROCEEDS........................................................................................................S-13
THE MORTGAGE POOL......................................................................................................S-13
YIELD ON THE CERTIFICATES..............................................................................................S-24
DESCRIPTION OF THE CERTIFICATES........................................................................................S-32
POOLING AND SERVICING AGREEMENT........................................................................................S-49
MORTGAGE LOAN SELLER...................................................................................................S-54
FEDERAL INCOME TAX CONSEQUENCES........................................................................................S-54
METHOD OF DISTRIBUTION.................................................................................................S-56
SECONDARY MARKET.......................................................................................................S-57
LEGAL OPINIONS.........................................................................................................S-57
RATINGS................................................................................................................S-57
LEGAL INVESTMENT.......................................................................................................S-58
ERISA CONSIDERATIONS...................................................................................................S-58
ANNEX I.................................................................................................................I-1
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
Title of Series.............................Salomon Mortgage Loan Trust, Series 2000-BoA1,
Mortgage Pass-Through Certificates.
Cut-off Date................................November 1, 2000.
Closing Date................................On or about November 28, 2000.
Depositor...................................Salomon Brothers Mortgage Securities VII, Inc., an
indirect wholly-owned subsidiary of Salomon Smith
Barney Holdings Inc. and an affiliate of the
underwriter. The depositor will deposit the mortgage
loans into the trust. See "The Depositor" in the
prospectus.
Originator and
Master Servicer.............................Bank of America, N.A. The master servicer will
service the mortgage loans for the trust. See "The
Mortgage Pool--Underwriting Standards;
Representations" and "Pooling and Servicing
Agreement--The Master Servicer" in this prospectus
supplement.
Mortgage Loan Seller........................Salomon Brothers Realty Corp., an indirect wholly
owned subsidiary of Salomon Smith Barney Holdings
Inc. and an affiliate of the depositor and the
underwriter. See "Mortgage Loan Seller" in this
prospectus supplement.
Trustee.....................................U.S. Bank 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 that
day is not a business day, on the next succeeding
business day, beginning in December 2000.
S-3
<PAGE>
Offered Certificates........................The classes of offered certificates, their pass-through
rates and initial certificate principal balances or
notional amounts are set forth in the table below.
</TABLE>
<TABLE>
<CAPTION>
INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE RATE
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<S> <C> <C>
A....................... $374,797,000 Variable(1)
IO...................... $388,141,000(2) 0.38%(3)
B-1..................... $ 5,887,000 Variable(1)
B-2..................... $ 4,710,000 Variable(1)
B-3..................... $ 2,747,000 Variable(1)
===========================================================================================
</TABLE>
-----------------
(1)The pass-through rate on the Class A Certificates, the Class B-1
Certificates, the Class B-2 Certificates and the Class B-3 Certificates is equal
to the weighted average net mortgage rate less approximately 0.38% per annum, as
described in this prospectus supplement under "Description of the
Certificates--Pass-Through Rates."
(2)The Class IO Certificates are interest only certificates and will have a
notional amount rather than a certificate principal balance.
(3)Approximate.
THE TRUST
The depositor will establish a trust with respect to the certificates, pursuant
to a pooling and servicing agreement dated as of the cut-off date among the
Depositor, the Master Servicer and the Trustee. There are ten 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 as of
the cut-off date.
The trust will contain approximately 913 conventional, one- to four-family,
adjustable-rate mortgage loans secured by first liens on residential real
properties. The mortgage loans have an aggregate principal balance of
approximately $392,458,253 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 have the following approximate characteristics as of the cut-
off date.
S-4
<PAGE>
Range of mortgage rates: 8.125% to 8.375%
Weighted average
mortgage rate: 8.229%
Range of gross margins: 2.500% to 3.000%
Weighted average gross
margin: 2.748%
Range of maximum
mortgage rates: 13.250% to 14.375%
Weighted average maximum
mortgage rate: 14.212%
Weighted average remaining
term to stated maturity: 29 years and 7 months
Range of principal balances: $37,757 to $1,870,289
Average principal balance: $429,856
Range of original
loan-to-value ratios: 11.70% to 95.00%
Weighted average
original loan-to-value ratio: 73.57%
Weighted average next
adjustment date: June 2005
The interest rate on each mortgage loan will adjust annually on each adjustment
date to equal the sum of one-year U.S. Treasury and the related gross margin on
such mortgage, subject to periodic and lifetime limitations, as described
herein. See "The Mortgage Pool--The Index" in this prospectus supplement.
With respect to the mortgage loans, the first adjustment date will occur only
after an initial period of approximately five years, as more fully described
under "The Mortgage Pool--Description of the Mortgage Loans" in this prospectus
supplement. For additional information regarding the mortgage loans, see "The
Mortgage Pool" herein.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A Certificates, the Class IO Certificates, the
Class B-1 Certificates, the Class B-2 Certificates and the Class B-3
Certificates are the only classes of certificates offered by this prospectus
supplement. The Class A Certificates and the Class IO Certificates are referred
to in this prospectus supplement as the Senior Certificates. The Class B-1
Certificates, the Class B-2 Certificates and the Class B-3 Certificates are
referred to in this prospectus supplement as the Offered Subordinate
Certificates.
The offered certificates will have the characteristics shown in the table above.
The pass-through rate on the Class A Certificates and the Offered Subordinate
Certificates is a rate per annum equal to the weighted average mortgage rate,
less the sum of the servicing fee and the pass-through rate for the Class IO
Certificates. See "Description of the Certificates --Pass-Through Rates" in this
prospectus supplement.
The pass-through rate on the Class IO Certificates is approximately 0.38% per
annum on the aggregate certificate principal balances of the Class A
Certificates and the Offered Subordinate Certificates.
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
S-5
<PAGE>
denominations of $100,000 and integral multiples of $1.00 in excess thereof. See
"Description of the Certificates--Registration of the Book- Entry Certificates"
in this prospectus supplement.
CLASS B-4 CERTIFICATES, CLASS B-5 CERTIFICATES AND CLASS B-6 CERTIFICATES. The
Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates are not offered by this prospectus supplement. These certificates
have in the aggregate an initial certificate principal balance of approximately
$4,317,253, evidencing an aggregate initial undivided interest in the trust of
approximately 1.10%. These certificates will be sold by the depositor to Salomon
Smith Barney Inc. on the closing date. The Offered Subordinate Certificates and
the Class B-4, Class B-5 and Class B-6 Certificates are referred to in this
prospectus supplement as the Subordinate Certificates.
RESIDUAL CERTIFICATES. The Class R-I Certificates and the Class R-II
Certificates represent the residual interests in the trust, but are not offered
by this prospectus supplement. These certificates will be sold by the depositor
to Salomon Smith Barney Inc. on the closing date.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
certificates consists of subordination as described below and under "Description
of the Certificates --Allocation of Losses; Subordination" in this prospectus
supplement.
SUBORDINATION. The rights of the holders of the Subordinate Certificates to
receive distributions will be subordinated, to the extent described under
"Description of the Certificates--Allocation of Losses; Subordination," 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 under "Description of the Certificates--Allocation of Losses;
Subordination."
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
these losses.
If none of the Subordinate Certificates remain outstanding, losses on mortgage
loans will be allocated to the Class A 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,
S-6
<PAGE>
bankruptcy of a mortgagor or other extraordinary events will be allocated as
described above only up to specified amounts. Any losses above those amounts
will be allocated among all outstanding classes of certificates, other than the
Class IO Certificates, the Class R-I Certificates and the Class R-II
Certificates, PRO RATA in proportion to their remaining principal balances.
Therefore, the Subordinate Certificates do not act as credit enhancement for
these losses.
Any losses that are not allocated to the Subordinate Certificates, as described
above, will be allocated to the Class A Certificates PRO RATA in proportion to
their remaining principal balance.
Once realized losses are allocated to a class of certificates, the certificate
principal balance of that 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 Losses; Subordination" in this
prospectus supplement.
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 under
"Description of the Certificates--P&I Advances." The master servicer is entitled
to be reimbursed for these advances, and therefore these advances are not a form
of credit enhancement. See "Description of the Securities--Advances in respect
of Delinquencies" in the prospectus.
OPTIONAL TERMINATION
At its option, the master servicer may purchase all of the mortgage loans,
together with any properties in respect of the mortgage loans acquired on behalf
of the trust, and thereby effect termination and early retirement of the
certificates, after the aggregate principal balance of the mortgage loans and
properties acquired in respect of the mortgage loans remaining in the trust has
been reduced to less than 5% of the aggregate principal balance of the mortgage
loans as of the cut-off date. See "Pooling and Servicing Agreement--
Termination" in this prospectus supplement and "Description of the Securities
--Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Two separate elections will be made to treat designated portions of the trust as
real estate mortgage investment conduits 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" in
this prospectus supplement and in the prospectus.
RATINGS
It is a condition to the issuance of the offered certificates that the offered
certificates received the following ratings from Fitch, Inc. and Moody's
Investors Service, Inc.:
S-7
<PAGE>
CLASS FITCH MOODY'S
----- ----- -------
Class A AAA Aaa
Class IO AAA Aaa
Class B-1 AA Aa2
Class B-2 A A2
Class B-3 BBB Baa2
A security rating does not address the frequency of prepayments on the mortgage
loans, 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, other than the Class B-2 and Class B-3 Certificates,
will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, or SMMEA, for so long as they are rated
not lower than the second highest rating category by one or more nationally
recognized statistical rating organizations and, as such, will be legal
investments for certain entities to the extent provided in SMMEA and applicable
state laws. The Class B-2 Certificates and the Class B-3 Certificates will not
constitute "mortgage related securities" for purposes of SMMEA. See "Legal
Investment" herein and in the prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, to the underwriter. This exemption, as recently
amended, 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, or ERISA, and the excise taxes imposed on these
prohibited transactions by Section 4975(a) and (b) of the Internal Revenue Code
of 1986, or the Code, and Section 502(i) of ERISA, transactions relating to the
purchase, sale and holding of pass-through certificates underwritten by the
underwriter. This exemption, as recently amended, generally applies to
certificates such as the offered certificates, and the servicing and operation
of asset pools such as the mortgage pool, provided that conditions are
satisfied.
S-8
<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.
MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE RATIOS LEAVE THE RELATED BORROWER WITH
LITTLE OR NO EQUITY IN THE RELATED MORTGAGED PROPERTY WHICH MAY RESULT IN LOSSES
WITH RESPECT TO THESE MORTGAGE LOANS.
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 9.68% of the mortgage loans, by aggregate principal balance
of the mortgage loans as of the cut-off date, had an original loan-to-value
ratio in excess of 80%. All of the mortgage loans originated with original
loan-to-value ratios in excess of 80% have primary mortgage insurance. No
mortgage loan had an original loan-to-value ratio exceeding 95.00%. 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
the 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. An increase of this kind may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the mortgage loan.
There can be no assurance that the loan-to-value ratio of any mortgage loan
determined at any time after origination will be less than or equal to its
original loan-to-value ratio. See "The Mortgage Pool--General" in this
prospectus supplement.
THE GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS IN CERTAIN STATES MAY
PRESENT A GREATER RISK OF LOSS
Approximately 62.30%, of the mortgage loans, by aggregate principal balance
of the mortgage loans as of the cut-off date, are secured by mortgaged
properties located in the State of California. In addition, the aggregate
principal balance of mortgage loans in the California zip code with the largest
amount of mortgage loans, by aggregate principal balance as of the cut-off date,
was approximately $8,320,760. Mortgaged properties located in California may be
more susceptible than homes located in other parts of the country to certain
types of uninsured hazards, such as earthquakes, floods, mudslides and other
natural disasters. In addition, 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
S-9
<PAGE>
loans may increase over historical levels of comparable type loans, and may
increase substantially.
YOUR CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT
OF ANY OTHER PARTY.
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 mortgage loan
seller, 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 these proceeds are insufficient or otherwise unavailable to make all
payments provided for under the offered certificates.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON THESE
CERTIFICATES.
The rate and timing of distributions allocable to principal on the offered
certificates, other than the Class IO Certificates, and the rate and timing of
reductions in the notional amount of the Class IO Certificates, will depend, in
general, on the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the mortgage loans
and the allocation thereof to pay principal on the offered certificates as
described under "Description of the Certificates--Principal Distributions on the
Offered Certificates." As is the case with mortgage pass-through certificates
generally, the offered certificates are subject to substantial inherent
cash-flow uncertainties because the mortgage loans may be prepaid at any time.
The mortgage loans may be paid in full or in part at any time without penalty.
See "The Mortgage Pool" in this prospectus supplement.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease. A decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the offered certificates, other than the Class IO Certificates, at a time
when reinvestment at higher prevailing rates would be desirable. Conversely,
when prevailing interest rates are declining, prepayment rates on mortgage loans
tend to increase. An increase in the prepayment rates on the mortgage loans will
result in a greater rate of return of principal to investors in the offered
certificates, other than the Class IO Certificates, at a time when reinvestment
at comparable yields may not be possible.
Prior to the distribution date in December 2007 and provided that the 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 A Certificates will be entitled
to receive distributions allocable to principal based on a
S-10
<PAGE>
disproportionately large percentage, which will likely be 100%, of principal
prepayments on the mortgage loans. Notwithstanding the foregoing, on or after
the distribution date in December 2003, if the subordinate percentage is equal
to or greater than two times the subordinate percentage on the closing date, the
subordinate certificates will be entitled to receive distributions allocable to
principal based on a larger percentage of principal prepayments on the mortgage
loans. To the extent that no principal prepayments or a disproportionately small
percentage of principal 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" in this prospectus supplement, including the table entitled
"Percent of Initial Certificate Principal Balance Outstanding at the Specified
Percentages of CPR."
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS.
The yield to maturity on the offered certificates, particularly the Class
IO 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 or notional amount of the 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 or notional amount of the 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 on those certificates 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, other than the Class IO Certificates, are purchased at a
discount and principal distributions on those certificates 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 22% CPR, as described in this prospectus supplement under "Yield
on the Certificates" and weighted average lives corresponding to that
assumption. No representation is made that the mortgage loans will prepay at
this rate or at any other rate. The yield
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<PAGE>
assumptions for the offered certificates will vary as determined at the time of
sale. See "Yield on the Certificates" in this prospectus supplement.
THE MULTIPLE CLASS STRUCTURE OF THE OFFERED CERTIFICATES CAUSES THE YIELD OF
SOME CLASSES TO BE PARTICULARLY SENSITIVE TO CHANGES IN THE RATES OF PREPAYMENT
OF THE RELATED MORTGAGE LOANS AND OTHER FACTORS.
CLASS IO CERTIFICATES. The yield on the Class IO Certificates will be
extremely sensitive to the rate of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the mortgage loans
and may fluctuate significantly from time to time. Prospective investors should
consider the risks associated with an investment in the Class IO Certificates,
including the risk that a rapid rate of principal payments on the mortgage loans
will have a materially negative effect on the yield to investors in the Class IO
Certificates and may result in the failure of investors in the Class IO
Certificates to recover fully their initial investment.
SUBORDINATE CERTIFICATES. The weighted average lives of, and the yield to
maturity on, the Subordinate Certificates will be progressively more sensitive,
in increasing order of their numerical class designations, to losses due to
defaults on the mortgage loans and the timing of those losses, to the extent
these losses are not covered by Subordinate Certificates with a higher numerical
class designation. Furthermore, as described under "Yield on the
Certificates--Yield Sensitivity of the Subordinate Certificates," the timing of
receipt of principal and interest by any class of Subordinate Certificates may
be adversely affected by losses even if that class does not ultimately bear the
loss.
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.
ALL CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT WILL HAVE THE
MEANINGS ASSIGNED TO THEM UNDER "DESCRIPTION OF THE CERTIFICATES--DEFINITIONS"
OR IN THE PROSPECTUS UNDER "GLOSSARY."
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<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 in exchange for
and concurrently with the delivery of the certificates. Net proceeds from the
sale of the offered certificates will be applied by the depositor to the
purchase of the mortgage loans from the mortgage loan seller. These net proceeds
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 acquired
the mortgage loans prior to the sale of the mortgage loans 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 as
of the cut-off date.
The mortgage pool will consist of approximately 913 conventional, one- to
four-family, adjustable-rate, fully-amortizing mortgage loans secured by first
liens on residential real properties and having an aggregate principal balance
as of the cut-off date of approximately $392,458,253, 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%. Approximately 46.63% of the
mortgage loans, by aggregate principal balance of the mortgage loans as of the
cut-off date, were originated under a program that allowed for alternative or
reduced forms of income and asset verification.
The mortgage loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of one- to four- family dwelling units,
individual condominium units, townhouses and individual units in planned unit
developments.
All of the mortgage loans have scheduled monthly payments due on the first
day of the month and that day is referred to as the "due date" with respect to
each mortgage loan. 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 mortgage rate on each mortgage loan is the per annum rate of interest
specified in the related mortgage note. Each mortgage loan provides for annual
adjustment to its mortgage rate; provided, however, that the rate adjusts after
an initial period of approximately five years from the date of origination of
the mortgage loan. In connection with each mortgage rate adjustment, the
mortgage loans provide for corresponding adjustments to their monthly payment
amounts, in each case on each applicable adjustment date. On each adjustment
date, the mortgage rate on each mortgage loan will generally be adjusted to
equal the sum, rounded to the nearest multiple of 0.125%, of the index and a
fixed percentage amount, or gross margin for that mortgage loan specified in the
related mortgage note. However, the mortgage rate on each mortgage loan will
generally not increase or decrease by more than the periodic rate cap specified
in the related mortgage note, which, in the case of the initial adjustment date
is a percentage ranging from 2.000% to 5.000% per annum and on any subsequent
adjustment date after the initial adjustment date is 2.000% per annum and will
not exceed a specified maximum mortgage rate over the life of the mortgage loan
over the life of the mortgage loan. Effective with the first monthly payment due
on each mortgage loan after each related adjustment date, the monthly payment
amount will be adjusted to an amount that will amortize fully the outstanding
principal balance of that mortgage loan over its remaining term and pay interest
at the mortgage rate as so adjusted. Due to the application
S-13
<PAGE>
of the periodic rate caps and the maximum mortgage rates, the mortgage rate on
each mortgage loan, as adjusted on any related adjustment date, may be less than
the sum of the index, calculated as described in this prospectus supplement, and
the related gross margin. See "--The Index" in this prospectus supplement. None
of the mortgage loans permits the related mortgagor to convert the adjustable
mortgage rate thereon to a fixed mortgage rate.
The mortgage loans have original terms to maturity of not greater than 30
years. The remaining terms to maturity of the mortgage loans range from
approximately 352 months to approximately 357 months. The weighted average
remaining term to maturity of the mortgage loans will be approximately 355
months as of the cut-off date. The latest maturity date of any mortgage loan is
August 2030.
The average principal balance of the mortgage loans at origination was
approximately $434,494. No mortgage loan had a principal balance at origination
of greater than approximately $1,875,000 or less than approximately $253,000.
The average principal balance of the mortgage loans as of the cut-off date was
approximately $429,856. No mortgage loan had a principal balance as of the cut-
off date of greater than approximately $1,870,289 or less than approximately
$37,757.
The mortgage loans had mortgage rates as of the cut-off date ranging from
approximately 8.125% per annum to approximately 8.375% per annum, and the
weighted average mortgage rate was approximately 8.229% per annum. As of the
cut-off date, the mortgage loans had gross margins ranging from approximately
2.500% to approximately 3.000% and maximum mortgage rates ranging from
approximately 13.250% per annum to approximately 14.375% per annum. The mortgage
loans do not have minimum mortgage rates and therefore the minimum mortgage rate
is equal to the gross margin. As of the cut-off date, the weighted average gross
margin was approximately 2.748% and the weighted average maximum mortgage rate
was approximately 14.212% per annum. The latest first adjustment date following
the cut-off date on any mortgage loan occurs in August 2005 and the weighted
average next adjustment date for all of the mortgage loans following the cut-off
date is June 2005.
As of the cut-off date, the weighted average original loan-to-value ratio
of the mortgage loans was approximately 73.57%. As of the cut-off date, no
mortgage loan had an original loan-to-value ratio greater than approximately
95.00% or less than approximately 11.70%. All of the mortgage loans with
original loan-to-value ratios in excess of 80% have primary mortgage insurance.
See "Description of Primary Insurance Policies--Primary Mortgage Insurance
Policies" in the prospectus.
None of the Mortgage Loans are buydown mortgage loans.
The mortgage loans are expected to have the following characteristics as of
the cut-off date. The sum in any column may not be equal to the total indicated
due to rounding:
S-14
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
% OF AGGREGATE
AGGREGATE ORIGINAL ORIGINAL PRINCIPAL
RANGE ($) NUMBER OF LOANS PRINCIPAL BALANCE BALANCE
--------- --------------- ----------------- -------
<S> <C> <C> <C>
250,000.01 - 300,000.00 216 $ 60,393,618.00 15.22%
300,000.01 - 350,000.00 187 61,290,077.00 15.45
350,000.01 - 400,000.00 137 51,720,800.00 13.04
400,000.01 - 450,000.00 92 39,201,034.00 9.88
450,000.01 - 500,000.00 69 33,168,100.00 8.36
500,000.01 - 550,000.00 37 19,438,950.00 4.90
550,000.01 - 600,000.00 39 22,499,050.00 5.67
600,000.01 - 650,000.00 32 20,305,755.00 5.12
650,000.01 - 700,000.00 21 14,265,370.00 3.60
700,000.01 - 750,000.00 27 19,977,150.00 5.04
750,000.01 - 800,000.00 8 6,268,250.00 1.58
800,000.01 - 850,000.00 6 5,011,000.00 1.26
850,000.01 - 900,000.00 6 5,283,000.00 1.33
900,000.01 - 950,000.00 5 4,646,750.00 1.17
950,000.01 - 1,000,000.00 23 22,968,749.00 5.79
1,050,000.01 - 1,100,000.00 4 4,400,000.00 1.11
1,150,000.01 - 1,200,000.00 1 1,190,000.00 0.30
1,300,000.01 - 1,350,000.00 1 1,330,000.00 0.34
1,450,000.01 - 1,500,000.00 1 1,460,000.00 0.37
1,850,000.01 - 1,900,000.00 1 1,875,000.00 0.47
--- --------------- ------
Total 913 $396,692,653.00 100.00%
=== =============== ======
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE PRINCIPAL % OF AGGREGATE
BALANCE OUTSTANDING PRINCIPAL BALANCE AS
RANGE ($) NUMBER OF LOANS AS OF THE CUT-OFF DATE OF THE CUT-OFF DATE
--------- --------------- ---------------------- -------------------
<S> <C> <C> <C>
0.01 - 50,000.00 1 $ 37,757.10 0.01%
50,000.01 - 100,000.00 1 93,581.12 0.02
100,000.01 - 150,000.00 2 273,027.72 0.07
150,000.01 - 200,000.00 1 179,271.17 0.05
250,000.01 - 300,000.00 219 61,016,812.40 15.55
300,000.01 - 350,000.00 192 62,820,834.58 16.01
350,000.01 - 400,000.00 128 48,302,668.91 12.31
400,000.01 - 450,000.00 93 39,542,603.98 10.08
450,000.01 - 500,000.00 68 32,627,435.45 8.31
500,000.01 - 550,000.00 37 19,412,166.18 4.95
550,000.01 - 600,000.00 38 21,868,799.82 5.57
600,000.01 - 650,000.00 31 19,606,764.87 5.00
650,000.01 - 700,000.00 22 14,919,097.85 3.80
700,000.01 - 750,000.00 26 19,207,622.20 4.89
750,000.01 - 800,000.00 7 5,448,788.60 1.39
800,000.01 - 850,000.00 6 4,996,765.77 1.27
850,000.01 - 900,000.00 5 4,364,782.40 1.11
900,000.01 - 950,000.00 5 4,632,399.79 1.18
950,000.01 - 1,000,000.00 23 22,887,039.39 5.83
1,050,000.01 - 1,100,000.00 4 4,385,744.46 1.12
1,150,000.01 - 1,200,000.00 1 1,186,153.32 0.30
1,300,000.01 - 1,350,000.00 1 1,325,700.80 0.34
1,450,000.01 - 1,500,000.00 1 1,452,145.50 0.37
1,850,000.01 - 1,900,000.00 1 1,870,289.28 0.48
--- --------------- ------
Total 913 $392,458,252.66 100.00%
=== =============== ======
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE 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>
8.125 - 8.249 191 $ 85,460,962.86 21.78%
8.250 - 8.374 689 288,830,280.31 73.60
8.375 - 8.499 33 18,167,009.49 4.63
--- --------------- ------
Total 913 $392,458,252.66 100.00%
=== ======
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES ON THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
MAXIMUM MORTGAGE RATE (%) NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
------------------------- --------------- ---------------------- ----------------
<S> <C> <C> <C>
13.000 - 13.499 16 $ 6,333,577.47 1.61%
14.000 - 14.499 897 386,124,675.19 98.39
--- --------------- ------
Total 913 $392,458,252.66 100.00%
=== =============== ======
</TABLE>
<TABLE>
<CAPTION>
GROSS MARGINS ON THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
GROSS MARGIN (%) NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
---------------- --------------- ---------------------- ----------------
<S> <C> <C> <C>
2.500 - 2.749 12 $ 4,474,711.07 1.14%
2.750 - 2.999 900 387,709,829.55 98.79
3.000 - 3.249 1 273,712.04 0.07
--- --------------- ------
Total 913 $392,458,252.66 100.00%
=== =============== ======
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
LOAN-TO-VALUE RATIO(%) NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- --------------- ---------------------- ----------------
<S> <C> <C> <C>
Less than or equal to 25.00 5 $ 3,520,904.97 0.90%
25.01 - 30.00 2 926,262.83 0.24
30.01 - 35.00 11 6,270,820.04 1.60
35.01 - 40.00 5 3,828,905.73 0.98
40.01 - 45.00 6 3,658,253.64 0.93
45.01 - 50.00 27 11,744,197.81 2.99
50.01 - 55.00 27 13,887,334.83 3.54
55.01 - 60.00 26 12,222,758.61 3.11
60.01 - 65.00 43 23,392,853.08 5.96
65.01 - 70.00 65 32,163,452.82 8.20
70.01 - 75.00 67 34,259,016.30 8.73
75.01 - 80.00 513 208,608,580.46 53.15
80.01 - 85.00 13 4,308,431.73 1.10
85.01 - 90.00 52 17,922,030.42 4.57
90.01 - 95.00 51 15,744,449.39 4.01
--- --------------- ------
Total 913 $392,458,252.66 100.00%
=== =============== ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE 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 679 $300,769,019.92
PUD Detached* 126 47,885,870.48 12.20
Condominium 92 37,635,708.28 9.59
PUD Attached* 8 2,522,893.30 0.64
Two- to Four-Family 5 2,332,202.38 0.59
Townhouse 3 1,312,558.30 0.33
--- --------------- ------
Total 913 $392,458,252.66 100.00%
</TABLE>
---------------
*Planned Unit Development
S-18
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGE LOANS*
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
OCCUPANCY NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
--------- --------------- ---------------------- ----------------
<S> <C> <C> <C>
Owner Occupied 850 $ 365,357,472.50 93.09%
Second Home 59 25,867,395.58 6.56%
Non Owner Occupied 4 1,233,384.580.31 0.31%
--- ----------------- ------
Total 913 $ 392,458,252.66 100.00%
=== ================= ======
</TABLE>
-------------
*The occupancy status of a mortgaged property is as represented by a mortgagor
in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
BALANCE OUTSTANDING OUTSTANDING AS OF
LOAN PURPOSE NUMBER OF LOANS AS OF THE CUT-OFF DATE THE CUT-OFF DATE
--------- --------------- ---------------------- ----------------
<S> <C> <C> <C>
Purchase 802 $342,498,255.53 87.27%
Rate-Term Refinance 65 30,290,936.23 7.72
Equity-out Refinance 46 19,669,060.90 5.01
--- -------------- ------
Total 913 392,458,252.66 100.00%
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
RELATING TO THE 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>
Arizona 31 $ 12,429,614.05 3.17%
California 556 244,492,502.74 62.30
Colorado 37 13,126,896.61 3.34
Connecticut 7 3,859,082.41 0.98
District of Columbia 9 4,996,299.62 1.27
Florida 28 16,065,495.97 4.09
Georgia 17 6,335,439.54 1.61
Hawaii 1 503,574.93 0.13
Illinois 24 9,004,223.39 2.29
Iowa 1 262,471.59 0.07
Kansas 1 490,084.90 0.12
Kentucky 2 647,250.25 0.16
Maine 2 766,020.76 0.20
Maryland 16 6,679,912.75 1.70
Massachusetts 20 7,647,481.09 1.95
Michigan 3 1,357,812.23 0.35
Minnesota 3 1,039,588.52 0.26
Missouri 4 1,813,013.05 0.46
Montana 1 617,995.83 0.16
Nevada 14 5,961,718.19 1.52
New Hampshire 7 2,670,732.45 0.68
New Jersey 4 1,477,650.66 0.38
New Mexico 3 1,181,869.44 0.30
New York 5 1,885,405.70 0.48
North Carolina 12 5,481,920.08 1.40
Oregon 9 3,731,262.23 0.95
Pennsylvania 4 1,775,245.66 0.45
Rhode Island 1 748,067.18 0.19
South Carolina 6 2,721,259.06 0.69
Tennessee 3 1,129,295.03 0.29
Texas 26 8,678,796.65 2.21
Utah 5 1,844,607.89 0.47
Virginia 15 5,163,168.01 1.32
Washington 34 14,814,114.10 3.77
Wisconsin 2 1,058,380.10 0.27
--- --------------- ------
Total 913 $392,458,252.66 100.00%
=== =============== ======
</TABLE>
S-20
<PAGE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATES FOR THE MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
MONTH OF NEXT ADJUSTMENT BALANCE OUTSTANDING AS OUTSTANDING AS OF THE
DATE NUMBER OF LOANS OF THE CUT-OFF DATE CUT-OFF DATE
---- --------------- ------------------- ------------
<S> <C> <C> <C>
March 2005 58 $ 26,726,872.86 6.81%
April 2005 108 44,252,936.27 11.28
May 2005 106 45,542,630.96 11.60
June 2005 184 78,778,750.08 20.07
July 2005 363 156,583,252.53 39.90
August 2005 94 40,573,809.96 10.34
--- --------------- -----
Total 913 $392,458,252.66 100.00%
=== ======
</TABLE>
<TABLE>
<CAPTION>
INITIAL PERIODIC RATE CAPS FOR THE MORTGAGE LOANS
% OF AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL BALANCE
INITIAL PERIODIC BALANCE OUTSTANDING AS OUTSTANDING AS OF THE
RATE CAPS (%) NUMBER OF LOANS OF THE CUT-OFF DATE CUT-OFF DATE
------------- --------------- ------------------- ------------
<S> <C> <C> <C>
2.000 1 $ 271,511,32 0.07%
3.000 897 386,124,675.19 98.39
5.000 15 6,062,066.15 1.54
--- --------------- ------
Total 913 $392,458,252.66 100.00%
</TABLE>
THE INDEX
With respect to mortgage loans, the index will be a per annum rate
equal to the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of one year as reported by the Federal Reserve Board in
statistical Release No. H.15(519), or the Release, and will be determined in
accordance with the terms of the mortgage note. The index is also referred to as
one- year U.S. Treasury. The average yields reflect the yields for the week
prior to that week.
The index is currently calculated based on information reported in the
Release. Listed below are the weekly average yields on actively traded U.S.
Treasury securities adjusted to a constant maturity of one year as reported in
the Release on the date that would have been applicable to mortgage loans whose
index was most recently available as of the date forty-five, thirty-five or
thirty days prior to the adjustment date and having the following adjustment
dates for the indicated years. The average yields may fluctuate significantly
from week to week as well as over longer periods and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future average yields. No assurance can be given
as to the average yields on such U.S. Treasury securities on any adjustment date
or during the life of any mortgage loan with an index of one-year U.S. Treasury.
S-21
<PAGE>
<TABLE>
<CAPTION>
ONE-YEAR U.S. TREASURY
ADJUSTMENT DATE 1996 1997 1998 1999 2000
--------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1.................................. 5.45% 5.44% 5.44% 4.52% 5.50%
February 1................................. 5.35 5.46 5.53 4.49 5.69
March 1.................................... 5.17 5.61 5.25 4.55 6.12
April 1.................................... 4.85 5.53 5.28 4.67 6.20
May 1...................................... 5.15 5.72 5.37 4.77 6.18
June 1..................................... 5.62 5.99 5.39 4.67 6.14
July 1 .................................... 5.67 5.90 5.46 4.79 6.38
August 1................................... 5.86 5.72 5.42 5.12 6.23
September 1................................ 5.90 5.54 5.36 5.01 6.09
October 1.................................. 5.60 5.55 5.23 5.23 6.17
November 1................................. 5.88 5.59 4.76 5.28 6.20
December 1................................. 5.57 5.45 4.18 5.34
</TABLE>
UNDERWRITING STANDARDS
The information set forth below with regard to the originator's
underwriting standards has been provided to the depositor by the originator.
None of the depositor, the trustee, the underwriter or any of their respective
affiliates has made any independent investigation of this information or has
made or will make any representation as to the accuracy or completeness of this
information.
The mortgage loans will be acquired by the depositor from the mortgage
loan seller. All of the mortgage loans were originated or acquired by the
originator generally in accordance with the respective underwriting criteria
described in this section.
Each mortgage loan underwritten by the originator has been underwritten
in accordance with guidelines established in the originator's product and policy
guides. These underwriting standards applied by the originator in originating or
acquiring mortgage loans are intended to evaluate the applicants' repayment
ability, credit standing and assets available for down payment, closing costs
and cash reserves. Additionally, guidelines are established regarding the
adequacy of the property as collateral for the loan requested. The underwriting
standards as established in the originator's product and policy guides are
continuously updated to reflect prevailing conditions in the residential market,
new mortgage products, and the investment market for residential mortgage loans.
The use of standardized underwriting guidelines does not imply that
each specific criterion was satisfied individually. The originator will consider
a mortgage loan to be originated in accordance with a given set of guidelines
if, based on an overall qualitative evaluation, the loan is in substantial
compliance with such underwriting guidelines. Even if one or more specific
criteria included in such underwriting guidelines were not satisfied, if other
factors compensated for the standards that were not satisfied, the mortgage loan
may be considered to be in substantial compliance with the underwriting
guidelines.
The real estate lending processes for one- to four-family mortgage
loans follow standard procedures, designed to comply with applicable federal and
state laws and regulations. Initially, a prospective borrower is required to
complete an application designed to provide pertinent information about the
prospective borrower, the property to be financed and the type of loan desired.
Information regarding the property to be financed may be provided by the
prospective borrower after the originator has approved, subject to review of the
property to be financed, a loan to the prospective borrower. As part of the
description of the prospective borrower's financial condition, the originator
generally requires a description of assets and liabilities and income and
expenses and
S-22
<PAGE>
obtains a credit report, which summarizes the prospective borrower's credit
history with merchants and lenders and any public records, such as bankruptcy.
In general, an employment verification is obtained providing current and
historical income information, and with respect to certain loans, a telephonic
employment confirmation is obtained. Such employment verification may be
obtained, either through analysis of the prospective borrower's W-2 forms for
the most recent two years and year to-date earnings statement or most recent two
years' tax returns, or from the prospective borrower's employer, wherein the
employer reports the length of employment and current salary with that
organization. Self-employed prospective borrowers generally are required to
submit their federal tax returns for the past two years plus year-to-date
financial statements, if the loan application is made 120 days or longer after
the end of the most recent tax year for which a federal tax return was provided.
The originator may, as part of its overall evaluation of a prospective
borrower's creditworthiness, use Credit Scores or a combination of Credit Scores
and Mortgage Scores. "Credit Scores" are statistical credit scores designed to
assess a borrower's creditworthiness and likelihood to default on a consumer
obligation over a two-year period based on a borrower's credit history. Credit
Scores were not developed to predict the likelihood of default on mortgage loans
and, accordingly, may not be indicative of the ability of a mortgagor to repay
its mortgage loan. A "Mortgage Score" takes into account not only a borrower's
credit history but also uses statistics to predict how the majority of loans
with common characteristics in a broad group of the population will perform in
the future. The Mortgage Score used by the originator will either have been
developed by the originator or by a third party and approved by the originator.
A prospective borrower with a higher Credit Score or a higher Credit Score and
Mortgage Score, which, in either event, indicates a more favorable credit
history, is eligible for one of the originator's accelerated processing
programs. Loans in the accelerated processing programs are subject to less
stringent documentation requirements but require income verification. In
addition, prospective borrowers with a strong asset base and acceptable Credit
Scores may be eligible.
Once all applicable employment and deposit documentation and the credit
report are received, a determination is made as to whether the prospective
mortgagor has sufficient monthly income available (i) to meet the mortgagor's
monthly obligations on the proposed mortgage loan and other expenses related to
the mortgaged property, such as property taxes, hazard insurance and maintenance
and utility costs and (ii) to meet other financial obligations and monthly
living expenses.
To determine the adequacy of the mortgaged property as collateral,
generally an independent appraisal is made of each mortgaged property considered
for financing. In certain instances the appraisal may be conducted by an
employee of the originator or an affiliate. An appraiser is required to inspect
the mortgaged property and verify that it is in acceptable condition and that
construction, if recent, has been completed. The evaluation is based on the
appraiser's estimate of value, giving appropriate weight to both the market
value of comparable housing, as well as the cost of replacing the mortgaged
property.
Certain states where the mortgaged properties securing the Mortgage
Loans are located are "anti-deficiency" states, where, in general, lenders
providing credit on one-to-four family properties must look solely to the
property for repayment in the event of foreclosure. See "Certain Legal Aspects
of the Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and
Other Limitations on Lenders" in the prospectus. The originator's underwriting
guidelines in all states, including anti-deficiency states, require that the
value of the mortgaged property being financed, as indicated by the independent
evaluation, currently supports and is anticipated to support in the future the
outstanding loan balance and provides sufficient value to mitigate the effects
of adverse shifts in real estate values, although there can be no assurance that
such value will support the outstanding loan balance in the future.
S-23
<PAGE>
Some of the mortgage loans were purchased by the originator from
correspondents who have satisfied financial and operational standards specified
by the originator in bulk purchase transactions. These bulk purchase mortgage
loans were underwritten by the related correspondents using underwriting
standards which may vary from the underwriting standards used by the originator.
However, the originator has in each case reviewed and approved the underwriting
standards prior to purchase and determined that such standards are not
materially different from the underwriting standards currently employed by the
originator. The originator will have performed post-purchase reviews of a
sampling of the mortgage loans for compliance with approved underwriting
standards.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage pool and
the mortgaged properties is based upon the mortgage pool as constituted as of
the close of business on the cut-off date, as adjusted for the scheduled
principal payments due on or before the cut-off 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 the
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 these mortgage loans would
materially alter the characteristics of the mortgage pool as described in this
prospectus supplement. The depositor believes that the information set forth in
this prospectus supplement 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 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 and purchase prices because:
o 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,
o on each succeeding distribution date the interest payable
thereon is the interest accrued during the month preceding the
month of the related distribution date, which ends 24 or more
days prior to the distribution date and
o during each Interest Accrual Period, other than the first
Interest Accrual Period, interest accrues on a Certificate
Principal Balance or Notional Amount that is less than the
Certificate Principal Balance or Notional Amount of that class
actually outstanding for the first 24 or more days of the
related 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 the 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 the prepayment for the month
in which the prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended, or 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 these
mortgage loans. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of
S-24
<PAGE>
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. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" in this
prospectus supplement. Accordingly, the effect of:
o any principal prepayments on the mortgage loans, to the extent
that any Prepayment Interest Shortfalls exceeds Compensating
Interest or
o 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 of these shortfalls will be allocated among the offered
certificates as provided under "Description of the Certificates--Interest
Distributions" in this prospectus supplement.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on each class of offered certificates,
other than the Class IO 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 the
mortgage loans as they change from time to time to accommodate changes in the
mortgage rates and by the rate of principal prepayments on the mortgage loans,
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 originator 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 Class A Certificates" in this
prospectus supplement, prior to the distribution date in November 2007, it is
possible that all principal prepayments on the mortgage loans will be allocated
to the Class A Certificates, if the Class A Certificates are still outstanding.
Thereafter, during certain periods, subject to loss and delinquency criteria
described under "Description of the Certificates--Principal Distributions on the
Class A Certificates," the Senior Prepayment Percentage may continue to be
disproportionately large, relative to the Senior Percentage, and the percentage
of principal prepayments payable to the Subordinate Certificates may continue to
be disproportionately small.
Prepayments, liquidations and repurchases of the mortgage loans will
result in distributions in respect of principal to the holders of the class or
classes of offered certificates then entitled to receive these distributions
that otherwise would be distributed over the remaining terms of the mortgage
loans. Since the rates of payment of principal on the mortgage loans will depend
on future events and a variety of factors, no assurance can be given as to that
rate or the rate of principal prepayments. The extent to which the yield to
maturity of any 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 the offered certificates
is sensitive to prepayments on the related mortgage loans. Further, an investor
should consider, in the case of any offered certificate purchased at a discount,
the risk that a slower than anticipated rate of principal payments on the
related mortgage loans could result in an actual yield to the investor that is
lower than the anticipated yield and, in the case of any offered certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield to the investor that is lower
than the anticipated yield. See "Maturity and Prepayment Considerations" in the
prospectus.
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<PAGE>
The yield to maturity of the Class IO Certificates will be extremely
sensitive to prepayments on the mortgage loans. See "--Yield Sensitivity on the
Class IO Certificates" in this prospectus supplement.
It is highly unlikely that the mortgage loans will prepay at any
constant rate until maturity or that all of the mortgage loans will prepay at
the same rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the yield to maturity on the offered certificates, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. In most cases, the earlier a prepayment of principal
is made on the mortgage loans, the greater the effect on the yield to maturity
of the offered certificates. As a result, the effect on an investor's yield of
principal payments occurring at a rate higher or lower than the rate anticipated
by the investor during the period immediately following the issuance of the
offered certificates would not be fully offset by a subsequent like reduction or
increase in the rate of principal payments.
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 in the mortgage pool, 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. The prepayment experience of the mortgage
loans in the mortgage pool may differ from that of the other mortgage loans. The
mortgage loans in the mortgage pool may be subject to greater rates of
prepayments as they approach their initial adjustment dates even if market
interest rates are only slightly higher or lower than the mortgage rates on the
mortgage loans as borrowers seek to avoid changes in their monthly payments. In
addition, the existence of the applicable periodic rate cap and maximum mortgage
rate may affect the likelihood of prepayments resulting from refinancings. There
can be no certainty as to the rate of prepayments on the mortgage loans in the
mortgage pool during any period or over the life of the certificates. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the prospectus.
Because principal distributions are paid to more senior classes of
offered certificates before other classes, holders of classes of offered
certificates having a later priority of payment bear a greater risk of losses
than holders of classes having earlier priorities for distribution of principal.
This is because the certificates having later priority will represent an
increasing percentage interest in the trust fund during the period prior to the
commencement of distributions of principal on these certificates.
Defaults on mortgage loans may occur with greater frequency in their
early years. In addition, default rates generally are higher for mortgage loans
used to refinance an existing mortgage loan. In the event of a mortgagor's
default on a mortgage loan, there can be no assurance that recourse beyond the
specific mortgaged property pledged as security for repayment will be available.
MARKET INTEREST RATE AND SUBORDINATION YIELD CONSIDERATIONS
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 mortgagor
delinquencies, to the extent not covered by P&I advances, and amounts otherwise
distributable to holders of the Subordinate Certificates with a higher numerical
class designation may be made available to protect the holders of Subordinate
Certificates with a lower numerical class designation against these
interruptions in distributions. Such delinquencies may affect the yield to
investors on these classes of the Subordinate Certificates, and, even if
subsequently cured, will affect the timing
S-26
<PAGE>
of the receipt of distributions by the holders of these classes of Subordinate
Certificates. Furthermore, after the Subordinate Certificates are retired or in
the case of Excess Losses, the Senior Certificates may be affected to a greater
extent by losses on the 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
Class A Certificates" and "--Principal Distributions on the Subordinate
Certificates" in this prospectus supplement.
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 that
security will be repaid to the investor. The weighted average life of each class
of offered certificates will be influenced by the rate at which principal on the
mortgage loans is paid, which may be in the form of scheduled payments or
prepayments, including repurchases and prepayments of principal by the borrower
as well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the mortgage loans, and the timing of these payments.
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 22% CPR. To assume 22% 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 22% CPR or any
other rate.
The table entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of CPR" 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 these classes of
certificates. The table is based on the following modeling assumptions:
o the mortgage pool consists of one assumed mortgage loan with the
characteristics set forth in the table below;
o distributions on the certificates are received, in cash, on the 25th
day of each month, commencing in December 2000;
o the mortgage loans prepay at the percentages of CPR indicated;
o 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;
o none of the depositor, the originator, the master servicer or any other
person purchases from the trust fund any mortgage loan pursuant to any
obligation or option under the pooling and servicing agreement, except
as indicated in footnote two in the table;
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in December 2000, and are computed
prior to giving effect to any prepayments received in the prior month;
o prepayments representing payment in full of individual mortgage loans
are received on the last day of each month commencing in November 2000,
and include 30 days' interest thereon;
S-27
<PAGE>
o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate and remaining term to
stated maturity such that the mortgage loan will amortize in amounts
sufficient to repay the remaining principal balance of the mortgage
loan by its remaining term to stated maturity;
o the certificates are purchased on November 28, 2000;
o one-year U.S. Treasury remains constant at 6.141% per annum and the
mortgage rate on each mortgage loan is adjusted on the next adjustment
date and on subsequent adjustment dates, if necessary, to equal the
index plus the applicable gross margin, subject to the applicable
periodic rate cap;
o the servicing fee rate is equal to 0.25% per annum; and
o the monthly payment on each mortgage loan is adjusted on the due date
immediately following the next adjustment date and on subsequent
adjustment dates, if necessary, to equal a fully amortizing monthly
payment.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL
PRINCIPAL TERM REMAINING MAXIMUM
BALANCE TO TERM NEXT MORTGAGE PERIODIC
AS OF THE MORTGAGE MATURITY TO MATURITY ADJUSTMENT GROSS RATE ADJUSTMENT
CUT-OFF DATE RATE(%) (MONTHS) (MONTHS) DATE MARGIN(%) RATE(%) CAP(%) FREQUENCY
------------ ------- -------- -------- ------ --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$392,458,252.70 8.2286% 360 355 June 2005 2.748% 14.212% 2.000% 12 months
</TABLE>
There will be discrepancies between the characteristics of the actual
mortgage loans and the characteristics assumed in preparing the table entitled
"Percent of Initial Certificate Principal Balance Outstanding at the Specified
Percentages of CPR." 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
entitled "Percent of Initial Certificate Principal Balance Outstanding at the
Specified Percentages of CPR," these classes of certificates may mature earlier
or later than indicated by the table. Based on the foregoing assumptions, the
table entitled "Percent of Initial Certificate Principal Balance Outstanding at
the Specified Percentages of CPR" indicates the weighted average life of each
class of the offered certificates, other than the Class IO Certificates, and
sets forth the percentage of the initial Certificate Principal Balance of each
class of certificates that would be outstanding after each of the dates shown,
at various percentages of CPR. Neither the prepayment model used in this
prospectus supplement 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 table. These variations may occur even if the average
prepayment experience of all of the mortgage loans equals any of the specified
percentages of CPR.
S-28
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF CPR
CLASS A CERTIFICATES SUBORDINATE CERTIFICATES
-------------------- ------------------------
DISTRIBUTION DATE 0% 15% 22% 30% 40% 0% 15% 22% 30% 40%
----------------- -- --- --- --- --- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............. 100 100 100 100 100 100 100 100 100 100
November 25, 2001........ 99 84 76 68 58 99 99 99 99 99
November 25, 2002........ 98 70 58 46 32 98 98 98 98 98
November 25, 2003........ 97 58 44 30 17 97 97 97 97 97
November 25, 2004........ 96 48 34 21 10 96 96 75 67 58
November 25, 2005........ 95 40 26 15 6 95 85 58 47 34
November 25, 2006........ 94 34 20 10 4 94 72 45 32 20
November 25, 2007........ 93 28 15 7 2 93 60 34 22 12
November 25, 2008........ 91 24 12 5 1 91 50 26 15 7
November 25, 2009........ 90 20 9 3 1 90 42 20 11 4
November 25, 2010........ 88 17 7 2 * 88 35 16 7 2
November 25, 2011........ 87 14 5 2 * 87 29 12 5 1
November 25, 2012........ 85 11 4 1 * 85 24 9 3 1
November 25, 2013........ 83 10 3 1 * 83 20 7 2 *
November 25, 2014........ 80 8 2 * * 80 17 5 2 *
November 25, 2015........ 78 6 2 * * 78 14 4 1 *
November 25, 2016........ 75 5 1 * * 75 11 3 1 *
November 25, 2017........ 72 4 1 * * 72 9 2 * *
November 25, 2018........ 69 4 1 * 0 69 7 2 * *
November 25, 2019........ 65 3 1 * 0 65 6 1 * *
November 25, 2020........ 61 2 * * 0 61 5 1 * *
November 25, 2021........ 57 2 * * 0 57 4 1 * 0
November 25, 2022........ 52 1 * * 0 52 3 * * 0
November 25, 2023........ 47 1 * * 0 47 2 * * 0
November 25, 2024........ 42 1 * 0 0 42 2 * * 0
November 25, 2025........ 36 1 * 0 0 36 1 * * 0
November 25, 2026........ 29 * * 0 0 29 1 * 0 0
November 25, 2027........ 22 * * 0 0 22 1 * 0 0
November 25, 2028........ 14 * * 0 0 14 * * 0 0
November 25, 2029........ 5 * 0 0 0 5 * 0 0 0
November 25, 2029........ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in
Years(1)................. 20.55 5.47 3.74 2.62 1.82 20.55 9.46 6.68 5.62 4.86
Weighted Average Life in
Years(1)(2).............. 20.54 5.28 3.58 2.50 1.74 20.54 9.05 6.31 5.24 4.41
</TABLE>
-----------------
* Represents less than one-half of one percent.
(1) The weighted average life of a certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the certificate to the related
distribution date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the certificate.
(2) Assumes the master servicer exercises its option to purchase the
mortgage loans on the earliest possible distribution date on which it
is permitted to exercise this option. See "Pooling and Servicing
Agreement --Termination" in this prospectus supplement.
S-29
<PAGE>
There is no assurance that prepayments of the mortgage loans included
in the mortgage pool will conform to any of the levels of CPR indicated in the
immediately preceding tables, or to any other level, or that the actual weighted
average lives of the offered certificates will conform to any of the weighted
average lives set forth in the immediately preceding tables. Furthermore, the
information contained in the tables with respect to the weighted average lives
of the offered certificates is not necessarily indicative of the weighted
average lives that might be calculated or projected under different or varying
prepayment assumptions.
The characteristics of the mortgage loans included in the mortgage pool
will differ from those assumed in preparing the immediately preceding tables. In
addition, it is unlikely that any mortgage loan will prepay at any constant
percentage until maturity, that all of the mortgage loans included in the
mortgage pool will prepay at the same rate. The timing of changes in the rate of
prepayments may significantly affect the actual yield to maturity to investors,
even if the average rate of principal prepayments is consistent with the
expectations of investors.
YIELD SENSITIVITY OF THE CLASS IO CERTIFICATES
The yield to maturity of the Class IO Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the mortgage
loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments on the mortgage loans that are allocated to the Class A
Certificates or the Offered Subordinate Certificates will have a material
negative effect on the yield to maturity of the Class IO Certificates. There can
be no assurance that the mortgage loans will prepay at any particular rate.
Prospective investors in the Class IO Certificates should fully consider the
associated risks, including the risk that these investors may not fully recover
their initial investment.
The pass-through rate on the Class IO Certificates is equal to
approximately 0.38% per annum on the aggregate Certificate Principal Balances of
the Class A Certificates and the Offered Subordinate Certificates. Because all
principal prepayments on the mortgage loans will be allocated to the Class A
Certificates until the earlier of:
o the distribution date on which the Subordinate Percentage
exceeds two times the initial Subordinate Percentage with
respect to any distribution date on or after December 2003 or
o the distribution date occurring in December 2007,
and because thereafter, subject to loss and delinquency criteria described under
"Description of the Certificates--Principal Distributions on the Class A
Certificates," the Senior Prepayment Percentage may continue to be
disproportionately large, the Notional Amount of the Class IO Certificates will
decline more rapidly than would be the case if principal prepayments were
allocated PRO RATA among the Class A Certificates and the Subordinate
Certificates.
The following table of pre-tax yields indicates the sensitivity of the
yield on the Class IO Certificates to various rates of prepayment on the
mortgage loans and the corresponding pre- tax yield on a corporate bond
equivalent basis, based on the modeling assumptions and the following additional
assumptions:
o the initial Notional Amount of the Class IO Certificates is
$388,141,000 and the pass-through rate in effect for each
distribution date for the Class IO Certificates is 0.3786% per
annum and
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<PAGE>
o the Class IO Certificates are purchased on November 28, 2000,
at the assumed aggregate purchase price set forth in the
table, which includes accrued interest from November 1, 2000.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY ON THE CLASS IO CERTIFICATES
AT VARIOUS PERCENTAGES OF CPR
PERCENTAGE OF CPR
--------------------------------------------------------------------------
ASSUMED AGGREGATE PURCHASE 0% 15% 22% 30% 40%
PRICE
----------------------------------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$3,991,623............................ 38.68% 20.33% 11.24% 0.25% (14.54)%
</TABLE>
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class IO Certificates, would cause the
discounted present value of the assumed stream of cash flows to equal the
assumed aggregate purchase price of the Class IO Certificates, and by converting
these monthly rates to corporate bond equivalent rates. This calculation does
not take into account shortfalls in collection of interest due to prepayments or
other liquidations on the mortgage loans or the interest rates at which
investors may be able to reinvest funds received by them as distributions on the
Class IO Certificates and consequently does not purport to reflect the return on
any investment in the Class IO Certificates when these reinvestment rates are
considered.
The characteristics of the mortgage loans will differ from those
assumed in preparing the table. There can be no assurance that the mortgage
loans will prepay at any of the rates shown in the table or at any other
particular rate, that the cash flow on the Class IO Certificates will correspond
to the cash flow assumed in preparing the table, that the pre-tax yield to
maturity on the Class IO Certificates will correspond to the pre-tax yields to
maturity shown in the table or that the aggregate purchase price of the Class IO
Certificates will be as assumed. In addition, it is unlikely that any mortgage
loan will prepay at the specified prepayment rates until maturity or that all of
the mortgage loans will prepay at the same rate. 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. Investors must make their own decisions as to the
appropriate prepayment assumptions to be used in deciding whether to purchase
the Class IO Certificates.
YIELD SENSITIVITY OF THE SUBORDINATE CERTIFICATES
If the Certificate Principal Balances of the Class B-6 Certificates,
Class B-5 Certificates, Class B-4 Certificates, Class B-3 Certificates and Class
B-2 Certificates have been reduced to zero, the yield to maturity on the Class
B-1 Certificates will become extremely sensitive to losses on the mortgage loans
and the timing of those losses that are covered by subordination, because the
entire amount of these losses will be allocated to the Class B-1 Certificates.
If the Certificate Principal Balances of the Class B-6 Certificates, Class B-5
Certificates, Class B-4 Certificates and Class B-3 Certificates have been
reduced to zero, the yield to maturity on the Class B-2 Certificates will become
extremely sensitive to losses on the mortgage loans and the timing of those
losses that are covered by subordination, because the entire amount of these
losses will be allocated to the Class B-2 Certificates. If the Certificate
Principal Balances of the Class B-6 Certificates, Class B-5 Certificates and
Class B-4 Certificates have been reduced to zero, the yield to maturity on the
Class B-3 Certificates will become extremely sensitive to losses on the mortgage
loans and the timing of those losses that are covered by subordination, because
the entire amount of these losses will be
S-31
<PAGE>
allocated to the Class B-3 Certificates. The initial undivided interest in the
trust fund evidenced by the Class B-1 Certificates, the Class B-2 Certificates,
the Class B-3 Certificates, the Class B-4 Certificates, the Class B-5
Certificates and the Class B-6 Certificates is approximately 1.50%,
approximately 1.20%, approximately 0.70%, approximately 0.50%, approximately
0.30% and approximately 0.30%, respectively.
Investors in the Offered Subordinate Certificates should fully consider
the risk that realized losses on the mortgage loans could result in the failure
of these investors to fully recover their investments. For additional
considerations relating to the yield on the Subordinate Certificates, see "Yield
Considerations" and "Maturity and Prepayment Considerations" in the prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will consist of ten classes of certificates
(collectively, the "Certificates"), designated as the Class A Certificates, the
Class IO 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, the Class B-6 Certificates, the Class R-I Certificates and the
Class R-II Certificates. The Class A Certificates and the Class IO Certificates
are referred to in this prospectus supplement as the Senior Certificates and the
Class B-1 Certificates, the Class B-2 Certificates and the Class B-3
Certificates are referred to in this prospectus supplement as the Offered
Subordinate Certificates. The Offered Subordinate Certificates and the Class
B-4, Class B-5 and Class B-6 Certificates are referred to in this prospectus
supplement as the Subordinate Certificates. Only the Senior Certificates and the
Offered Subordinate Certificates are offered by this prospectus supplement.
Distributions on the offered certificates will be made on the 25th day
of each month, or, if that day is not a business day, on the next succeeding
business day, beginning in December 2000.
The certificates represent in the aggregate the entire beneficial
ownership interest in a trust fund consisting primarily of the mortgage pool of
conventional, one- to four-family, adjustable-rate, fully-amortizing, first lien
mortgage loans having original terms to maturity of not greater than 30 years
and an aggregate principal balance as of the cut-off date of approximately
$392,458,253, after application of scheduled payments due on or before the
cut-off date whether or not received, subject to a permitted variance as
described under "The Mortgage Pool" in this prospectus supplement.
Each class of the offered certificates will have the approximate
initial Certificate Principal Balance or Notional Amount, as applicable as set
forth in the table under "Summary of Prospectus Supplement--Offered
Certificates" in this prospectus supplement. The pass-through rate on the
offered certificates are set forth under "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
The Class B-4 Certificates, Class B-5 Certificates and Class B-6
Certificates have in the aggregate an initial Certificate Principal Balance of
approximately $4,317,253 and the pass-through rate for the Class B-4
Certificates, Class B-5 Certificates and the Class B-6 Certificates are set
forth under "Description of the Certificates--Pass-Through Rates" in this
prospectus supplement. The Class B-4 Certificates, the Class B-5 Certificates,
the Class B-6 Certificates, which are not being offered by this prospectus
supplement, will be sold by the depositor to Salomon Smith Barney Inc. on the
closing date.
The offered certificates will be issued, maintained and transferred on
the book-entry records of the Depository Trust Company, or DTC, and its
participants in minimum denominations of
S-32
<PAGE>
$100,000 and integral multiples of $1.00 in excess of those minimum
denominations. The Class B-4 Certificates, the Class B-5 Certificates, the Class
B-6 Certificates will be issued in fully registered, certificated form.
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 the
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 the distribution date
occurs. Distributions will be made either by check mailed to the address of each
certificateholder as it appears in the certificate register or upon written
request to the trustee at least five business days prior to the relevant record
date by any holder of certificates having an aggregate initial Certificate
Principal Balance or Notional Amount, as applicable, that is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the initial aggregate Certificate
Principal Balance or Notional Amount, as applicable, of such class of
Certificates, by wire transfer in immediately available funds to the account of
the 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 the related certificates at the corporate trust office of the
trustee or other location specified in the notice to certificateholders of the
final distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
The offered certificates will be book-entry certificates. Persons acquiring
beneficial ownership interests in the offered certificates, or certificate
owners, will hold the certificates through The Depository Trust Company or DTC
in the United States, or Clearstream Banking Luxembourg, or Clearstream,
formerly known as Cedelbank SA, or Euroclear in Europe, if they are participants
of these systems, or indirectly through organizations which are participants in
these systems. The book-entry certificates will be issued in one or more
certificates which equal the aggregate Certificate Principal Balance of the
certificates and will initially be registered in the name of Cede & Co., 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 positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream and
The Chase Manhattan Bank will act as depositary for Euroclear. Citibank and The
Chase Manhattan Bank will be referred to individually in this prospectus
supplement as the "Relevant Depositary" and will be referred to collectively in
this prospectus supplement as the "European Depositaries". Investors may hold
beneficial interests in the book-entry certificates in minimum denominations of
$100,000 and integral multiples of $1.00 in excess of the minimum denominations.
Except as described in this section, no person acquiring a book-entry
certificate will be entitled to receive a physical or definitive certificate
representing that certificate. Unless and until definitive certificates are
issued, it is anticipated that the only "certificateholder" of the offered
certificates will be Cede & Co., as nominee of DTC. Certificate owners will not
be certificateholders as that term is used in the pooling and servicing
agreement. Certificate owners are only permitted to exercise their rights
indirectly through participants and DTC.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of the book-entry
certificate will be recorded on the records of DTC or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant and on the records of Clearstream or
Euroclear, as appropriate.
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Certificate owners will receive all distributions of principal of and
interest on the book-entry certificates from the trustee through DTC and DTC
participants. While the book- entry certificates are outstanding, under the
rules, regulations and procedures creating and affecting DTC and its operations,
DTC is required to make book-entry transfers among participants on whose behalf
it acts with respect to the book-entry certificates and is required to receive
and transmit distributions of principal of, and interest on, the book-entry
certificates. Participants and indirect participants with whom certificate
owners have accounts with respect to book-entry certificates are similarly
required to make book-entry transfers and receive and transmit distributions on
behalf of their respective certificate owners. Accordingly, although certificate
owners will not possess certificates representing their respective interests in
the book- entry certificates, the DTC rules provide a mechanism by which
certificate owners will receive distributions and will be able to transfer their
interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the book-entry certificates, except
under the limited circumstances described under this section. Unless and until
definitive certificates are issued, certificateholders who are not participants
may transfer ownership of book-entry certificates only through participants and
indirect participants by instructing these participants and indirect
participants to transfer book-entry certificates, by book-entry transfer,
through DTC for the account of the purchasers of the book-entry certificates,
which account is maintained with their respective participants. Under the DTC
rules and in accordance with DTC's normal procedures, transfers of ownership of
book-entry certificates will be executed through DTC and the accounts of the
respective participants at DTC will be debited and credited. Similarly, the
participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing
certificateholders.
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. These credits or any transactions in
these securities settled during this processing will be reported to the relevant
Euroclear or Clearstream participants on the business day following the DTC
settlement date. Cash received in Clearstream or Euroclear as a result of sales
of securities by or through a Clearstream participant or Euroclear participant
to a DTC 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 Considerations--REMICs--Backup Withholding With Respect to REMIC
Certificates" and "--Foreign Investors in REMIC Certificates" in the prospectus
and "Global Clearance and Settlement and Tax Documentation Procedures--Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I of this
prospectus supplement.
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, these types of cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, based on
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
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settlement applicable to DTC. Clearstream participants and Euroclear
participants may not deliver instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which directly or indirectly own DTC. In
accordance with its normal procedures, DTC is expected to record the positions
held by each DTC participant in the book-entry certificates, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of book-entry certificates will be subject to the DTC rules, as in
effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and therefore is subject
to regulation by the Institute Monetaire Luxembourgeois or "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers, which are referred to in
this prospectus supplements as Clearstream participants, and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream provides various services,
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in several countries
through established depository and custodial relationships. Clearstream has
established an electronic bridge with Morgan Guaranty Trust as the Euroclear
operator in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
The Euroclear system was created in 1968 to hold securities for its
participants which are referred to in this prospectus supplement as 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 be
settled in any of 29 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, which is referred to in this prospectus supplement as the Euroclear
operator, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation, or simply, 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, central banks,
securities brokers and dealers and other professional financial intermediaries.
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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,
which are referred to in this prospectus supplement as 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 on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of these payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing these payments to the beneficial owners of the
book-entry certificates that it represents and to each financial intermediary
for which it acts as agent. Each financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry certificates that it
represents.
Under a book-entry format, beneficial owners of the book-entry certificates
may experience some delay in their receipt of payments, since these payments
will be forwarded by the trustee to DTC. 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. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Considerations--REMICs--Backup Withholding With Respect to REMIC
Certificates" and "--Foreign Investors in REMIC Certificates" in the prospectus.
Because DTC can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry certificates to persons or entities that
do not participate in the depository system, or otherwise take actions in
respect of the book-entry certificates, may be limited due to the lack of
physical certificates for the book-entry certificates. In addition, issuance of
the book-entry certificates in book-entry form may reduce the liquidity of the
certificates in the secondary market since potential investors may be unwilling
to purchase certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the financial intermediaries to whose DTC
accounts the book-entry certificates of the beneficial owners are credited.
DTC has advised the depositor that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the book-entry certificates under the pooling and servicing agreement
only at the direction of one or more financial intermediaries to whose DTC
accounts the book-entry certificates are credited, to the extent that actions
are taken on behalf of financial intermediaries whose holdings include the
book-entry certificates. Clearstream or the
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Euroclear operator, as the case may be, will take any other action permitted to
be taken by a certificateholder under the pooling and servicing agreement on
behalf of a Clearstream participant or Euroclear participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect actions on its behalf through DTC. DTC may take
actions, at the direction of the related participants, with respect to some
book-entry certificates which conflict with actions taken with respect to other
book-entry certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
o DTC or the depositor advises the trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the
book-entry certificates and the depositor or the trustee is unable to
locate a qualified successor;
o the depositor, at its sole option, with the consent of the trustee,
elects to terminate a book-entry system through DTC or
o after the occurrence of an event of default, beneficial owners having
percentage interests aggregating not less than 51% of the book-entry
certificates advise the trustee and DTC through the financial
intermediaries and the DTC participants in writing that the
continuation of a book-entry system through DTC, or a successor to DTC,
is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described above, the trustee will
be required to notify all beneficial owners of the occurrence of the event and
the availability through DTC of definitive certificates. Upon surrender by DTC
of the global certificate or certificates representing the book-entry
certificates and instructions for re-registration, the trustee will issue
definitive certificates, and thereafter the trustee will recognize the holders
of the definitive certificates as certificateholders under the pooling and
servicing agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of book-entry certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
None of the depositor, the master servicer, the mortgage loan seller or the
trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the book-entry
certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
PASS-THROUGH RATES
The pass-through rate on the Class A Certificates and the Offered
Subordinate Certificates will be a rate per annum equal to the weighted average
net mortgage rate less the pass-through rate for the Class IO Certificates. The
pass-through rate on the Class IO Certificates will be approximately 0.38% per
annum on the aggregate Certificate Principal Balances of the Class A
Certificates and the Offered Subordinate Certificates. The pass-through rate on
the Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates will be a rate per annum equal to the weighted average net mortgage
rate.
The net mortgage rate on any mortgage loan is equal to the then applicable
mortgage rate on the mortgage loan minus the servicing fee rate. The mortgage
rate on each mortgage loan is the
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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.
GLOSSARY
AVAILABLE DISTRIBUTION AMOUNT: The Available Distribution Amount for any
distribution date is equal to the sum, net of amounts reimbursable therefrom to
the master servicer or the trustee, of (i) the aggregate amount of scheduled
monthly payments on the mortgage loans due on the related due date and received
on or prior to the related determination date, after deduction of the servicing
fees, (ii) certain unscheduled payments in respect of the mortgage loans,
including prepayments, insurance proceeds, liquidation proceeds and proceeds
from repurchases of and substitutions for the mortgage loans occurring during
the preceding calendar month and (iii) all P&I advances with respect to the
mortgage loans received for the related distribution date.
BANKRUPTCY AMOUNT: The aggregate amount of realized losses which may be
allocated in connection with Bankruptcy Losses on the mortgage loans through
subordination.
BANKRUPTCY LOSS: A Bankruptcy Loss is a Deficient Valuation or a Debt Service
Reduction.
CERTIFICATE PRINCIPAL BALANCE: 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 of that certificate is
thereafter entitled to receive as distributions allocable to principal from the
cash flow on the mortgage loans and the other assets in the trust fund. The
Certificate Principal Balance of any class of certificates, other than the Class
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 that 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 realized losses on
the mortgage loans and Extraordinary Trust Fund Expenses, in either
case as described under "--Allocation of Losses: Subordination."
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:
o the then aggregate principal balance of the mortgage loans over
o the then aggregate Certificate Principal Balances of all other classes
of certificates.
COMPENSATING INTEREST: With respect to any principal prepayments in full, any
payments made by the master servicer from its own funds to cover Prepayment
Interest Shortfalls.
DEBT SERVICE REDUCTION: 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.
DEFICIENT VALUATION: 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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EXCESS BANKRUPTCY LOSSES: Excess Bankruptcy Losses are Bankruptcy Losses in
excess of the Bankruptcy Amount.
EXCESS FRAUD LOSSES: Excess Fraud Losses are Fraud Losses in excess of the Fraud
Loss Amount.
EXCESS LOSSES: Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess
Fraud Losses and Extraordinary Losses.
EXCESS SPECIAL HAZARD LOSSES: Excess Special Hazard Losses are Special Hazard
Losses in excess of the Special Hazard Amount.
EXTRAORDINARY LOSSES: Any loss resulting from:
o 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;
o 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;
o any weapon of war employing atomic fission or radioactive forces
whether in time of peace or war; and
o 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.
EXTRAORDINARY TRUST FUND EXPENSE: 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
under "Federal Income Tax Consequences" in this prospectus supplement.
FRAUD LOSS: 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 the mortgage loan, including a loss by reason of the denial of
coverage under any related primary mortgage insurance policy because of fraud,
dishonesty or misrepresentation.
FRAUD LOSS AMOUNT: The aggregate amount of realized losses which may be
allocated in connection with Fraud Losses on the mortgage loans through
subordination.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for any distribution date
and for each class of certificates is the one-month period preceding the month
in which the 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.
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INTEREST DISTRIBUTION AMOUNT: The Interest Distribution Amount for each class of
certificates 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 the related certificates immediately prior to the
distribution date at the then applicable pass-through rate for that class, plus,
in the case of each class, any such amount remaining unpaid from previous
distribution dates, and reduced, to not less than zero, in the case of each
class, by the allocable share for that 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.
NOTIONAL AMOUNT: The Notional Amount of the Class IO Certificates as of any date
of determination is equal to the aggregate Certificate Principal Balances of the
Class A Certificates and the Offered Subordinate Certificates as of that date.
Reference to the Notional Amount 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.
PREPAYMENT INTEREST SHORTFALL: With respect to any principal prepayments on the
mortgage loans, any resulting interest shortfall.
SENIOR INTEREST DISTRIBUTION AMOUNT: The Senior Interest Distribution Amount on
each distribution date is equal to the Interest Distribution Amount for that
distribution date on the Senior Certificates.
SENIOR PERCENTAGE: The Senior Percentage, which initially will equal
approximately 95.50% 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 Class A Certificates immediately prior to the related
distribution date divided by the aggregate of the Scheduled Principal Balances
of the mortgage loans immediately prior to the related distribution date.
SCHEDULED PRINCIPAL BALANCE: The Scheduled Principal Balance of any mortgage
loan as of any date of determination is equal to the principal balance of the
mortgage loan 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:
o the principal portion of all monthly payments due on or before the date
of determination, whether or not received,
o all amounts allocable to unscheduled principal that were received prior
to the calendar month in which the date of determination occurs, and
o any Bankruptcy Loss occurring out of a Deficient Valuation that was
incurred prior to the calendar month in which the date of determination
occurs.
SENIOR PREPAYMENT PERCENTAGE: Except as described below, the Senior Prepayment
Percentage for any distribution date occurring prior to the distribution date in
December 2007 will equal 100%. Except as described below, the Senior Prepayment
Percentage for any distribution date occurring after the first seven years will
be as follows:
o for any distribution date during the eighth year after the closing
date, the Senior Percentage for the distribution date plus 70% of the
Subordinate Percentage for the distribution date;
o for any distribution date during the ninth year after the closing date,
the Senior Percentage for the distribution date plus 60% of the
Subordinate Percentage for the distribution date;
o for any distribution date during the tenth year after the closing date,
the Senior Percentage for the distribution date plus 40% of the
Subordinate Percentage for the distribution date;
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o for any distribution date during the eleventh year after the closing
date, the Senior Percentage for the distribution date plus 20% of the
Subordinate Percentage for the distribution date; and
o for any distribution date thereafter, the Senior Percentage for the
distribution date.
Any scheduled reduction to the Senior Prepayment Percentage 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.
Notwithstanding the foregoing, if on any distribution date:
o the Subordinate Percentage, prior to giving effect to any distributions
on the related distribution date, equals or exceeds two times the
initial Subordinate Percentage and
o the provisions of clauses (i) and (ii) of the immediately preceding
paragraph are met,
then the Senior Prepayment Percentage for the related distribution date will
equal 100%, if the distribution date is prior to December 2003, and will equal
the Senior Percentage for the related distribution date, if the distribution
date occurs on or after December 2003.
Notwithstanding the foregoing, on any distribution date on which the Senior
Percentage exceeds the initial Senior Percentage, the Senior Prepayment
Percentage for that distribution date will equal 100%. Upon reduction of the
Certificate Principal Balance of the Class A Certificates to zero, the Senior
Prepayment Percentage will equal 0%.
SENIOR PRINCIPAL DISTRIBUTION AMOUNT: The Senior Principal Distribution Amount
with respect to any distribution date is the lesser of:
o the balance of the related Available Distribution Amount remaining
after the Senior Interest Distribution Amount is distributed and
o the sum of the amounts described in clauses (i) through (iv) under
"--Principal Distributions on the Class A Certificates."
SPECIAL HAZARD AMOUNT: The aggregate amount of realized losses which may be
allocated in connection with Special Hazard Losses on the mortgage loans through
subordination.
SPECIAL HAZARD LOSS: 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, which is not insured against under the standard hazard
insurance policy or blanket policy insuring against hazard losses which the
master servicer is required to cause to be maintained on each mortgage loan.
Special Hazard Losses will not include Extraordinary Losses or any loss
resulting from:
o wear and tear, deterioration, rust or corrosion, mold, wet or dry rot;
inherent vice or latent defect; animals, birds, vermin, insects;
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o smog, smoke, vapor, liquid or dust discharge from agricultural or
industrial operations; pollution; contamination;
o settling, subsidence, cracking, shrinkage, bulging or expansion of
pavements, foundations, walls, floors, roofs or ceilings;
o 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.
SUBORDINATE INTEREST DISTRIBUTION AMOUNT: The Subordinate Interest Distribution
Amount on each distribution date is equal to the aggregate of the Interest
Distribution Amounts for that distribution date on all of the Subordinate
Certificates.
SUBORDINATE PERCENTAGE: The Subordinate Percentage as of any date of
determination is equal to 100% minus the Senior Percentage as of that date.
SUBORDINATE PREPAYMENT PERCENTAGE: The Subordinate Prepayment Percentage for any
distribution date will equal 100% minus the Senior Prepayment Percentage.
SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT: The Subordinate Principal
Distribution Amount with respect to any distribution date is the lesser of:
o the balance of the Available Distribution Amount remaining after the
distribution of the Senior Interest Distribution Amount, the Senior
Principal Distribution Amount and the Subordinate Interest Distribution
Amount and
o the aggregate of the sum for each class of Subordinate Certificates of
the amounts described in clauses (i) through (iv) under "--Principal
Distributions on the Subordinate Certificates."
TRIGGER AMOUNT: The Trigger Amount for any distribution date will be 30% of the
initial sum of the Certificate Principal Balances of the Subordinate
Certificates.
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 the
distribution date occurs and ends on the first day of the month in which the
distribution date occurs. The "prepayment period" with respect to any
distribution date is the calendar month immediately preceding the month in which
the distribution date occurs. The "determination date" with respect to any
distribution date is on the 15th day of the month in which the distribution date
occurs or, if that day is not a business day, on the immediately succeeding
business day.
INTEREST DISTRIBUTIONS
Distributions on each distribution date will be made to the extent of the
Available Distribution Amount for that distribution date.
Distributions in respect of interest will be made on each distribution
date:
o to the holders of the Senior Certificates in an aggregate amount equal
to the Senior Interest Distribution Amount and
o to the holders of the Subordinate Certificates, in an aggregate amount
equal to the Subordinate Interest Distribution Amount, to the extent of
the portion of the Available
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Distribution Amount remaining after the distribution on that date of
the Senior Interest Distribution Amount and the Senior Principal
Distribution Amount.
Distributions of the Subordinate Interest Distribution Amount on each
distribution date will be made first, to the holders of the Class B-1
Certificates, second to the holders of the Class B-2 Certificates, third to the
holders of the Class B-3 Certificates, and then to the holders of the remaining
classes of Subordinate Certificates, in each case to the extent of available
funds and in each case to the extent of the Interest Distribution Amount for
those certificates for the related distribution date.
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 on a PRO RATA
basis based on the respective amounts of interest accrued on the certificates
for the related distribution date.
Except as otherwise described in this prospectus supplement, on any
distribution date, distributions of the Interest Distribution Amount for a class
of certificates will be made in respect of that class of certificates, to the
extent provided in this section, on a PARI PASSU basis, based on the Certificate
Principal Balance or Notional Amount, as applicable, of the certificates of each
class.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of the Class A Certificates will be entitled to receive on each
distribution date, to the extent of the portion of the Available Distribution
Amount remaining after distribution of the Senior Interest Distribution Amount
on that date, distributions allocable to principal until the Certificate
Principal Balance of the Class A Certificates has been reduced to zero, an
amount equal to the sum of the following:
(i) the product of (A) the then applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on the
mortgage loans due during the related due period, whether or not
received;
(2) the principal portion of all proceeds received in respect of
the repurchase of a mortgage loan, or, in the case of a substitution,
certain amounts received representing a principal adjustment, as
required by the pooling and servicing agreement during the related
prepayment period; and
(3) the principal portion of all other unscheduled collections,
other than amounts described in clauses (ii) and (iii) hereof,
including insurance proceeds and liquidation proceeds relating to the
mortgage loans, received during the related prepayment period, to the
extent applied as recoveries of principal;
(ii) the product of (A) the then applicable Senior Prepayment
Percentage and (B) the aggregate of all full and partial principal
prepayments received during the related prepayment period;
(iii) with respect to the net liquidation proceeds received and
allocable to principal of any mortgage loan that was finally liquidated
during the related prepayment period, the least of (a) the product of the
then applicable Senior Prepayment Percentage and the net liquidation
proceeds and (b) the product of the then applicable Senior Percentage and
the Scheduled Principal Balance of the mortgage loan at the time of
liquidation; and
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(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 of these amounts are not attributable
to realized losses that were allocated to the Subordinate Certificates.
Holders of the Class IO Certificates are not entitled to receive any
distributions allocable to principal.
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.
For purposes of all principal distributions described in this section and
for calculating the Senior Percentage, the Subordinate Percentage and the Senior
Prepayment Percentage, the applicable Certificate Principal Balance for any
distribution date shall be determined 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 the related distribution date as described under
"--Allocation of Losses; Subordination."
PRINCIPAL DISTRIBUTION ON THE SUBORDINATE CERTIFICATES
Holders of each class of Subordinate Certificates will be entitled to
receive on each distribution date, to the extent of the portion of the Available
Distribution Amount remaining after distribution on that date of the Senior
Interest Distribution Amount, the Senior Principal Distribution Amount and the
Subordinate Interest Distribution Amount, distributions allocable to principal
in reduction of the Certificate Principal Balances of the Subordinate
Certificates equal to the sum of the following:
(i) the product of (A) the then applicable related Class B Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on the
mortgage loans due during the related due period, whether or not
received;
(2) the principal portion of all proceeds received in respect of
the repurchase of a mortgage loan, or, in the case of a substitution,
certain amounts received representing a principal adjustment, as
required by the pooling and servicing agreement during the related
prepayment period; and
(3) the principal portion of all other unscheduled collections,
other than amounts described in clauses (ii) and (iii) hereof,
including insurance proceeds and liquidation proceeds relating to the
mortgage loans, received during the related prepayment period, to the
extent applied as recoveries of principal;
(ii) the portion allocable to each class of Subordinate Certificates,
as described below, of the product of (A) the then applicable Subordinate
Prepayment Percentage and (B) the aggregate of all full and partial
principal prepayments received during the related prepayment period;
(iii) the portion allocable to each 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
the net liquidation proceeds exceed the amount distributable to the Class A
Certificates in respect of
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the net liquidation proceeds pursuant to clause (iii) of the definition of
Senior Principal Distribution Amount; and
(iv) any amounts allocable to principal for any previous distribution
date, calculated pursuant to the three preceding clauses, that remain
undistributed, to the extent that any of these amounts are not attributable
to realized losses that were allocated to classes of the Subordinate
Certificates bearing a higher numerical class designation.
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 initially will equal
approximately 1.50%, approximately 1.20%, approximately 0.70%, approximately
0.50%, approximately 0.30% and approximately 0.30%, 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 the related distribution date
divided by the aggregate of the Scheduled Principal Balances of the mortgage
loans immediately prior to the related distribution date.
On any distribution date, the portion of all principal prepayments on the
mortgage loans and net liquidation proceeds allocable to principal of any
mortgage loan that was finally liquidated during the related prepayment period,
in each case not included in the Senior Principal Distribution Amount will be
allocated on a PRO RATA basis among the following classes of Subordinate
Certificates in proportion to the respective outstanding Certificate Principal
Balances thereof:
o the Class B-1 Certificates;
o the Class B-2 Certificates, if on the related 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 3.00% before giving effect to distributions on the
related distribution date;
o the Class B-3 Certificates, if on the related 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 1.80%
before giving effect to distributions on the related distribution date;
o the Class B-4 Certificates, if on the related 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 1.10% before giving effect to
distributions on the related distribution date;
o the Class B-5 Certificates, if on the related 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 0.60%
before giving effect to distributions on the related distribution date;
and
o the Class B-6 Certificates, if on the related distribution date the
aggregate percentage interest in the trust fund evidenced by the Class
B-6 Certificates equals or exceeds 0.30% before giving effect to
distributions on the related distribution date.
For purposes of all principal distributions described above and for
calculating the Subordinate Percentage, the applicable Certificate Principal
Balance for any distribution date shall be determined 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 the distribution date as
described under "--Allocation of Losses; Subordination" below.
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As stated under "--Principal Distributions on the Class A Certificates",
until the earlier of:
o the distribution date on which the Subordinate Percentage exceeds two
times the initial Subordinate Percentage with respect to any
distribution date on or after December 2003 or
o the distribution date occurring in December 2007, subject to certain
loss and delinquency criteria
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 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
Subordinate Percentage. See "--Principal Distributions on the Class A
Certificates" in this prospectus supplement.
Distributions of the Subordinate Principal Distribution Amount on each
distribution date will be made as follows: first to the holders of the Class B-1
Certificates, second to the holders of the Class B-2 Certificates, third to the
holders of the Class B-3 Certificates, and then to the holders of the remaining
classes of Subordinate Certificates, in each case to the extent of available
funds and in each case to the extent of the portion of the Subordinate Principal
Distribution Amount payable in respect of each class of Subordinate Certificates
for the related distribution date.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted mortgage loan that is finally liquidated
through foreclosure sale, disposition of the related mortgaged property, if
acquired 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 the related mortgage loan was finally liquidated,
after application of all amounts recovered, net of amounts reimbursable to the
master servicer for P&I advances, servicing advances and other related expenses,
including attorney's fees, towards interest and principal owing on the mortgage
loan. The amount of loss realized and any Special Hazard Losses, Fraud Losses,
Bankruptcy Losses and Extraordinary Losses are referred to in this prospectus
supplement as "realized losses." In the event that amounts recovered in
connection with the final liquidation of a defaulted mortgage loan are
insufficient to reimburse the master servicer for P&I advances and servicing
advances, these amounts may be reimbursed to the master servicer out of any
funds in the certificate account prior to the distribution on the certificates.
In the event that realized losses are incurred that are covered by
subordination, these losses will be allocated to the most subordinate class of
certificates then outstanding. The priorities for distribution of cash flows
described in this prospectus supplement, 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 shortfall of this kind 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 shortfall of
this kind would not result in a reduction of the Certificate Principal Balance
of that class. In such event, the percentage interest represented by that 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
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Class B-1 Certificates, in each case until the Certificate Principal Balance of
the related class has been reduced to zero. Thereafter, upon the reduction of
the Certificate Principal Balances of the Subordinate Certificates to zero,
realized losses will be allocated on any distribution date among the Class A
Certificates on a PRO RATA basis.
Excess Losses will be allocated on any distribution date among the Class A
Certificates and the Subordinate Certificates on a PRO RATA basis.
Once realized losses are allocated to a class of certificates, the
Certificate Principal Balance of that 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 the
related class has been reduced to zero. Thereafter, Extraordinary Trust Fund
Expenses will be allocated on any distribution date among the Class A
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 of the
certificate by the amount so allocated as of the distribution date in the month
following the calendar month in which the 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 class of certificates on the basis of its then outstanding Certificate
Principal Balance prior to giving effect to distributions to be made on the
related distribution date.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount and the Senior Principal Distribution Amount, on
each distribution date, holders of the Senior Certificates have a right to
distributions of the Available Distribution Amount that is prior to the rights
of the holders of the Subordinate Certificates, to the extent necessary to
satisfy the Senior Interest Distribution Amount and the Senior Principal
Distribution Amount.
The application of the Senior Prepayment Percentage, when it exceeds the
Senior Percentage, to determine the Senior Principal Distribution Amount will
accelerate the amortization of the Class A Certificates relative to the actual
amortization of the mortgage loans. To the extent that the Class A Certificates
are amortized faster than the related mortgage loans, in the absence of
offsetting realized losses allocated to the Subordinate Certificates, the
percentage interest evidenced by the Class A Certificates in the trust fund will
be decreased, with a corresponding increase in the percentage interest in the
trust fund evidenced by the Subordinate Certificates. Consequently, the
subordination afforded the Senior Certificates by the Subordinate Certificates
will increase relative to their respective Certificate Principal Balances.
The holders of the offered 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 offered 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.
The Special Hazard Amount shall initially be equal to approximately
$8,320,760. As of each anniversary of the cut-off date, the Special Hazard
Amount shall equal the lesser of:
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o the Special Hazard Amount as of the previous anniversary of the cut-off
date less the sum of all amounts allocated to the Subordinate
Certificates in respect of Special Hazard Losses since such previous
anniversary and
o the adjustment amount.
The adjustment amount with respect to each anniversary of the cut-off date
will be equal to the greatest of (i) 1.00% multiplied by the aggregate
outstanding principal balance of the mortgage loans, (ii) the aggregate
outstanding principal balance of the mortgage loans secured by mortgaged
properties located in the California zip code area in which the highest
percentage of mortgage loans by aggregate outstanding principal balance are
located and (iii) two times the outstanding principal balance of the mortgage
loan having the largest outstanding principal balance, in each case as of such
anniversary of the cut-off date. After the Certificate Principal Balances of the
Subordinate Certificates are reduced to zero, the Special Hazard Amount will be
zero.
The Fraud Loss Amount shall initially be equal to approximately $7,849,166.
As of any date of determination after the cut-off date, the Fraud Loss Amount
shall equal:
o prior to the first anniversary of the cut-off date an amount equal to
2.00% of the aggregate principal balance of the mortgage loans as of
the cut-off date minus the aggregate amounts allocated to the
Subordinate Certificates with respect to Fraud Losses up to such date
of determination,
o after the first anniversary of the cut-off date and 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 the date of
determination and
o 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 the date of determination.
On and after the fifth anniversary of the cut-off date, the Fraud Loss
Amount shall be zero.
The Bankruptcy Amount will initially be equal to approximately $113,362. 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 the date of determination.
The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may be
reduced or modified upon confirmation from the rating agencies that the
reduction or modification will not adversely affect the then-current ratings
assigned to the offered certificates rated thereby. A reduction or modification
in these amounts may adversely affect the coverage provided by the subordination
with respect to Special Hazard Losses, Fraud Losses and Bankruptcy Losses.
P&I ADVANCES
Subject to the limitations set forth in the following paragraph, the master
servicer will be obligated to advance or cause to be advanced on or before each
distribution date its own funds, or funds in the certificate account that are
not included in the Available Distribution Amount for the distribution date. The
amount of the master servicer's advance will be equal to the aggregate of all
payments of principal and interest, net of the servicing fee, that were due
during the related due
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period on the mortgage loans and that were delinquent on the related
determination date, plus amounts representing assumed payments not covered by
any current net income on the mortgaged properties acquired by foreclosure or
deed in lieu of foreclosure. These advances are referred to in this prospectus
supplement as "P&I advances."
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 the 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 the 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 that the master servicer fails in its obligation to make any
required advance, the trust administrator will be obligated to make the advance,
and in the event the trust administrator fails in its obligation to make the
advance, the trustee will be obligated to make the advance, in each case, to the
extent required in the pooling and servicing agreement.
RESTRICTIONS ON TRANSFER OF THE OFFERED SUBORDINATE CERTIFICATES
Because the Offered Subordinate Certificates are subordinate to the Senior
Certificates, any benefit plan purchasing the Offered Subordinate Certificates
will be deemed to have represented that certain conditions have been satisfied
in connection with the purchase. See "ERISA Considerations" in this prospectus
supplement.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to the pooling and servicing
agreement, dated as of November 1, 2000, 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 pooling and servicing 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 pooling and servicing agreement will consist of:
o all of the depositor's right, title and interest in and to the mortgage
loans, the related mortgage notes, mortgages and other related
documents,
o all payments on or collections in respect of the mortgage loans due
after the cut-off date, together with any proceeds thereof,
o any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues
received thereon,
o the rights of the trustee under all insurance policies required to be
maintained pursuant to the pooling and servicing agreement and
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o 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 in this section regarding the trust fund, the terms and
conditions of the pooling and servicing agreement and the offered certificates.
The depositor will provide to a prospective or actual certificateholder without
charge, on written request, a copy, without exhibits, of the pooling and
servicing agreement. Requests should be addressed to the Secretary, Salomon
Brothers Mortgage Securities VII, Inc., 390 Greenwich Street, 4th Floor, New
York, New York 10013.
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:
o the mortgage note endorsed without recourse to the trustee,
o the original mortgage with evidence of recording indicated thereon and
o an assignment of the mortgage recorded in the name of the trustee.
The 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 the 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 recording is not necessary to perfect the trustee's
interest in the related mortgage loan; provided further, however,
notwithstanding the delivery of the opinion of counsel, upon the occurrence of
certain events set forth in the pooling and servicing agreement, each assignment
of mortgage shall be recorded by the trustee as set forth in the pooling and
servicing agreement.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided to
the depositor by the master servicer. None of the depositor, the trustee, the
underwriter or any of their respective affiliates has made any independent
investigation of this information or has made or will make any representation as
to the accuracy or completeness of this information.
The master servicer is an indirect wholly-owned subsidiary of Bank of
America Corporation. The master servicer is engaged in a general commercial
banking business, offering a full range of commercial, corporate, international,
financial and retail banking services to corporations, governments and
individuals. The master servicer originates and services residential mortgage
loans and performs subservicing functions for affiliates. Prior to July 23,
1999, the master servicer was called Bank of America NT&SA. On July 23, 1999,
Bank of America, N.A. (which prior to July 5, 1999 was known as NationsBank,
N.A.) was merged into Bank of America NT&SA and Bank of America NT&SA changed
its name to Bank of America, N.A. In addition, on December 1, 1999, Bank of
America, FSB, an affiliate for whom the master servicer previously acted as
subservicer, merged into and with Bank of America, N.A.
The master servicer's headquarters and its executive offices are located at
101 South Tryon Street, Charlotte, North Carolina 28255, and the telephone
number is (704) 388-3232. The master servicer is subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency and
has been approved as a mortgagee and seller/servicer by the Department of
Housing
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and Urban Development, the Veterans Administration, the Government National
Mortgage Association, Fannie Mae and Freddie Mac.
All of the mortgage loans in the mortgage pool will be serviced by the
master servicer in accordance with the terms of the pooling and servicing
agreement. The master servicer may perform any of its obligations under the
pooling and servicing agreement through one or more subservicers. Despite the
existence of subservicing arrangements, the master servicer will be liable for
its servicing duties and obligations under the pooling and servicing agreement
as if the master servicer alone were servicing the mortgage loans. See "The
Pooling and Servicing Agreement" in this prospectus supplement.
LOSS AND DELINQUENCY HISTORY OF THE MASTER SERVICER'S SERVICING PORTFOLIO
The following table summarizes the delinquency and foreclosure experience
on the portfolio of one- to four-family first mortgage loans originated or
acquired by the master servicer or certain of its affiliates and serviced or
subserviced by the master servicer, or serviced by the master servicer for
others, other than:
o mortgage loans acquired through certain mergers with previously
unaffiliated entities,
o mortgage loans with respect to which the servicing rights were acquired
by the master servicer in bulk and
o certain other mortgage loans, to the extent such mortgage loans were
originated at bank branches of the master servicer.
The portfolio of mortgage loans serviced by the master servicer includes
both fixed- and adjustable-rate mortgage loans, including "buydown" mortgage
loans, loans with balances conforming to Freddie Mac's and Fannie Mae's limits
as well as jumbo loans, loans with stated maturities of 10 to 40 years and other
types of mortgage loans having a variety of payment characteristics, and
includes mortgage loans secured by mortgaged properties in geographic locations
that may not be representative of the geographic distribution or concentration
of the mortgaged properties securing the mortgage loans in the mortgage pool.
There can be no assurance that the delinquency, foreclosure and loss experience
set forth below will be similar to the results that may be experienced with
respect to the mortgage loans in the mortgage pool.
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<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
--------------------- -------------------- -------------------- --------------------
NUMBER/% OUTSTANDING NUMBER/% OUTSTANDING NUMBER/% OUTSTANDING NUMBER/% OUTSTANDING
OF PRINCIPAL OF PRINCIPAL OF PRINCIPAL OF PRINCIPAL
MORTGAGE AMOUNT MORTGAGE AMOUNT MORTGAGE AMOUNT MORTGAGE AMOUNT
LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS)
----- ------------- ----- ------------- ----- ------------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio....... 1,245,346 $175,871.2 1,166,326 $160,078.3 1,020,195 $134,348.6 838,176 $104,092.2
Delinquencies*
One Installment
delinquent...... 20,633 2,275.5 18,632 1,962.4 17,085 1,764.9 16,422 $ 1,605.5
Percent
Delinquent...... 1.7% 1.3% 1.6% 1.2% 1.7% 1.3% 2.0% 1.5%
Two Installments
delinquent...... 4,217 $ 416.8 3,662 $ 355.6 3,606 $ 352.8 3,730 $ 350.6
Percent
Delinquent...... 0.3% 0.2% 0.3% 0.2% 0.4% 0.3% 0.4% 0.3%
Three or more
installments
delinquent...... 4,701 $ 439.4 4,266 $ 391.0 3,599 $ 327.2 4,122 $ 374.1
Percent
Delinquent...... 0.4% 0.2% 0.4% 0.2% 0.4% 0.2% 0.5% 0.4%
In Foreclosure........ 3,847 $ 381.1 3,940 $ 385.4 4,036 $ 411.0 3,380 $ 363.3
Percent in
Foreclosure..... 0.3% 0.2% 0.3% 0.2% 0.4% 0.3% 0.4% 0.3%
Delinquent and in
Foreclosure........ 33,398 $ 3,512.8 30,500 $ 3,094.4 28,326 $ 2,855.9 27,654 $ 2,693.5
Percent Delinquent
and in
Foreclosure........ 2.7% 2.0% 2.6% 1.9% 2.8% 2.1% 3.3% 2.6%
</TABLE>
-------------
* A mortgage loan is deemed to have "one installment delinquent" if any
scheduled payment of principal or interest is delinquent past the end of the
month in which such payment was due, "two installments delinquent" if such
delinquency persists past the end of the month following the month in which
such payment was due, and so forth.
** The sums of the Percent Delinquent and Percent in Foreclosure set forth in
this table may not equal the Percent Delinquent and in Foreclosure due to
rounding.
THE TRUSTEE
U.S. Bank National Association, a national banking association, will act as
trustee for the certificates pursuant to the pooling and servicing agreement.
The trustee's offices for notices under the pooling and servicing agreement are
located at 180 East Fifth Street, St. Paul, Minnesota 55101, and its telephone
number is (612) 973-5800. The trustee will act as initial paying agent,
certificate registrar and custodian.
The principal compensation to be paid to the trustee in respect of its
obligations under the pooling and servicing agreement will be equal to any
interest or other income earned on funds held in the distribution account as
provided in the pooling and servicing agreement. The pooling and servicing
agreement will provide that the trustee and any director, officer, employee or
agent of the trustee will be indemnified by the trust fund and will be held
harmless against any loss, liability or expense incurred 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 pooling and servicing agreement, other than any loss, liability
or expense:
o resulting from any breach of the master servicer's obligations in
connection with the pooling and servicing agreement;
o that constitutes a specific liability of the trustee under the pooling
and servicing agreement or
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o incurred by reason of willful misfeasance, bad faith or negligence in
the performance of the trustee's duties under the pooling and servicing
agreement or as a result of a breach, or by reason of reckless
disregard, of the trustee's obligations and duties under the pooling
and servicing agreement.
The indemnification provided to the trustee in the pooling and servicing
agreement shall not include expenses, disbursements and advances incurred or
made by the trustee, including the compensation and expenses and disbursements
of its agents and counsel, in the ordinary course of the trustee's performance
in accordance with the provisions of the pooling and servicing 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 each
mortgage loan accrues for the calendar month. 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 collection 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 to the extent of its
aggregate servicing fee for the 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 pooling and servicing agreement and is
entitled to reimbursement therefor as provided in the pooling and servicing
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" in this prospectus supplement regarding 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, the Class R-I
Certificates and the Class R-II 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 Class R Certificates in proportion to the
percentage interests in the classes evidenced by their respective certificates.
TERMINATION
The circumstances under which the obligations created by the pooling and
servicing agreement will terminate in respect of the certificates are described
in "Description of the Certificates--Termination" in the prospectus. The master
servicer will have the right to purchase the mortgage loans and any properties
acquired in respect of the mortgage loans on any distribution date, once the
aggregate principal balance of the mortgage loans and any related properties at
the time of purchase is reduced to less than 5% of the aggregate principal
balance of the mortgage loans as of the cut-off date. If the master servicer
elects to exercise the foregoing option, this election will effect the
termination of the trust fund and the early retirement of the certificates. In
the event the master servicer exercises this option, the purchase price payable
in connection therewith generally will be equal to the greater of par or the
fair market value of the mortgage loans and related 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 the repurchase price is
distributed, together with any
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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 this option, the portion of the purchase price allocable to
the certificates of each class will be, to the extent of available funds:
o 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
o in the case of the certificates of any class, one month's interest
on the then outstanding Certificate Principal Balance or Notional
Amount thereof at the then applicable pass- through rate for that
class, plus
o any previously accrued but unpaid interest thereon.
In no event will the trust created by the pooling and servicing agreement
continue beyond the expiration of 21 years from the death of the survivor of the
persons named in the pooling and servicing agreement. See "Description of the
Certificates--Termination" in the prospectus.
THE MORTGAGE LOAN SELLER
Salomon Brothers Realty Corp., a New York corporation, obtained the
mortgage loans from the originator. The mortgage loan seller will transfer the
mortgage loans to the depositor pursuant to a mortgage loan purchase agreement,
dated as of November 21, 2000, among the mortgage loan seller, the originator
and the depositor.
FEDERAL INCOME TAX CONSEQUENCES
Two separate elections will be made to treat designated portions of the
trust fund as real estate mortgage investment conduits, or REMICs, 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 pooling and
servicing agreement, for federal income tax purposes, each of the REMICs,
sometimes referred to as REMIC I and REMIC II, will qualify as a REMIC under
Sections 860A through 860G of the Code.
For federal income tax purposes, (i) the Class R-I Certificates will be the
sole class of "residual interests" in REMIC I, (ii) separate non-certificated
regular interests in REMIC I will be issued and will be the "regular interests"
in REMIC I, (iii) the Class R-II Certificates will be the sole class of
"residual interests" in REMIC II and (iv) the Senior Certificates and the
Subordinate Certificates will represent ownership of "regular interests" in, and
will be treated as debt instruments of REMIC II. See "Federal Income Tax
Consequences--REMIC--Classification of REMICs" in the prospectus.
For federal income tax reporting purposes, the Class IO Certificates and
the Class B-3 Certificates will, and the other classes of 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 22% 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, or IRS, has issued OID regulations under
Sections 1271 to 1275 of the Code generally addressing the treatment of debt
instruments issued with original issue
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discount. Purchasers of the offered certificates should be aware that the OID
regulations do not adequately address certain issues relevant to, or are not
applicable to, securities such as the offered certificates. In addition, there
is considerable uncertainty concerning the application of the OID regulations to
REMIC regular interests that provide for payments based on a variable rate such
as the offered certificates, other than the Class IO Certificates.
A reasonable application of the principles of the OID regulations to the
offered certificates that provide for payments based on a variable rate
generally would be to report all income with respect to each class of
certificates as original issue discount for each period, computing such original
issue discount:
o by assuming that the initial variable pass-through rate with respect to
the offered certificates will remain constant for purposes of
determining the original yield to maturity of each class of
certificates and projecting future distributions on the certificates,
thereby treating the certificates as fixed rate instruments to which
the original issue discount computation rules described in the
prospectus can be applied, and
o by accounting for any positive or negative variation in the actual
value of the variable rate in any period from its assumed value as a
current adjustment to original issue discount with respect to such
period.
Prospective purchasers of the offered certificates are advised to consult
their tax advisors concerning the tax treatment of their certificates.
If the method of computing original issue discount described in the
prospectus results in a negative amount for any period with respect to any
certificateholder, particularly with respect to the holders of the Class IO
Certificates, the amount of original issue discount allocable to the period
would be zero, and that 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 the
certificate exceeds the maximum amount of future payments to which the
certificateholder is entitled, assuming no further prepayments of the mortgage
loans. Although the matter is not free from doubt, any loss of this kind 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 those certificates in this regard.
Certain classes of certificates may be treated for federal income tax
purposes as having been issued with a premium. Certificateholders may elect to
amortize that premium under a constant yield method in which case the
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
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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 REMICs will engage in any transactions that
would subject either of them 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 any REMIC, the tax will be borne (i) by the trustee, if the
trustee has breached its obligations with respect to REMIC compliance under the
pooling and servicing agreement, (ii) by the master servicer, if the master
servicer has breached its obligations with respect to REMIC compliance under the
pooling and servicing 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated November 21, 2000, the depositor has agreed to sell, and the
underwriter has agreed to purchase the offered certificates. The underwriter is
obligated to purchase all offered certificates offered by this prospectus
supplement 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 100.75% of the initial 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.
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SECONDARY MARKET
There is currently no secondary market for the offered certificates and
there can be no assurance that a secondary market for the offered certificates
will develop or, if it does develop, that it will continue. The underwriter
intends to establish a market in the offered certificates but it is not
obligated to do so. 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 available on an ongoing
basis. The limited nature of the 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. The primary
source of information available to investors concerning the offered certificates
will be the monthly statements discussed in the prospectus under "Description of
the Securities--Form of Reports to Securityholders," which will include
information as to the outstanding principal balance of the offered certificates
and the status of the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the offered certificates will be passed upon for
the depositor and the underwriter by Thacher Proffitt & Wood, New York, New
York.
RATINGS
It is a condition to the issuance of the certificates that the Senior
Certificates be rated "AAA" by Fitch, Inc., or Fitch, and "Aaa" by Moody's
Investors Service, Inc., or Moody's, that the Class B-1 Certificates be rated at
least "AA" by Fitch and "Aa2" by Moody's, that the Class B-2 Certificates be
rated at least "A" by Fitch and "A2" by Moody's and that the Class B-3
Certificates be rated at least "BBB" by Fitch and "Baa2" by Moody's.
The ratings of Fitch and Moody's assigned to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which the 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 these prepayments will differ from that originally anticipated.
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 the offered
certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the offered certificates, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
offered certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the offered certificates as stated in this section.
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LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of 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, therefore, will be legal investments for those
entities to the extent provided in SMMEA. SMMEA, however, provides for state
limitation on the authority of entities to invest in "mortgage related
securities" provided that the restrictive legislation was enacted prior to
October 3, 1991. There are ten states that have enacted legislation which
overrides the preemption provisions of SMMEA. The Class B-2 Certificates and the
Class B-3 Certificates will not constitute "mortgage related securities" for
purposes of SMMEA.
The depositor makes no representations as to the proper characterization of
any class of offered certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of offered
certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of offered certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of offered certificates constitutes a legal
investment or is subject to investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any ERISA plan, IRA, Keogh plan or government plan,
collectively referred to here as "benefit plans," or any insurance company,
whether through its general or separate accounts, or any other person investing
benefit plan assets of any benefit plan, should carefully review with its legal
advisors whether the purchase or holding of offered certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the offered certificates by or on
behalf of, or with benefit plan assets of, a benefit plan may qualify for
exemptive relief under the Underwriters' Exemption, as described under
"Considerations for Benefit Plan Investors--Possible Exemptive Relief" in the
prospectus and as recently amended, as described below. The Underwriters'
Exemption relevant to the offered certificates was granted by the Department of
Labor, or DOL, on April 18, 1994 as Prohibited Transaction Exemption 91-23 at 56
Fed. Reg. 15936. The purchase of the Senior Certificates by, on behalf of or
with the plan assets of any benefit plan may qualify for exemptive relief under
the Underwriters' Exemption. On November 13, 2000, the DOL published in the
Federal Register an amendment to the Underwriters' Exemption permitting a
subordinated pass-through certificate representing a beneficial ownership
interest in a trust primarily consisting of residential or home equity loans
that have loan-to-value ratios of 100% or less to be purchased and held by or on
behalf of, or with ERISA plan assets of, an ERISA plan provided the certificate
is rated at least "BBB-", or its equivalent, by Standard & Poor's Ratings
Services, Fitch or Moody's Investors Service, Inc. at the time of purchase.
Accordingly, the Offered Subordinate Certificates may qualify for exemptive
relief under the amended Underwriters' Exemption if such Certificates are rated
at least "BBB-", or its equivalent, at the time of purchase. See Prohibited
Transaction Exemption 2000-58, 65 Fed. Reg. 67765 (November 13, 2000). However,
the Underwriters' Exemption contains a number of other conditions which must be
met for the exemption to apply, including the requirement that the investing
benefit 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.
Before purchasing an offered certificate, a fiduciary of a benefit plan
should itself confirm that the offered certificates constitute "securities" for
purposes of the Underwriters' Exemption and that the
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specific and general conditions of the Underwriters' Exemption and the other
requirements set forth in the Underwriters' Exemption would be satisfied,
including the requirement that the certificate be rated "BBB-" or higher at the
time of purchase. For further information regarding the ERISA considerations of
investing in the Certificates, see "Considerations for Benefit Plan Investors"
in the prospectus.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances described in this prospectus supplement
under "Description of the Certificates--Book-Entry Certificates", the offered
certificates will be available only in book-entry form. Investors in the global
securities may hold the global securities through any of DTC, Clearstream or
Euroclear. The global securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice, that is seven calendar day settlement.
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between 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 that
capacity, and as DTC participants.
Non-U.S. holders of Global Securities will be subject to U.S. withholding
taxes unless those holders meet specific 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 relevant depositary
which in turn will hold those positions in their accounts as DTC participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through 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.
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.
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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 relevant depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in the accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the relevant depositary to the DTC participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the 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--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 account 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 to 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 overdraft charges, although the 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 crediting 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 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 credit the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in the accrual period and a year
assumed to consist to 360 days.
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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 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--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 is taken. At least three techniques
should be readily available to eliminate this potential problem:
o borrowing through Clearstream or Euroclear for one day, until the
purchase side of the trade is reflected in their Clearstream or
Euroclear accounts, in accordance with the clearing system's customary
procedures
o 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
o 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.
MATERIAL 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
o 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
o 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
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
I-3
<PAGE>
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:
o a citizen or resident of the United States,
o 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
o an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, or
o 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.
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 trust fund assets, or
o debt obligations secured by trust fund assets.
THE TRUST FUND AND ITS ASSETS
The assets of a trust fund will primarily include any combination of :
o one- to four-family residential first and junior lien
mortgage loans, multifamily residential mortgage
loans, cooperative apartment loans or manufactured
housing conditional sales contracts, installment loan
agreements, home equity revolving lines of credit,
including partial balances of those lines of credit,
or beneficial interests,
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, or 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.
CREDIT ENHANCEMENT
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 21, 2000.
<PAGE>
TABLE OF CONTENTS
RISK FACTORS ....................................................4
THE TRUST FUNDS...............................................................18
The Mortgage Loans...................................................18
Revolving Credit Loans...............................................24
Agency Securities ...................................................28
Private Mortgage-Backed Securities...................................34
Funding Agreements...................................................36
USE OF PROCEEDS...............................................................38
YIELD CONSIDERATIONS..........................................................38
MATURITY AND PREPAYMENT
CONSIDERATIONS................................................................40
THE DEPOSITOR.................................................................42
MORTGAGE LOAN PROGRAM.........................................................42
Underwriting Standards...............................................42
Qualifications of Originators and Mortgage Loan
Sellers............................................................44
Representations by or on Behalf of Mortgage
Loan Sellers; Repurchases..........................................44
DESCRIPTION OF THE SECURITIES.................................................47
General ...................................................47
Assignment of Trust Fund Assets......................................50
Deposits to Certificate Account......................................53
Payments on Mortgage Loans...........................................54
Payments on Agency Securities and Private
Mortgage-Backed Securities.........................................56
Distributions ...................................................56
Interest on the Securities...........................................58
Principal of the Securities..........................................58
Pre-Funding Account..................................................58
Allocation of Losses.................................................59
Advances in Respect of Delinquencies.................................59
Reports to Securityholders...........................................60
Collection and Other Servicing Procedures............................62
Sub-Servicing ...................................................63
Realization Upon Defaulted Mortgage Loans............................64
Retained Interest; Servicing or Administration
Compensation and Payment of Expenses...............................65
Evidence as to Compliance............................................66
Certain Matters Regarding the Master Servicer
and the Depositor..................................................66
Events of Default and Rights Upon Events of
Default............................................................68
Amendment ...................................................71
Termination ...................................................72
Duties of the Trustee................................................73
Description of the Trustee...........................................77
DESCRIPTION OF CREDIT SUPPORT.................................................74
Subordination ...................................................74
Letter of Credit ...................................................76
Mortgage Pool Insurance Policy.......................................77
Special Hazard Insurance Policy......................................79
Bankruptcy Bond ...................................................81
Financial Guarantee Insurance........................................81
Reserve Fund ...................................................81
Overcollateralization................................................82
Cross-Support Features...............................................82
Cash Flow Agreements.................................................82
DESCRIPTION OF PRIMARY INSURANCE POLICIES.....................................83
Primary Mortgage Insurance Policies..................................83
Primary Hazard Insurance Policies....................................83
FHA Insurance ...................................................85
VA Guarantees ...................................................85
LEGAL ASPECTS OF MORTGAGE LOANS...............................................86
General ...................................................86
Single-Family Loans and Multifamily Loans............................86
Leases and Rents ...................................................87
Cooperative Loans ...................................................87
Contracts ...................................................88
Foreclosure on Mortgages.............................................90
Foreclosure on Mortgaged Properties Located in
the Commonwealth of Puerto Rico....................................92
Foreclosure on Cooperative Shares....................................92
Repossession with respect to Contracts...............................93
Notice of Sale; Redemption Rights with respect to
Manufactured Homes.................................................94
Louisiana Law ...................................................94
Rights of Redemption with respect to Single-Family
Properties and Multifamily Properties..............................95
Notice of Sale; Redemption Rights with respect to
Manufactured Homes.................................................95
Anti-Deficiency Legislation and Other Limitations on
Lenders............................................................95
Junior Mortgages ...................................................97
Consumer Protection Laws with respect to
Contracts..........................................................98
Other Limitations ...................................................99
Enforceability of Provisions.........................................99
Subordinate Financing...............................................101
Applicability of Usury Laws.........................................101
Alternative Mortgage Instruments....................................102
Formaldehyde Litigation with respect to Contracts...................103
Soldiers' and Sailors' Civil Relief Act of 1940.....................104
Environmental Legislation...........................................104
Forfeitures in Drug and RICO Proceedings............................105
Negative Amortization Loans.........................................105
FEDERAL INCOME TAX CONSEQUENCES..............................................106
General ..................................................105
REMICs ..................................................107
Taxation of Owners of REMIC Regular
Certificates......................................................108
Taxation of Owners of REMIC Residual
Certificates......................................................113
Sales of REMIC Certificates.........................................119
Notes ..................................................124
Grantor Trust Funds.................................................125
Characterization of Investments in Grantor Trust
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Certificates......................................................125
Taxation of Owners of Grantor Trust Strip
Certificates......................................................131
Sales of Grantor Trust Certificates.................................133
Partnership Trust Funds.............................................134
Taxation of Owners of Partnership Certificates......................135
STATE AND OTHER TAX CONSEQUENCES.............................................140
CONSIDERATIONS FOR BENEFIT PLAN
INVESTORS..................................................................140
Investors Affected..................................................140
Fiduciary Standards for ERISA Plans and
Related Investment Vehicles.......................................140
Prohibited Transaction Issues for ERISA Plans,
Keogh Plans, IRAs and Related Investment
Vehicles..........................................................141
Possible Exemptive Relief...........................................142
Consultation with Counsel...........................................146
Government Plans ..................................................146
Representation from Plans Investing in Notes with
Substantial Equity Features or Certain
Securities........................................................146
Tax Exempt Investors................................................147
Required Deemed Representations of
Investors.........................................................147
LEGAL INVESTMENT.............................................................148
METHODS OF DISTRIBUTION......................................................149
LEGAL MATTERS................................................................150
FINANCIAL INFORMATION........................................................150
RATING ....................................................................150
AVAILABLE INFORMATION........................................................151
REPORTS TO SECURITYHOLDERS...................................................151
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE..................................................................152
GLOSSARY ....................................................................153
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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 the offered securities.
You should carefully consider, among other things, the following
factors in connection with the purchase of the securities offered by this
prospectus:
THE SECURITIES WILL HAVE LIMITED LIQUIDITY SO INVESTORS MAY BE UNABLE TO SELL
THEIR SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR INITIAL
OFFERING PRICE
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 in the prospectus supplement intends
to establish a secondary market in the securities, however no underwriter will
be obligated to do so. As a result, any resale prices that may be available for
any offered security in any market that may develop may be at a discount from
the initial offering price. The securities offered by this prospectus 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
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. 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.
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 in this prospectus
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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<PAGE>
CREDIT SUPPORT MAY BE LIMITED; THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES ON
THE TRUST FUND ASSETS WILL RESULT IN LOSSES ALLOCATED TO THE RELATED 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 one or more of the forms referred
to in this prospectus and the related prospectus supplement. Regardless of the
form of credit support provided, the amount of coverage will usually be limited
in amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula. Furthermore, credit support may provide only very
limited coverage as to particular types of losses or risks, and may provide no
coverage as to other types of losses or risks. If losses on the trust fund
assets exceed the amount of coverage provided by any credit support or the
losses are of a type not covered by any credit support, these losses will be
borne by the holders of the related securities or specific classes of the
related securities. See "Description of Credit Support."
THE TYPES OF MORTGAGE LOANS INCLUDED IN THE TRUST FUND RELATED TO YOUR
SECURITIES MAY BE ESPECIALLY PRONE TO DEFAULTS WHICH MAY EXPOSE YOUR SECURITIES
TO GREATER LOSSES
The securities will be directly or indirectly backed by mortgage loans,
manufactured housing conditional sales contracts and installment loan
agreements. The types of mortgage loans included in the trust fund may have a
greater likelihood of delinquency and foreclosure, and a greater likelihood of
loss in the event of delinquency and foreclosure. You should be aware that if
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 those 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.
The prospectus supplement for each series of securities will describe the
mortgage loans which are to be included in the trust fund related to your
security and risks associated with those mortgage loans which you should
carefully consider in connection with the purchase of your security.
NEGATIVELY AMORTIZING LOANS. In the case of mortgage loans that are
subject to negative amortization, the principal balances of these 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 these 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 these 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.
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<PAGE>
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 the mortgage loan will be less than the scheduled
monthly payments on the mortgage loan, the resulting difference to be made up
from:
o an amount contributed by the borrower, the seller of the
mortgaged property or another source and placed in a custodial
account,
o investment earnings on the amount, if any, contributed by the
borrower, or
o 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 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 larger monthly payments could lead to losses on
these mortgage loans, and to the extent not covered by credit support, may
adversely affect the yield to maturity on the related securities.
BALLOON LOANS. Some 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, 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:
o the value of the related mortgaged property,
o the level of available mortgage rates at the time of sale or
refinancing,
o the mortgagor's equity in the related mortgaged property,
o prevailing general economic conditions,
o the availability of credit for loans secured by comparable real
properties and,
o 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.
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<PAGE>
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 these 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 the 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 the 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
Fannie Mae and the Freddie Mac due to credit characteristics that to not satisfy
the Fannie Mae and Freddie Mac guidelines, including mortgagors whose
creditworthiness and repayment ability do not satisfy the Fannie Mae and Freddie
Mac underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other derogatory
credit items. Accordingly, non-conforming mortgage loans are likely to
experience rates of delinquency, foreclosure and loss that are higher, and that
may be substantially higher, than mortgage loans originated in accordance with
Fannie Mae or Freddie Mac underwriting guidelines. The principal differences
between conforming mortgage loans and non-conforming mortgage loans include:
o the applicable loan-to-value ratios,
o the credit and income histories of the related mortgagors,
o the documentation required for approval of the related mortgage
loans,
7
<PAGE>
o the types of properties securing the mortgage loans, the loan
sizes, and
o 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 these 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
losses of this kind, to the extent not covered by credit enhancement, may affect
the yield to maturity of the related securities.
JUNIOR LIEN MORTGAGE LOANS. 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. An increase of this kind 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
8
<PAGE>
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 junior lien
mortgage loans.
MANUFACTURED HOMES. Any conditional sales contracts and installment
loan agreements with respect to manufactured homes 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 manufactured housing
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. If the master servicer fails,
due to clerical errors or otherwise, to take the appropriate steps to perfect
the security interest, the trustee may not have a first priority security
interest in the manufactured home securing a manufactured housing contract.
Additionally, courts in many states have held that manufactured homes may 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 manufactured housing 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.
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 these 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 these 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
9
<PAGE>
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 these 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 a series of securities may be
concentrated in these regions, and this concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration.
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. The
mortgage loans will generally have been originated in accordance with
underwriting standards acceptable to the depositor and generally described 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 this 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 losses of
this kind, to the extent not covered by credit support, may adversely affect the
yield to maturity of the related securities.
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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. In several 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
may impede the ability of the master servicer to foreclose on or sell the
mortgaged property or to obtain liquidation proceeds sufficient to repay all
amounts due on the related mortgage loan. The master servicer will be entitled
to deduct from liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on the related liquidated mortgage loan and
not yet repaid, including payments to prior lienholders, accrued servicing fees,
legal fees and costs of legal action, real estate taxes, and maintenance and
preservation expenses. If any mortgaged properties fail to provide adequate
security for the mortgage loans in the trust fund related to your security and
insufficient funds are available from any applicable credit support, you could
experience a loss on your 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 master 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 the property. These laws often impose liability whether or not the owner
or operator knew of, or was responsible for, the presence of the hazardous or
toxic substances. A lender also risks liability on foreclosure of the mortgage
on the property. In addition, the presence of hazardous or toxic substances, or
the failure to properly remediate the property, may adversely affect the owner's
or operator's ability to sell the 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
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property unless it has taken adequate steps to ensure environmental compliance
with respect to the 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 environmental law
violations, or is unable to honor its 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.
THE RATINGS OF YOUR SECURITIES MAY BE LOWERED OR WITHDRAWN WHICH MAY ADVERSELY
AFFECT THE LIQUIDITY OR MARKET VALUE OF YOUR 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 the 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 of the securities as a result of the downgrading
of the obligations of any applicable credit support provider, or as a result of
losses on the related mortgage loans in excess of the levels contemplated by the
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. If any rating is
revised or withdrawn, the liquidity or the market value of your 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 the 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, the related mortgage loan seller will be
obligated to cure the breach or repurchase or, if permitted, replace the
mortgage loan as described under "Mortgage Loan Program-Representations as to
Mortgage Loans to be made by or on Behalf of Mortgage Loan Sellers; Remedies for
Breach of Representation". 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 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.
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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 the mortgage
loan seller that could provide for the purchase of only a portion of the
affected mortgage loans. Any 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 their purchase obligations. 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 related losses 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 the
mortgage loan was purchased from the mortgage loan seller by or on behalf of the
depositor which 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 after the date of sale by the mortgage loan seller, an
event occurs that would have given rise to a repurchase 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.
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY OF THE SECURITIES
Because transfers and pledges of securities registered in the name of a
nominee of the 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 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.
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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;
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 and
o with respect to a trust fund containing revolving credit loans,
additional draws on under the related credit line agreements.
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 that 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, Accrual Securities, securities with an interest rate
which fluctuates inversely with an index or certain other classes in a series
including more than one class of securities, may be relatively more sensitive to
the rate of prepayment on the related mortgage loans than other classes of
securities and, if applicable, to the occurrence of an early retirement of the
securities.
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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."
THE EXERCISE OF AN 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 the securities or at any
time thereafter, at the option of the party entitled to 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 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 the
outstanding mortgage loans and other trust fund assets at the cut-off date for
that series. The percentage will be between 25% and 0%. The exercise of the
termination 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 the securities will be entitled to receive upon early retirement.
In addition to the repurchase of the assets in the related trust fund
as described in the paragraph above, the related prospectus supplement may
permit that, a holder of a non-offered class of securities 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 the date as the option to
terminate as described in the paragraph above becomes exercisable and thereby
effect early retirement of the securities of the series. Any call of this type
will be of the entire trust fund at one time; multiple calls with respect to any
series of securities will not be permitted. In this case, the call class must
remit to the trustee for distribution to the holders of the related securities
offered by this prospectus a price equal to 100% of the principal balance of
their securities offered by this prospectus as of the day of the purchase plus
accrued interest thereon at the applicable interest rate during the related
period on which interest accrues on their securities. If funds equal to the call
price 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, the 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
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securities have been surrendered and paid in full, there will not be any
continuing liability from the securityholders or from the trust fund to
securityholders.
A trust fund may also be terminated and the certificates retired upon
the master servicer's determination, 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 the REMIC 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 would decrease the average life of the securities and may adversely
affect the yield to holders of some or all classes of the related securities.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
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 these plans, if you are subject to the 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
by this prospectus and the related prospectus supplement.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND THE SECURITIES BACKED BY THOSE MORTGAGE LOANS
Federal and state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices:
o regulate interest rates and other charges on mortgage loans;
o require specific disclosures to borrowers;
o require licensing of originators; and
o regulate generally the origination, servicing and collection
process for the mortgage loans.
Depending on the specific facts and circumstances involved, violations
may limit the ability of a trust fund to collect all or a part of the principal
of or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and could result in liability for damages and
administrative enforcement against the originator or an assignee of the
originator, like a trust fund, or the initial servicer or a subsequent servicer,
as the case may be. In particular, it is possible that mortgage loans included
in a trust fund will be subject to the Home Ownership and Equity Protection Act
of 1994. The Homeownership Act adds additional
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provisions to Regulation Z, the implementing regulation of the Federal
Truth-In-Lending Act. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans with
high interest rates or high up-front fees and charges. In general, mortgage
loans within the purview of the Homeownership Act have annual percentage rates
over 10 percentage points greater than the yield on Treasury securities of
comparable maturity and/or fees and points which exceed the greater of 8% of the
total loan amount or $441. The $441 amount is adjusted annually based on changes
in the Consumer Price Index for the prior year. The provisions of the
Homeownership Act apply on a mandatory basis to all mortgage loans originated on
or after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of the
creditor, like a trust fund, would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including the
right to rescind the mortgage loan. Recently, class action lawsuits under the
Homeownership Act have been brought naming as a defendant securitization trusts
like the trust funds described in this prospectus with respect to the mortgage
loans.
In addition, amendments to the federal bankruptcy laws have been
proposed that could result in (1) the treatment of a claim secured by a junior
lien in a borrower's principal residence as protected only to the extent that
the claim was secured when the security interest was made and (2) the
disallowance of claims based on secured debt if the creditor failed to comply
with specific provisions of the Truth in Lending Act (15 U.S.C. ss.1639). These
amendments could apply retroactively to secured debt incurred by the debtor
prior to the date of effectiveness of the amendments.
The depositor will represent that all applicable federal and state laws
were complied with in connection with the origination of the mortgage loans. If
there is a material and adverse breach of a representation, the depositor will
be obligated to repurchase any affected mortgage loan or to substitute a new
mortgage loan into the related trust fund. See "Legal Aspects of Mortgage
Loans".
MODIFICATION OF A MORTGAGE LOAN BY THE MASTER SERVICER MAY REDUCE THE YIELD ON
THE RELATED SECURITIES
In instances in which a mortgage loan is in default, or if default is
reasonably foreseeable, the master servicer, if it determines it is in the best
interests of the related securityholders, may permit modifications of the
mortgage loan rather than proceeding with foreclosure. Modification may have the
effect of reducing the interest rate on the mortgage loan, forgiving the payment
of principal or interest rate or extending the final maturity date of the
mortgage loan. Any modified mortgage loan retained in the related trust fund may
result in reduced collections from that mortgage loan and, to the extent not
covered by the related credit support, reduced distributions on one or more
classes of the related securities. Any mortgage loan modified to extend the
final maturity of the mortgage loan may result in extending the final
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maturity of one or more classes of the related securities. See "Collection and
Other Servicing Procedures Employed by the Master Servicer".
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, legal aspects of trust fund assets as well as any risk factors
pertaining to the investment in a particular class of offered securities.
Several capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. All of the capitalized terms used in
this prospectus are defined in the glossary in this prospectus.
THE TRUST FUNDS
The trust fund for each series will be held by the trustee for the
benefit of the related securityholder. Each trust fund will consist of:
o a segregated pool of various types of one- to four-family
residential first and junior lien mortgage loans including
closed-end home equity loans, one- to four-family first or junior
lien home equity revolving lines of credit, 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 GNMA, Fannie Mae or Freddie Mac, commonly referred to as
agency securities,
o pass-through or participation certificates or other
mortgage-backed securities issued or guaranteed by private
entities, or
o funding agreements secured by mortgage loans, agency securities
or private mortgage-backed securities or any combination thereof,
together with other assets.
THE MORTGAGE LOANS
GENERAL
The mortgage loans, home equity loans or revolving credit loans
included in a trust fund may be secured by any of the following:
o first or junior liens on by one- to four-family residential
properties
o rental apartments or projects, including apartment buildings
owned by cooperative housing corporations, containing five or
more dwelling units
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o shares in a private cooperative housing corporation that give the
owner thereof the right to occupy a particular dwelling unit in
the cooperative
o conditional sales contracts and installment loan agreements with
respect to new or used manufactured homes, or beneficial
interests therein, or
o real property acquired upon foreclosure or comparable conversion
of the mortgage loans.
Any of these loan types 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
leasehold will exceed the term of the mortgage note by at least five years.
In connection with a series of securities backed by revolving credit
loans, if the accompanying prospectus supplement indicates that the pool
consists of certain balances of the revolving credit loans, then the term
revolving credit loans in this prospectus refers only to those balances.
Each mortgage loan will have been originated by a person not affiliated
with 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, which prior holder may not be the originator
thereof and may be an affiliate of the depositor. See "Mortgage Loan
Program--Underwriting Standards".
All of the mortgage loans or home equity loans will have individual
principal balances at origination of not more than $5,000,000, monthly payments
due on the first day of each month, original terms to maturity of not more than
40 years and be one of the following types of mortgage loans:
o fully amortizing mortgage loans with a fixed rate of interest and
level monthly payments to maturity;
o 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
o ARM Loans that provide for an election, at the borrower's option,
to convert the adjustable interest rate to a fixed interest rate,
which will be described in the related prospectus supplement;
o 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;
o 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, which will be
described in the related prospectus supplement;
o 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;
o revolving credit loans; or
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o another type of mortgage loan described in the related prospectus
supplement.
JUNIOR LIEN MORTGAGE LOANS
If provided in the related prospectus supplement, the mortgage pools
may contain mortgage loans secured by junior liens, and the related 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 and 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 these 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 the 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 proceeds from a foreclosure or similar sale of the related
mortgaged property are insufficient to satisfy all senior liens and the mortgage
loan in the aggregate, the trust fund, as the holder of the junior lien, and,
accordingly, holders of one or more classes of the securities bear (i) the risk
of delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment is not realized
upon. Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the property
securing a junior mortgage unless it forecloses subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do
not vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that the master servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because the average outstanding principal balance of the mortgage loans is
smaller relative to the size of the average outstanding principal balance of the
loans in a typical pool of first priority mortgage loans, liquidation proceeds
may also be smaller as a percentage of the principal balance of a mortgage loan
than would be the case in a typical pool of first priority mortgage loans.
Unless otherwise specified in the related prospectus supplement, the
following requirements as to the loan-to-value ratio of each junior lien
mortgage loan 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 the loan
and (b) the sales price for the 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
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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, 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 90%, in the case of a mortgage loan secured by an
owner-occupied primary residence or 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.
OCCUPANCY STATUS OF THE RELATED MORTGAGED PROPERTY
With respect to each mortgaged property, unless otherwise provided in
the related prospectus supplement, the borrower will have represented that the
dwelling is either an owner-occupied primary residence or a vacation or second
home that is not part of a mandatory rental pool and 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.
CONDOMINIUMS
Unless otherwise specified in the related prospectus supplement, with
respect to mortgage loans secured by condominium units, the related condominium
project will generally have characteristics that satisfy the Fannie Mae
guidelines. See "Mortgage Loan Program--Representations by or on behalf of
Mortgage Loan Sellers; Repurchases" for a description of certain other
representations made by or on behalf of mortgage loan sellers at the time
mortgage loans are sold.
BUYDOWN MORTGAGE LOANS
If provided in the related prospectus supplement, certain of the
mortgage pools may contain mortgage loans subject to temporary buydown plans,
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 is to be made up
from buydown funds equal to an amount contributed by the borrower, the seller of
the mortgaged property, or another source and placed in a
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custodial account and unless otherwise specified in the prospectus supplement,
investment earnings on the buydown funds.
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.
PRIMARY MORTGAGE INSURANCE
Except in the case of high loan-to-value loans and as otherwise
specified in the related prospectus supplement, each mortgage loan having a
loan-to-value ratio at origination in excess of 80%, is required to be covered
by a primary mortgage guaranty insurance policy insuring against default on such
mortgage loan as to at least the principal amount thereof exceeding 75% of the
value of the mortgaged property at origination of the mortgage loan. This
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".
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENT
Each prospectus supplement will contain information, as of the date of
the related 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:
o 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,
o 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),
o the original terms to maturity of the mortgage loans,
o the earliest origination date and latest maturity date,
o 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%,
o 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,
o the geographical distribution of the mortgage loans on a
state-by-state basis,
o the number and aggregate principal balance of buydown mortgage
loans, if any,
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o the weighted average retained interest, if any,
o with respect to adjustable rate mortgage 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 adjustable rate mortgage loan, and
o with respect to the high loan-to-value mortgage loans of the type
described above, whether the 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 initial issuance of
the series.
The composition and characteristics of a pool containing revolving
credit loans may change from time to time as a result of any draws made after
the related cut-off date under the related credit line agreements that are
included in the mortgage pool. If assets of the trust fund are added or deleted
from the trust fund after the date of the accompanying prospectus supplement
other than as a result of any draws, the addition or deletion will be noted in
the Form 8-K.
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 these losses are not covered by credit
support, these losses will be borne, at least in part, by the holders of one or
more classes of the securities of the related series offered by this prospectus.
ASSIGNMENT OF THE MORTGAGE LOANS
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
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obligations under the related pooling and servicing agreement or servicing
agreement as if the master servicer alone were servicing the 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 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 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 and in the related prospectus
supplement.
The single-family loans will be evidenced by promissory notes, the
mortgage notes, secured by first mortgages or first deeds of trust 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
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.
The cooperative loans will be evidenced by promissory notes secured by
security interests in shares issued by cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific cooperative units in the related buildings.
REVOLVING CREDIT LOANS
GENERAL
The revolving credit loans will be originated under credit line
agreements subject to a maximum amount or credit limit. In most instances,
interest on each revolving credit loan will be calculated based on the average
daily balance outstanding during the billing cycle. The billing cycle in most
cases will be the calendar month preceding a due date. Each revolving credit
loan will have a loan rate that is subject to adjustment on the day specified in
the related mortgage note, which may be daily or monthly, equal to the sum of
the index on the day specified in the accompanying prospectus supplement, and
the gross margin specified in the related mortgage note, which may vary under
circumstances if stated in the accompanying prospectus supplement, subject to
the maximum rate specified in the mortgage note and the maximum rate permitted
by applicable law. If specified in the prospectus supplement, some revolving
credit loans may be teaser loans with an introductory rate that is lower than
the rate that would be in effect if the applicable index
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and gross margin were used to determine the loan rate. As a result of the
introductory rate, interest collections on the loans may initially be lower than
expected. Commencing on their first adjustment date, the loan rates on the
teaser loans will be based on the applicable index and gross margin.
The borrower for each revolving credit loan may draw money in most
cases with either checks or credit cards, subject to applicable law, on such
revolving credit loan at any time during the period in which a draw may be made
under the related credit line agreement, the draw period. Unless specified in
the accompanying prospectus supplement, the draw period will not be more than 15
years. Unless specified in the accompanying prospectus supplement, for each
revolving credit loan, if the draw period is less than the full term of the
revolving credit loan, the related borrower will not be permitted to make any
draw during the repayment period. Prior to the repayment period, or prior to the
date of maturity for loans without repayment periods, the borrower for each
revolving credit loan will be obligated to make monthly payments on the
revolving credit loan in a minimum amount as specified in the related mortgage
note, which usually will be the finance charge for each billing cycle as
described in the second following paragraph. In addition, if a revolving credit
loan has a repayment period, during this period, the borrower is required to
make monthly payments consisting of principal installments that would
substantially amortize the principal balance by the maturity date, and to pay
any current finance charges and additional charges.
The borrower for each revolving credit loan will be obligated to pay
off the remaining account balance on the related maturity date, which may be a
substantial principal amount. The maximum amount of any draw for any revolving
credit loan is equal to the excess, if any, of the credit limit over the
principal balance outstanding under the mortgage note at the time of the draw.
Draws will be funded by the master servicer or servicer or other entity
specified in the accompanying prospectus supplement.
Unless specified in the accompanying prospectus supplement, for each
revolving credit loan:
o the finance charge for any billing cycle, in most cases, will be
an amount equal to the aggregate of, as calculated for each day
in the billing cycle, the then-applicable loan rate divided by
365 multiplied by that day's principal balance,
o the account balance on any day in most cases will be the
aggregate of the unpaid principal of the revolving credit loan
outstanding at the beginning of the day, plus all related draws
funded on that day and outstanding at the beginning of that day,
plus the sum of any unpaid finance charges and any unpaid fees,
insurance premiums and other charges, collectively known as
additional charges, that are due on the revolving credit loan
minus the aggregate of all payments and credits that are applied
to the repayment of any draws on that day, and
o the principal balance on any day usually will be the related
account balance minus the sum of any unpaid finance charges and
additional charges that are due on the revolving credit loan.
Payments made by or on behalf of the borrower for each revolving credit
loan, in most cases, will be applied first, to any unpaid finance charges that
are due on the revolving credit loan, second, to any unpaid additional charges
that are due thereon, and third, to any related draws outstanding.
The mortgaged property securing each revolving credit loan will be
subject to the lien created by the related loan in the amount of the outstanding
principal balance of each related draw or portion thereof, if any, that is not
included in the related pool, whether made on or prior to the related cut-off
date or thereafter. The lien will be the same rank as the lien created by the
mortgage relating to the revolving credit loan, and monthly payments,
collections and other recoveries under the credit line agreement related to the
revolving
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credit loan will be allocated as described in the related prospectus supplement
among the revolving credit loan and the outstanding principal balance of each
draw or portion of draw excluded from the pool. The depositor, an affiliate of
the depositor or an unaffiliated seller may have an interest in any draw or
portion thereof excluded from the pool. If any entity with an interest in a draw
or portion thereof excluded from the pool or any other excluded balance were to
become a debtor under the Bankruptcy Code and regardless of whether the transfer
of the related revolving credit loan constitutes an absolute assignment, a
bankruptcy trustee or creditor of such entity or such entity as a
debtor-in-possession could assert that such entity retains rights in the related
revolving credit loan and therefore compel the sale of such revolving credit
loan over the objection of the trust fund and the securityholders. If that
occurs, delays and reductions in payments to the trust fund and the
securityholders could result.
In most cases, each revolving credit loan may be prepaid in full or in
part at any time and without penalty, and the related borrower will have the
right during the related draw period to make a draw in the amount of any
prepayment made for the revolving credit loan. The mortgage note or mortgage
related to each revolving credit loan will usually contain a customary
due-on-sale clause.
As to each revolving credit loan, the borrower's rights to receive
draws during the draw period may be suspended, or the credit limit may be
reduced, for cause under a limited number of circumstances, including, but not
limited to:
o a materially adverse change in the borrower's financial
circumstances;
o a decline in the value of the mortgaged property significantly
below its appraised value at origination; or
o a payment default by the borrower.
However, as to each revolving credit loan, a suspension or reduction
usually will not affect the payment terms for previously drawn balances. The
master servicer or the servicer, as applicable, will have no obligation to
investigate as to whether any of those circumstances have occurred or may have
no knowledge of their occurrence. Therefore, there can be no assurance that any
borrower's ability to receive draws will be suspended or reduced if the
foregoing circumstances occur. In the event of default under a revolving credit
loan, at the discretion of the master servicer or servicer, the revolving credit
loan may be terminated and declared immediately due and payable in full. For
this purpose, a default includes but is not limited to:
o the borrower's failure to make any payment as required;
o any action or inaction by the borrower that materially and
adversely affects the mortgaged property or the rights in the
mortgaged property; or
o any fraud or material misrepresentation by a borrower in
connection with the loan.
The master servicer or servicer will have the option to allow an
increase in the credit limit applicable to any revolving credit loan in certain
limited circumstances. In most cases, the master servicer or servicer will have
an unlimited ability to allow increases provided that the specified conditions
are met including a new appraisal or other indication of value is obtained and
the new combined LTV ratio is less than or equal to the original combined LTV
ratio.
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If a new appraisal is not obtained and the other conditions in the
preceding sentence are met, the master servicer or servicer will have the option
to allow a credit limit increase for any revolving credit loan subject to the
limitations described in the related agreement
The proceeds of the revolving credit loans may be used by the borrower
to improve the related mortgaged properties, may be retained by the related
borrowers or may be used for purposes unrelated to the mortgaged properties.
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
For any series of securities backed by revolving credit loans, the
related trust fund may include either:
o the entire principal balance of each revolving credit loan
outstanding at any time, including balances attributable to daws
made after the related cut-off date, or
o a specified portion of the total principal balance of each
revolving credit loan outstanding at any time, which will consist
of all or a portion of the principal balance thereof as of the
cut-off date minus the portion of all payments and losses
thereafter that are allocated to such balance, and may not
include some portion of the principal balance attributable to
draws made after the cut-off date.
The accompanying prospectus supplement will describe the specific
provisions by which payments and losses on any revolving credit loan will be
allocated as between the trust balance and any portion of the principal balance
of a revolving credit loan, if any, not included in the trust balance at any
time, which will include balances attributable to draws after the cut-off date
and may include a portion of the principal balance outstanding as of the cut-off
date, the excluded balance. Typically, the provisions may:
o provide that principal payments made by the borrower will be
allocated as between the trust balance and any excluded balance
either on a pro rata basis, or first to the trust balance until
reduced to zero, then to the excluded balance, or according to
other priorities specified in the accompanying prospectus
supplement, and
o provide that interest payments, as well as liquidation proceeds
or similar proceeds following a default and any realized losses,
will be allocated between the trust balance and any excluded
balance on a pro rata basis or according to other priorities
specified in the accompanying prospectus supplement.
Even where a trust fund initially includes the entire principal balance
of the revolving credit loans, the related agreement may provide that after a
specified date or on the occurrence of specified events, the trust fund may not
include balances attributable to additional draws made thereafter. The
accompanying prospectus supplement will describe these provisions as well as the
related allocation provisions that would be applicable.
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
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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:
o 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 Freddie Mac certificates,
o guaranteed mortgage pass-through certificates issued and
guaranteed as to timely payment of principal and interest by the
Fannie Mae certificates,
o fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by the
GNMA certificates,
o 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,
o 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
o 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 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 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.
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 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
of these mortgage loans is secured by a one- to four-family residential
property. GNMA will approve the issuance of each GNMA certificate in accordance
with 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 GNMA certificate, even
if the payments received by the GNMA issuer on the FHA Loans or VA Loans
underlying each GNMA certificate are less than the amounts due on each 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 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 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 the 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 the 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 the GNMA certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any 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 the 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 the GNMA certificate will have recourse only against
GNMA to obtain such payment. The trustee or its nominee, as registered holder of
the GNMA certificates held in a trust fund, will have the right to proceed
directly against GNMA under the terms of the guaranty agreements relating to
such GNMA certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I certificate must have
the same interest rate, except for pools of mortgage loans secured by
manufactured homes, over the term of the loan. The interest rate on such GNMA I
certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage
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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 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 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.
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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, referred to together as 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:
o 30 days following foreclosure sale,
o 30 days following payment of the claim by any mortgage insurer,
or
o 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 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
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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 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.
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
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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 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
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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 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 mortgage
participations or pass-through certificates evidencing an undivided interest in
a pool of mortgage loans or 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. The
seller/servicer of the underlying mortgage loans will have entered into the
private mortgage-backed securities with the trustee under such private mortgage-
backed agreement. The private mortgage-backed 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 directly or by one or more subservicers
who may be subject to the supervision of the servicer. The 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 will be a
financial institution or other entity engaged generally in the business of
mortgage lending, a public agency or instrumentality of a state, local or
federal government, or a limited purpose corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the prospectus supplement, the private mortgage-backed securities
issuer may be an affiliate of the depositor. The obligations of the private
mortgage-backed securities issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
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the related trust. Unless otherwise specified in the related prospectus
supplement, the private mortgage- backed securities will not have guaranteed any
of the assets conveyed to the related trust or any of the private
mortgage-backed securities issued under the private mortgage backed 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 trustee or the servicer. The private mortgage-backed
securities issuer or the private mortgage-backed securities 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:
o no mortgage loan will have had a loan-to-value ratio at
origination in excess of 95% (except in the case of high
loan-to-value loans),
o 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 loan-to-value loans),
o each mortgage loan will have had an original term to stated
maturity of not less than 5 years and not more than 40 years,
o 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 agreement,
o 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
o 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 related agreement, letters
of credit, insurance policies or other types of credit support may
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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 the aggregate
approximate principal amount and type of the private mortgage-backed securities
to be included in the trust fund and certain characteristics of the mortgage
loans which comprise the underlying assets for the Private Mortgage-Backed
Securities including
o the payment features of such mortgage loans,
o the approximate aggregate principal balance, if known, of
underlying mortgage loans insured or guaranteed by a governmental
entity,
o the servicing fee or range of servicing fees with respect to the
mortgage loans and
o the minimum and maximum stated maturities of the underlying
mortgage loans at origination,
o the maximum original term-to-stated maturity of the private
mortgage-backed securities,
o the weighted average term-to-stated maturity of the private
mortgage-backed securities,
o the pass-through or certificate rate of the private
mortgage-backed securities,
o the weighted average pass-through or certificate rate of the
private mortgage-backed securities,
o the private mortgage-backed securities issuer, servicer, if other
than the issuer, and the trustee for such private mortgage-backed
securities,
o 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,
o 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
o 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, referred to as a finance company, pursuant
to which:
o the depositor will lend the net proceeds of the sale of the
securities to such finance company,
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o the finance company will pledge trust fund assets owned by it to
secure the loan from the depositor, and
o the depositor will assign the funding agreement, as so secured,
to the trust fund for a series. 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:
o 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
o 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:
o purchase such other trust fund assets and substitute them for the
trust fund assets pledged by the finance company, to the extent
that such purchase and substitution did not adversely affect the
tax treatment of the related series, or
o 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
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.
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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 stripped interest will be in an
amount, as to any distribution date, 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 fund will not be made until the distribution date occurring in
the month following the month of accrual of interest in the case of mortgage
loans, and in later months in the case of agency securities, private
mortgage-backed securities or funding agreements and in the case of a series of
securities having distribution dates occurring at intervals less frequently than
monthly.
Unless otherwise specified in the related prospectus supplement, when a
principal prepayment in full is made on a mortgage loan or a mortgage loan
underlying a private mortgage-backed security, the borrower is charged interest
only for the period from the due date of the preceding monthly payment up to the
date of such prepayment, instead of for a full month. Accordingly, the effect of
principal prepayments in full during any month will be to reduce the aggregate
amount of interest collected that is available for distribution to
securityholders. If so provided in the related prospectus supplement, certain of
the mortgage loans or the mortgage loans underlying a private mortgage-backed
security may contain provisions limiting prepayments hereof or requiring the
payment of a prepayment penalty upon prepayment in full or in part. Unless
otherwise specified in the related prospectus supplement, partial principal
prepayments are applied, other than a revolving credit loan, on the first day of
the month following receipt, with no resulting reduction in interest payable for
the period, other than with respect to a revolving credit loan, 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
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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 outstanding principal balances of revolving credit loans
are, in most cases, much smaller than traditional first lien mortgage loan
balances, and the original terms to maturity of those loans are often shorter
than those of traditional first lien mortgage loans. As a result, changes in
interest rates will not affect the monthly payments on those loans or contracts
to the same degree that changes in mortgage interest rates will affect the
monthly payments on traditional first lien mortgage loans. Consequently, the
effect of changes in prevailing interest rates on the prepayment rates on
shorter-term, smaller balance loans and contracts may not be similar to the
effects of those changes on traditional first lien mortgage loan prepayment
rates, or those effects may be similar to the effects of those changes on
mortgage loan prepayment rates, but to a smaller degree.
For some loans, including revolving credit loans and
adjustable rate mortgage loans, the loan rate at origination may be below the
rate that would result if the index and margin relating thereto were applied at
origination. Under the applicable underwriting standards, the borrower under
each of the loans, other than a revolving credit loan, usually will be qualified
on the basis of the loan rate in effect at origination, and borrowers under
revolving credit loans are usually qualified based on an assumed payment which
reflects a rate significantly lower than the maximum rate. The repayment of any
such loan may thus be dependent on the ability of the borrower to make larger
monthly payments following the adjustment of the loan rate. In addition,
depending upon the use of the revolving credit line and the payment patterns,
during the repayment period, a borrower may be obligated to make payments that
are higher than the borrower originally qualified for. Some of the revolving
credit loans are not expected to significantly amortize prior to maturity. As a
result, a borrower will, in these cases, be required to pay a substantial
principal amount at the maturity of a revolving credit loan.
The prospectus supplement for each series of securities may set forth
additional information regarding yield considerations.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the trust fund assets in a particular
trust fund will vary depending upon the type of mortgage loans underlying or
comprising the trust fund assets in such trust fund. Each prospectus supplement
will contain information with respect to the type and maturities of the trust
fund assets in the related trust fund. Unless otherwise specified in the related
prospectus supplement, all of the single-family loans, revolving credit loans,
cooperative loans and contracts and all of the mortgage loans underlying the
agency securities, private mortgage-backed securities and funding agreements may
be prepaid without penalty in full or in part at any time. If so provided in the
related prospectus supplement, certain of the mortgage loans may contain
provisions prohibiting prepayment for a specified period after the origination
date, a lockout period 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
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mortgaged property. Thus, the rate of prepayments on FHA Loans, VA Loans and
other mortgage loans underlying GNMA certificates may be lower than that of
conventional mortgage loans bearing comparable interest rates.
With respect to a series of securities evidencing interests in the
trust fund including mortgage loans, unless otherwise provided in the related
prospectus supplement, the master servicer generally will enforce any
due-on-sale clause or due-on-encumbrance clause, to the extent it has knowledge
of the conveyance or encumbrance or the proposed conveyance or encumbrance of
the underlying mortgaged property and reasonably believes that it is entitled to
do so under applicable law; provided, however, that the master servicer will not
take any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "Description of the
Securities--Collection and Other Servicing Procedures" and "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" , 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.
There can be no assurance as to the rate of principal payments or draws
on the revolving credit loans. In most cases, the revolving credit loans may be
prepaid in full or in part without penalty. The prospectus supplement will
specify whether loans may not be prepaid in full or in part without penalty. The
rate of principal payments and the rate of draws, if applicable, may fluctuate
substantially from time to time. Such loans may experience a higher rate of
prepayment than typical first lien mortgage loans. Due to the unpredictable
nature of both principal payments and draws, the rates of principal payments net
of draws for those loans may be much more volatile than for typical first lien
mortgage loans.
For any series of securities backed by revolving credit loans,
provisions governing whether future draws on the revolving credit loans will be
included in the trust will have a significant effect on the rate and timing of
principal payments on the securities. The rate at which additional balances are
generated may be affected by a variety of factors. The yield to maturity of the
securities of any series, or the rate and timing of principal payments on the
loans may also be affected by the risks associated with other loans.
As a result of the payment terms of the revolving credit loans or of
the mortgage provisions relating to future draws, there may be no principal
payments on those securities in any given month. In addition, it is possible
that the aggregate draws on revolving credit loans included in a pool may exceed
the aggregate payments of principal on those revolving credit loans for the
related period. If specified in the accompanying prospectus supplement, a series
of securities may provide for a period during which all or a portion of the
principal collections on the revolving credit loans are reinvested in additional
balances or are accumulated in a trust account pending commencement of an
amortization period relating to the securities.
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THE DEPOSITOR
Salomon Brothers Mortgage Securities VII, Inc, as 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 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:
o the location of the multifamily property,
o the availability of competitive lease space and rental income of
comparable properties in the relevant market area,
o the overall economy and demographic features of the geographic
area and
o the mortgagor's prior experience in owning and operating
properties similar to the Multifamily Properties.
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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
to:
o 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
o 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
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 loan-to-value loans are underwritten with an emphasis on the
creditworthiness of the related mortgagor. Such mortgage loans are underwritten
with a limited expectation of recovering any amounts from the foreclosure of the
related mortgaged property.
In the case of a single family loan or multifamily loan secured by a
leasehold interest in a residential property, the title to which is held by a
third party lessor, the mortgage loan seller, or another party on its behalf, is
required to warrant, among other things, that the remaining term of the lease
and any sublease be at least five years longer than the remaining term of the
mortgage loan.
The mortgaged properties may be located in states where, in general, a
lender providing credit on a residential property may not seek a deficiency
judgment against the mortgagor but rather must look solely to
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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 below. 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 BIF
or SAIF of 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:
o that any required hazard insurance was effective at the
origination of each mortgage loan, and that each such policy
remained in effect on the date of purchase of the mortgage loan
from the mortgage loan seller by or on behalf of the depositor;
o that, in the case of single-family loans and multifamily loans,
either:
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o 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
o 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;
o 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 may forgive certain indebtedness of a
borrower;
o 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;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
o that each mortgage loan was current as to all required payments;
and
o that each mortgage loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws
and regulations in all material respects.
If a person other than a mortgage loan seller makes any of the
foregoing representations and warranties on behalf of such mortgage loan seller,
the identity of such person will be specified in the related prospectus
supplement. Any person making representations and warranties on behalf of a
mortgage loan seller shall be an affiliate thereof or such other person
acceptable to the depositor having knowledge regarding the subject matter of
such representations and warranties.
All of the representations and warranties made by or on behalf of a
mortgage loan seller in respect of a mortgage loan will have been made as of the
date on which such mortgage loan seller sold the mortgage loan to or on behalf
of the depositor. A substantial period of time may have elapsed between such
date and the date of initial issuance of the series of securities evidencing an
interest in such mortgage loan. Unless otherwise specified in the related
prospectus supplement, in the event of a breach of any such representation or
warranty, the mortgage loan seller will be obligated to cure such breach or
repurchase or replace the affected mortgage loan as described below. Since the
representations and warranties made by or on behalf of such mortgage loan seller
do not address events that may occur following the sale of a mortgage loan by
such mortgage loan seller, it will have a cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to the date of
such sale. A mortgage loan seller would have no such obligations if the relevant
event that causes such breach occurs after the date of such sale. However, the
depositor will not include any mortgage loan in the trust fund for any series of
securities if anything has come to the depositor's attention that would cause it
to believe that the representations and warranties made in respect of such
mortgage loan will not be accurate and complete in all material respects as of
the date of initial issuance of the related series of securities.
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The only representations and warranties to be made for the benefit of
holders of securities in respect of any mortgage loan relating to the period
commencing on the date of sale of such mortgage loan by the mortgage loan seller
to or on behalf of the depositor will be certain limited representations of the
depositor and of the master servicer described below under "Description of the
Securities--Assignment of Trust Fund Assets". If the master servicer is also a
mortgage loan seller with respect to a particular series, such representations
will be in addition to the representations and warranties made by the master
servicer in its capacity as a mortgage loan seller.
The master servicer and/or trustee will promptly notify the relevant
mortgage loan seller of any breach of any representation or warranty made by or
on behalf of it in respect of a mortgage loan that materially and adversely
affects the value of such mortgage loan or the interests therein of the
securityholders. If such mortgage loan seller cannot cure such breach within 60
days from the date on which the mortgage loan seller was notified of such
breach, then such mortgage loan seller will be obligated to repurchase such
mortgage loan from the trustee within 90 days from the date on which the
mortgage loan seller was notified of such breach, at the purchase price
therefor.
As to any mortgage loan, unless otherwise specified in the related
prospectus supplement, the Purchase Price is equal to the sum of:
o the unpaid principal balance thereof,
o unpaid accrued interest on the stated principal balance 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,
o any unpaid servicing fees and certain unreimbursed servicing
expenses payable or reimbursable to the master servicer with
respect to such mortgage loan,
o any unpaid Retained Interest with respect to such mortgage loan,
o any realized losses, as described below under "Description of the
Securities--Allocation of Losses", incurred with respect to such
mortgage loan, and
o 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".
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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 called the pooling and servicing agreement, among the
depositor, the master servicer if the depositor is not acting as master
servicer, and the trustee named in the prospectus supplement. Each series of
notes evidencing indebtedness of a trust fund consisting of mortgage loans will
be issued pursuant to an indenture between the related issuer and the trustee
named in the prospectus supplement. Such trust fund will be created pursuant to
a 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 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. 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 in this prospectus 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 by this
prospectus and by the related prospectus supplement, unless the context
otherwise requires.
GENERAL
The certificates of each series including any class of certificates not
offered by this prospectus 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 by this prospectus 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 registered
in the name of a
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nominee of the 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:
o such trust fund assets, or interests therein, exclusive of 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;
o 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;
o with respect to trust funds that include mortgage loans,
o property acquired on behalf of the securityholders by
foreclosure, deed in lieu of foreclosure or repossession and
any revenues received thereon;
o 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";
o the rights of the depositor under the agreement or
agreements pursuant to which it acquired the mortgage loans
in such trust fund; and
o the rights of the trustee in any cash advance reserve fund
or surety bond as described under "Advances in respect of
Delinquencies" and
o any letter of credit, mortgage pool insurance policy, special
hazard insurance policy, bankruptcy bond, reserve fund or other
type of credit support provided with respect to the related
series, as described under "Description of Credit Support".
Subject to any limitations described in the related prospectus
supplement, the trust fund 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:
o a single class of securities evidencing the entire beneficial
ownership of or indebtedness of the related trust fund;
o 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 of
subordinate securities to the extent described in the related
prospectus supplement; or
o other types of classes of securities, as described in the related
prospectus supplement.
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A series may include one or more classes of securities entitled to
principal distributions, with disproportionate, nominal or no interest
distributions or 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, referred to as 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 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. See "Description of Credit Support".
Each class of securities, other than certain strip securities, will
have a stated 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 by this prospectus 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 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 in this prospectus. If such an election is made with respect to a
series of certificates, one of the classes of certificates comprising such
series will be designated as evidencing all "residual interests" in the related
REMIC as defined under the Code. All other classes of certificates in such a
series will constitute "regular interests" in the related REMIC as defined in
the Code. As to each series of certificates with respect to which a REMIC
election is to be made, the master servicer or the trustee will be obligated to
take all actions required in order to comply with applicable laws and
regulations and, unless otherwise provided in the related prospectus supplement,
will be obligated to pay any prohibited transaction taxes or contribution taxes
arising out of a breach of its obligations with respect to such compliance
without any right of reimbursement therefor from the trust fund or from any
securityholder. Unless otherwise provided in the related prospectus supplement,
a prohibited transaction tax or contribution tax resulting from any other cause
will be charged against the related trust fund, resulting in a reduction in
amounts otherwise distributable to securityholders. See "Federal Income Tax
Consequences--REMICs-- Prohibited Transactions Tax and Other Taxes".
As to each series, the securities of each class offered by this
prospectus will be rated in one of the four highest rating categories by one or
more nationally recognized statistical rating organizations, referred to as a
rating agency.
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ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of any series of securities, the depositor will
cause the pool of mortgage loans to be 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 the mortgage loans after the
related 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 the assignment of mortgage loans, deliver
the securities to the depositor in exchange for the trust fund assets. Each
mortgage loan will be identified in a schedule appearing as an exhibit to the
related servicing agreement. The schedule of mortgage loans 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 on the mortgage loan, the interest rate net of the
sum of the rates at which the servicing fees and the retained interest, if any,
are calculated, 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 other
information with respect to the mortgage loans.
In addition, the depositor will, with respect to each mortgage loan,
deliver or cause to be delivered to the trustee, or to the custodian on behalf
of the trustee:
(1) With respect to each single-family loan, the mortgage note
endorsed, without recourse, to the order of the trustee or in
blank, the original Mortgage with evidence of recording
indicated thereon and an assignment of the Mortgage to the
trustee or in blank, in recordable form. If, however, a
mortgage loan has not yet been returned from the public
recording office, the depositor will deliver or cause to be
delivered a copy of the Mortgage together with its certificate
that the original of the Mortgage was delivered to the
recording office. 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, recording of the
assignment is not required to protect the trustee's interest
in the mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor,
the master servicer, the relevant mortgage loan seller or any
other prior holder of the mortgage loan.
(2) With respect to each cooperative loan, the cooperative note,
the original security agreement, the proprietary lease or
occupancy agreement, the related stock certificate and related
stock powers endorsed in blank, and a copy of the original
filed financing statement together with an assignment thereof
to the trustee in a form sufficient for filing. 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, filing of the assignment
and financing statement 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 manufactured housing contract, the
original manufactured housing contract endorsed, without
recourse, to the order of the trustee and copies of documents
and instruments related to the manufactured housing contract
and the security interest in the manufactured home securing
the manufactured housing contract, together with a blanket
assignment to the trustee of all manufactured housing
contracts in the related trust fund and the documents and
instruments. In order to give notice of the right, title and
interest of the securityholders to the manufactured housing
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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, the Mortgages with respect to these mortgage loans
either secure a specific obligation for the benefit of a specified person or
secure an instrument transferable by endorsement. Endorsable Puerto Rico
Mortgages do not require an assignment to transfer the related lien. Rather,
transfer of endorsable 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. Puerto Rico Mortgages that secure a
specific obligation for the benefit of a specified person, however, require an
assignment to be recorded with respect to any transfer of the related lien and
the assignment for that purpose would be delivered to the trustee.
The trustee, or the custodian, will review the mortgage loan documents
within a specified period after receipt, and the trustee, or the custodian, will
hold the mortgage loan documents in trust for the benefit of the
securityholders. If any mortgage loan document is found to be missing or
defective in any material respect, the trustee, or the custodian, shall 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 a specified number of days after receipt of
notice, the mortgage loan seller will be obligated to repurchase the related
mortgage loan from the trustee at the purchase price or substitute for the
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 the repurchase or substitution
obligation to the extent described above under "The Depositor's Mortgage Loan
Purchase Program-Representations by or on behalf of Mortgage Loan Sellers;
Remedies for Breach of Representation", neither the master servicer nor the
depositor will be obligated to repurchase or substitute for that mortgage loan
if the mortgage loan seller defaults on its obligation. The assignment of the
mortgage loans to the trustee will be without recourse to the depositor and this
repurchase or substitution obligation constitutes the sole remedy available to
the securityholders or the trustee for omission of, or a material defect in, a
constituent document.
With respect to the mortgage loans in a trust fund, the depositor will
make representations and warranties as to the types and geographical
concentration of the mortgage loans and as to the accuracy in all material
respects of identifying information furnished to the trustee in respect of each
mortgage loan, e.g., original loan-to-value ratio, principal balance as of the
cut-off date, interest rate and maturity. In addition, 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 90 days delinquent as to
payment of principal and interest and no mortgage loan was more than 90 days
delinquent more than once during the previous 12 months. Upon a breach of any
representation of the depositor that materially and adversely affects the value
of a mortgage loan or the interests of the securityholders in the mortgage loan,
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
that mortgage loan as described in the paragraph below.
If the depositor discovers or receives notice of any breach of its
representations or warranties with respect to a mortgage loan, the depositor may
be permitted under the agreement governing the trust fund to remove the mortgage
loan from the trust fund, rather than repurchase the mortgage loan, and
substitute in its place one or more mortgage loans, but only if (a) with respect
to a trust fund for which a REMIC election is to be made, the substitution is
effected within two years of the date of initial issuance of the certificates,
plus permissible extensions, or (b) with respect to a trust fund for which no
REMIC election is to be made, the substitution is effected within 180 days of
the date of initial issuance of the securities. Each substitute mortgage loan
will, on the date of substitution, comply with the following requirements:
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(1) 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,
(2) have an interest rate not less than, and not more than
1% greater than, the interest rate of the deleted
mortgage loan,
(3) have a remaining term to maturity not greater than, and
not more than one year less than, that of the deleted
mortgage loan
(4) have a Lockout Date, if applicable, not earlier than
the Lockout Date on the deleted mortgage loan and
(5) comply with all of the representations and warranties
set forth in the pooling and servicing agreement or
indenture 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 rate at which interest accrued on the deleted
mortgage loan, less the servicing fee rate and the retained interest, if any, on
the difference, 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 (1) above will be determined on the basis of aggregate principal
balances, the rate described in (2) above with respect to deleted mortgage loans
will be determined on the basis of weighted average interest rates, and the
terms described in (3) above will be determined on the basis of weighted average
remaining terms to maturity and the Lockout Dates described in (4) above will be
determined on the basis of weighted average Lockout Dates.
With respect to any series as to which credit support is provided by
means of a mortgage pool insurance policy, in addition to making the
representations and warranties described above, the depositor or the related
mortgage loan seller, or another party on behalf of the related mortgage loan
seller, as specified in the related prospectus supplement, will represent and
warrant to the trustee that no action has been taken or failed to be taken, no
event has occurred and no state of facts exists or has existed on or prior to
the date of the initial issuance of the securities which has resulted or will
result in the exclusion from, denial of or defense to coverage under any
applicable primary mortgage insurance policy, FHA insurance policy, mortgage
pool insurance policy, special hazard insurance policy or bankruptcy bond,
irrespective of the cause of the 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. This representation is referred to in
this prospectus and the related prospectus supplement as the insurability
representation. 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 the affected mortgage loan at the purchase price. 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 in the prospectus supplement. See
"Description of Primary Insurance Policies" and "Description of Credit
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Support" in this prospectus and in the related prospectus supplement for
information regarding the extent of coverage under the aforementioned insurance
policies.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute mortgage loans
constitutes the sole remedy available to the securityholders or the trustee for
any breach of the representations.
The master servicer will make representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the servicing agreement. Upon a breach of any 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 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." Each private mortgage-backed security will be identified in a
schedule appearing as an exhibit to the related agreement which will specify the
original principal amount, outstanding principal balance as of the cut-off date,
annual pass-through rate or interest rate and maturity date for each private
mortgage-backed security conveyed to the trustee.
ASSIGNMENT OF FUNDING AGREEMENTS
The depositor will cause funding agreements to be registered in the
name of the trustee. The trustee or 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" in this prospectus. 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 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. These accounts are collectively referred to in this prospectus and the
related prospectus supplement as the certificate account. The certificate
account must be either:
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o maintained with a bank or trust company, and in a manner,
satisfactory to the rating agency or agencies rating any class of
securities of the series or
o 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 so 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 the 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 servicing agreement as permitted
investments. A certificate account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held in the certificate account may
be invested pending each succeeding distribution date in permitted investments.
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 the
institution meets the standards set forth in the bullet points 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 trust fund asset under 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 or other standards as may be acceptable to the master
servicer. 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 will
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 servicing
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, 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 retained interest:
(1) all payments on account of principal, including
principal prepayments, on the mortgage loans;
(2) all payments on account of interest on the mortgage
loans, net of any portion retained by the master
servicer or by a sub-servicer as its servicing
compensation and net of any retained interest;
(3) all proceeds of the hazard insurance policies and any
special hazard insurance policy, to the extent the
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
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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 and all other amounts
received and retained in connection with the
liquidation of defaulted mortgage loans, by foreclosure
or otherwise, 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;
(4) any amounts required to be paid under any letter of
credit, as described below under "Description of Credit
Support--Letter of Credit";
(5) any advances made as described below under "Advances by
the Master Servicer in respect of Delinquencies on the
Trust Funds Assets";
(6) 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";
(7) any buydown funds, and, if applicable, investment
earnings thereon, required to be deposited in the
certificate account as described in the first paragraph
below;
(8) all proceeds of any mortgage loan or property in
respect of the mortgage loan purchased by the master
servicer, the depositor, any sub-servicer or any
mortgage loan seller as described under "The
Depositor's Mortgage Loan Purchase
Program-Representations by or on behalf of Mortgage
Loan Sellers; Remedies for Breach of Representations"
or "--Assignment of Trust Fund Assets; Review of Files
by Trustee" above, exclusive of the retained interest,
if any, in respect of the mortgage loan;
(9) all proceeds of any mortgage loan repurchased as
described under "--Termination" below;
(10) 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
(11) any amount required to be deposited by the master
servicer in connection with losses realized on
investments for the benefit of the master servicer of
funds held in the certificate account.
With respect to each buydown mortgage loan, the master servicer, or a
sub-servicer, will deposit related buydown funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for certificate
accounts. This account is referred to in this prospectus and the related
prospectus supplement as a buydown account. The terms of all buydown mortgage
loans provide for the contribution of buydown funds in an amount not less than
either (a) the total payments to be made from the buydown funds under the
related buydown plan or (b) if the 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 the buydown funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency in buydown funds 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
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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 the 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.
If 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 the 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 the 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 the insurer and
the insurer pays all of the loss incurred in respect of the default. In the case
of any 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
buydown mortgage loan will be deemed to reduce the amount that would be required
to be paid by the borrower to repay fully the related mortgage loan if the
mortgage loan were not subject to the buydown plan.
PAYMENTS ON AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The agency securities and private mortgage-backed securities included
in a trust fund will be registered in the name of the trustee so that all
distributions thereon will be made directly to the trustee. The trustee will
deposit or cause to be deposited into the certificate account for each trust
fund including agency securities and private mortgage-backed securities as and
when received, unless otherwise provided in the related agreement, all
distributions received by the trustee with respect to the related agency
securities and private mortgage-backed securities, other than payments due on or
before the cut-off date and exclusive of any trust administration fee and
amounts representing the retained interest, if any.
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 and referred to as a
distribution date, commencing with the month following the month in which the
applicable cut-off date occurs. Distributions will be made to the persons in
whose names the securities are registered at the close of business on 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 and referred
to as 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 that 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
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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 by wire transfer in
immediately available funds to the account of a securityholder, if the
securityholder holds securities in the requisite amount specified in the related
prospectus supplement and if the securityholder has so notified the depositor or
its designee no later than the date specified in the related prospectus
supplement. Otherwise, payments will be made by check mailed to the address of
the person entitled to payment as it appears on the security register maintained
by the depositor or its agent. 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 the final distribution. With respect to each series of
certificates or notes, the security register will be referred to as the
certificate register or note register, respectively.
All distributions on the securities of each series on each distribution
date will be made from the available distribution amount described in the next
sentence, in accordance with the terms described in the related prospectus
supplement. The available distribution amount for each distribution date will
equal the sum of the following amounts:
(1) 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,
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received
subsequent to the related Prepayment Period, and
(c) all amounts in the certificate account that are due or
reimbursable to the depositor, the trustee, a mortgage
loan seller, a sub-servicer or the master servicer or
that are payable in respect of specified expenses of
the related trust fund;
(2) if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the certificate
account;
(3) all advances with respect to the distribution date;
(4) if the related prospectus supplement so provides, amounts paid
with respect to interest shortfalls resulting from prepayments
during the related Prepayment Period;
(5) 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
the distribution date; and
(6) any other amounts described in the related prospectus supplement.
The entire available distribution amount will be distributed among the
related securities, including any securities not offered by this prospectus, on
each distribution date, and accordingly will be released from the trust fund and
will not be available for any future distributions.
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INTEREST ON THE SECURITIES
Each class of securities may earn interest at a different 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 distribution in respect of interest on each security, other than principal
only Strip Securities, will be equal to one month's interest on the outstanding
principal balance of the security immediately prior to the distribution date, at
the applicable security interest rate, subject to the following. As to each
Strip Security with no or a nominal principal balance, the distributions in
respect of interest on any distribution date will be on the basis of a notional
amount and equal one month's Stripped Interest. Prior to the time interest is
distributable on any class of Accrual Securities, interest accrued on that class
will be added to the principal balance thereof on each distribution date.
Interest distributions 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
if specified in the related prospectus supplement unless the master servicer is
obligated to cover the shortfalls from its own funds up to its servicing fee for
the related due period. With respect to each series of certificates or notes,
the interest distributions payable will be referred to in the applicable
prospectus supplement as the accrued certificate interest or accrued note
interest, respectively. See "Yield Considerations".
PRINCIPAL OF THE SECURITIES
The principal balance of a security, 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 by this prospectus 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 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 on that security, and, if
and to the extent so provided on the related prospectus supplement, by the
amount of any realized losses, allocated to that security. The initial aggregate
principal balance of a series and each class of securities related to a series
will be specified in the related prospectus supplement. Distributions of
principal will be made on each distribution date to the class or classes of
securities entitled to principal until the principal balance of that class has
been reduced to zero. With respect to a Senior/Subordinate Series, distributions
allocable to principal of a class of securities will be based on the percentage
interest in the related trust fund evidenced by the class, which in turn will be
based on the principal balance of that class as compared to the principal
balance of all classes of securities of the series. Distributions of principal
of any class of securities will be made on a pro rata basis among all of the
securities of the 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 agency security 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
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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. If a pre-funding account is
established, all or a portion of the proceeds of the sale of one or more classes
of securities of the related series will be deposited in such account to be
released as additional mortgage loans are transferred.
A pre-funding account will be required to be maintained as an eligible account
under the related agreement, all amounts therein will be required to be invested
in permitted investments and the amount held therein shall at no time exceed 25%
of the aggregate outstanding principal balance of the securities. The related
agreement or other agreement providing for the transfer of additional mortgage
loans will generally provide that all such transfers must be made within 3
months after the closing date, and that amounts set aside to fund such transfers
whether in a pre-funding account or otherwise and not so applied within the
required period of time will be deemed to be principal prepayments and applied
in the manner set forth in such prospectus supplement.
The depositor will be required to provide data regarding the additional
mortgage loans to the rating agencies and the security insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by such
parties. Transfer of the additional mortgage loans will be further conditioned
upon confirmation by the rating agencies that the addition of such mortgage
loans to the trust fund will not result in the downgrading of the securities or,
in the case of a series guaranteed or supported by a security insurer, will not
adversely affect the capital requirements of such security insurer. Finally, a
legal opinion to the effect that the conditions to the transfer of the
additional mortgage loans have been satisfied.
ALLOCATION OF LOSSES
With respect to any defaulted mortgage loan that is finally liquidated,
through foreclosure sale or otherwise, the amount of the realized loss incurred
in connection with 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 liquidation remaining
after application of the 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 mortgage loans the principal
balances of which have been reduced in connection with bankruptcy proceedings,
the amount of that reduction also will be treated as a realized loss. As to any
series of securities, other than a Senior/Subordinate Series, 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. As to any Senior/Subordinate
Series, realizes losses will be allocated first to the most subordinate class of
securities as described below under "Description of Credit
Support--Subordination".
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of securities, 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 that distribution date unless the master servicer, in good faith, determines
that any advances made will not be reimbursable from proceeds subsequently
recovered on the mortgage loan related to the advance. The amount of each
advance will be equal to the aggregate of payments of 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. In most cases, the
prospectus supplement for a series will also provide that the master servicer
will advance, together with delinquent interest, the aggregate amount of
principal payments that were due during the related Due Period and delinquent as
of the determination date, subject to the same reimbursement determination,
except that, with respect to balloon loans, the master servicer will not have to
advance a delinquent balloon payment.
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Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of securities entitled
to payments, rather than to guarantee or insure against losses. 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 advances were made; provided, however, that any advance will be
reimbursable from any amounts in the certificate account to the extent that the
master servicer shall determine that the advance is not ultimately recoverable
from Related Proceeds. If advances have been made by the master servicer from
excess funds in the certificate account, the master servicer will replace those
funds in the certificate account on any future distribution date to the extent
that funds in the certificate account on that distribution date are less than
payments required to be made to securityholders on that 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 surety bond, will be set forth in the related prospectus
supplement.
Advances in respect of delinquencies will not be made in connection
with revolving credit loans, except as otherwise provided in the related
prospectus supplement.
In the case of revolving credit loans, the master servicer or servicer
is required to advance funds to cover any draws made on a revolving credit loan,
subject to reimbursement by the entity specified in the accompanying prospectus
supplement, provided that as specified in the accompanying prospectus supplement
during any revolving period associated with the related series of securities,
draws may be covered first from principal collections on the other loans in the
pool.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of securities of a
series, the master servicer or the trustee, will forward or cause to be
forwarded to each securityholder, to the depositor and to those other parties as
may be specified in the related servicing agreement, a statement setting forth
the following as of the distribution date:
(1) the amount of the distribution to holders of securities of that
class applied to reduce the principal balance of the securities;
(2) the amount of the distribution to holders of securities of that
class allocable to interest;
(3) the amount of related administration or servicing compensation
received by the trustee or the master servicer and any
sub-servicer and any 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;
(4) if applicable, the aggregate amount of advances included in the
distribution, and the aggregate amount of unreimbursed advances
at the close of business on that distribution date;
(5) the aggregate stated principal balance of the mortgage loans at
the close of business on that distribution date;
(6) 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;
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(7) 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 that month;
(8) 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;
(9) the aggregate principal balance of each class of securities
(including any class of securities not offered by this
prospectus) at the close of business on that distribution date,
separately identifying any reduction in the principal balance due
to the allocation of any realized loss;
(10) the amount of any special hazard realized losses allocated to the
subordinate securities, if any, at the close of business on that
distribution date;
(11) the aggregate amount of principal prepayments made and realized
losses incurred during the related Prepayment Period;
(12) the amount deposited in the reserve fund, if any, on that
distribution date;
(13) the amount remaining in the reserve fund, if any, as of the close
of business on that distribution date;
(14) the aggregate unpaid accrued interest, if any, on each class of
securities at the close of business on that distribution date;
(15) in the case of securities that accrue interest at the variable
rate, the security interest rate applicable to that distribution
date, as calculated in accordance with the method specified in
the related prospectus supplement;
(16) in the case of securities that accrued interest at an adjustable
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
(17) as to any series which includes credit support, the amount of
coverage of each instrument of credit support included in the
trust fund as of the close of business on that distribution date.
In the case of information furnished under subclauses (1)-(3) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
securities or for 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 (1)-(3) above, aggregated for that calendar year or the applicable
portion thereof during which that person was a securityholder. The obligation of
the master servicer or the trustee shall be deemed to
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have been satisfied to the extent that substantially comparable information
shall be provided by the master servicer or the trustee in accordance with any
requirements of the Code as are from time to time in force.
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer, directly or through sub-servicers, will make
reasonable efforts to collect all scheduled payments under the mortgage loans
and will follow or cause to be followed the 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 these procedures are consistent with the
related servicing agreement and any related insurance policy, bankruptcy bond,
letter of credit or other insurance instrument described under "Description of
Primary Insurance Policies" or "Description of Credit Support". Consistent with
this servicing standard, 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 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
modifications of the mortgage loan rather than proceeding with foreclosure. In
making that determination, the estimated realized loss that might result if the
mortgage loan were liquidated would be taken into account. Modifications may
have the effect of reducing the interest rate on the mortgage loan, forgiving
the payment of principal or interest or extending the final maturity date of the
mortgage loan. Any modified mortgage loan may remain in the related trust fund,
and the reduction in collections resulting from the 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 so that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount of the mortgage loan by the
original maturity date based on the original interest rate. Reamortization will
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, has been, or is about to be, conveyed by the borrower, the master
servicer will exercise or cause to be exercised on behalf of the related trust
fund the lender's rights to accelerate the maturity of the mortgage loan under
any due-on-sale or due-on-encumbrance clause applicable to that mortgage loan.
The master servicer will only exercise these rights only if the exercise of any
these 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 a 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 the property has been or is about
to be conveyed or encumbered, under which that person becomes liable under the
mortgage note, cooperative note or manufactured housing 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 a release will not
adversely affect the collectability of the mortgage loan. An ARM Loan may be
assumed if the 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 the ARM Loan would not be impaired by the assumption. If a
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mortgagor transfers the mortgaged property subject to an ARM Loan without
consent, that 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. In connection with any assumption, the terms of the related
mortgage loan may not be changed. See "Legal Aspects of Mortgage
Loans--Enforceability of Provisions".
SUB-SERVICING
Any master servicer may delegate its servicing obligations in respect
of the mortgage loans to third-party servicers, but the master servicer will
remain obligated under the related servicing agreement. Each sub- servicer will
be required to perform the customary functions of a servicer of comparable
loans, including:
o collecting payments from borrowers and remitting the collections
to the master servicer,
o maintaining primary hazard insurance as described in this
prospectus and in any related prospectus supplement,
o filing and settling claims under primary hazard insurance
policies, which may be subject to the right of the master
servicer to approve in advance any settlement,
o maintaining escrow or impoundment accounts of borrowers for
payment of taxes, insurance and other items required to be paid
by any borrower in accordance with the mortgage loan,
o processing assumptions or substitutions where a due-on-sale
clause is not exercised,
o attempting to cure delinquencies,
o supervising foreclosures or repossessions,
o inspecting and managing mortgaged properties, if applicable, and
o maintaining accounting records relating to the mortgage loans.
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 will be consistent with the terms of the related servicing
agreement and will not result in a withdrawal or downgrading of any class of
securities issued in accordance with the related agreement. With respect to
those mortgage loans serviced by the master servicer through a sub-servicer, the
master servicer will remain liable for its servicing obligations under the
related policy and servicing agreement or servicing agreement as if the master
servicer alone were servicing those mortgage loans. Although each sub-servicing
agreement will be a contract solely between the master servicer and the
sub-servicer, the agreement under which a series of securities is issued will
provide that, if for any reason the master servicer for the series of securities
is no longer acting in a servicing capacity, the trustee or any successor master
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing agreement.
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The master servicer will be solely liable for all fees owed by it to
any sub-servicer, irrespective of whether the master servicer's compensation
under the related agreement is sufficient to pay the fees. However, a
sub-servicer may be entitled to a retained interest in mortgage loans. Each
sub-servicer will be reimbursed by the master servicer for expenditures which it
makes, generally to the same extent the master servicer would be reimbursed
under the related servicing agreement. See "Description of the
Securities--Retained Interest, Servicing or Administration 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. 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 reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
mortgage loans. As set forth under "-Collection and Other Servicing Procedures
Employed by the Master Servicer", 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 previously described. 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 policy or special hazard
insurance policy 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 (a) that the restoration will increase the
proceeds to securityholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and (b) that its 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 the 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 those proceedings and which
are reimbursable under the servicing agreement, the trust fund will realize a
loss in the amount of the 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 any 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.
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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 Insurance
Proceeds, prior to distribution of that amount to securityholders, amounts
representing its normal servicing compensation on that 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 those 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 the 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 expenses incurred by the master servicer, no 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 interest rate net of servicing fees and the retained interest, if any. 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 amount is legally permissible, the insurer will exercise its
right under any related mortgage pool insurance policy to purchase the 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. This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring board 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. See
"Legal Aspects of Mortgage Loans-Foreclosure on Cooperatives".
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 from the trust fund assets, and, if
so, the owner of the retained interest. 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 interest rate on the mortgage loan, net of the rates
at which the servicing fees and the retained interest are calculated, on a pari
passu basis.
The master servicer's, or in the case of a trust fund consisting of
agency securities or Private Mortgage- Backed Securities if specified in the
related prospectus supplement, the trustee's, primary compensation with respect
to a series of securities will come from the monthly payment to it, with respect
to each interest payment on a trust fund asset, of an amount equal to one-
twelfth of the servicing fee rate specified in the related prospectus supplement
times the scheduled principal balance of the trust fund asset. Since any
retained interest and the master servicer's primary compensation are percentages
of the scheduled principal balance of each trust fund asset, these 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, late payment charges and , unless otherwise stated in the
prospectus supplement, prepayment penalties, to the
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extent collected from mortgagors. 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 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 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 expenses incurred
by it in connection with the liquidation of defaulted mortgage loans, including
expenditures incurred by it in connection with the restoration of mortgaged
properties, the 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.
EVIDENCE AS TO COMPLIANCE
Each servicing agreement with respect to a series of securities, will
provide that on or before a specified date in each year, the first date being 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 the 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 servicing agreement, was conducted in
compliance with the terms of those 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 the accounting 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 the statement, of firms of
independent public accountants with respect to the related sub-servicer.
Each servicing agreement will also provide for delivery to the trustee,
on or before a specified date in each year, of an annual statement signed by two
officers of the master servicer to the effect that the master servicer has
fulfilled its obligations under the related agreement throughout the preceding
year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by securityholders without
charge upon written request to the master servicer at the address set forth in
the related prospectus supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The master servicer under each pooling and servicing agreement and each
servicing agreement will be named in the related prospectus supplement. The
entity serving as master servicer may be the depositor or an affiliate of the
depositor and may have other normal business relationships with the depositor or
the depositor's affiliates.
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Each pooling and servicing agreement and each servicing agreement will
provide that the master servicer may resign from its obligations and duties
under the related agreement only if such resignation, and the appointment of a
successor, will not result in a downgrading of any class of securities or upon a
determination that its duties under the related agreement are no longer
permissible under applicable law. No such resignation will become effective
until the trustee or a successor servicer has assumed the master servicer's
obligations and duties under the related agreement.
Each pooling and servicing agreement and each servicing agreement will
further provide that neither the master servicer, the depositor nor any
director, officer, employee, or agent of the master servicer or the depositor
will be under any liability to the related trust fund or securityholders for any
action taken, or for refraining from the taking of any action, in good faith
pursuant to the related agreement, or for errors in judgment; provided, however,
that neither the master servicer, the depositor nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each pooling and servicing agreement and each servicing agreement
will further provide that the master servicer, the depositor and any director,
officer, employee or agent of the master servicer or the depositor will be
entitled to indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related agreement or the securities, other than any loss,
liability or expense is related to any specific mortgage loan or mortgage loans,
unless any such loss, liability or expense otherwise reimbursable pursuant to
the related agreement, and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each pooling and servicing agreement and each servicing
agreement will provide that neither the master servicer nor the depositor will
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its respective responsibilities under the related agreement
and which in its opinion may involve it in any expense or liability. The master
servicer or the depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the related
agreement and the rights and duties of the parties thereto and the interests of
the securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the securityholders, and the master servicer or the depositor, as
the case may be, will be entitled to be reimbursed therefor and to charge the
certificate account. Except in the case of a series of senior/subordinate
securities, any such obligation of the securityholders will be borne among them
on a pro rata basis in proportion to the accrued security interest payable
thereto, and, notwithstanding any other provision, their respective
distributions will be reduced accordingly.
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.
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EVENTS OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT
Events of default under each pooling and servicing agreement will
include:
o any failure by the master servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues unremedied for a specified number of business days
after the giving of written notice of the 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;
o 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 a specified
number of days after the giving of written notice of the 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
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and 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 the 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 the agreement and will be
entitled to similar compensation arrangements. 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.
If the trustee is unwilling or unable so to act, it may or, at the
written request of the holders of certificates entitled to at least 51% of the
voting rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the rating
agency with a net worth at the time of the appointment of at least $1,000,000 to
act as successor to the master servicer under the agreement. Pending the
appointment of a successor, the trustee is obligated to act in the capacity of
master servicer. The trustee and any successor master servicer 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 under the agreement unless:
o the certificateholder previously has given to the trustee written
notice of default,
o the holders of certificates evidencing not less than 25% of the
voting rights have made written request upon the trustee to
institute the proceeding in its own name as trustee thereunder,
o have offered to the trustee reasonable indemnity, and
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o the trustee for fifteen days has neglected or refused to
institute a 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 under or in relation to the
agreement at the request, order or direction of any of the
holders of certificates covered by the agreement, unless the
certificateholders have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities
which may be incurred.
SERVICING AGREEMENT
A servicing default under the related servicing agreement will include:
o 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 the series any required payment which
continues unremedied for a specified number of business days
after the giving of written notice of the failure to the master
servicer by the trustee or the Issuer;
o 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 the series of notes which
continues unremedied for a specified number of days after the
giving of written notice of the failure to the master servicer by
the trustee or the issuer;
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings regarding the master
servicer and actions by the master servicer indicating its
insolvency or inability to pay its obligations and
o 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
the termination. Upon termination of the master servicer the trustee will
succeed to all responsibilities, duties and liabilities of the master servicer
under the servicing agreement, other than the obligation to repurchase mortgage
loans, and will be entitled to similar compensation arrangements. If the trustee
would be obligated to succeed the master servicer but is unwilling to so act, it
may appoint, or if it is unable to so 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 $1,000,000 to act as successor to the
master servicer under the servicing agreement. Pending the appointment of a
successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and the 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
An event of default under the indenture will include:
o a default for a specified number of days or more in the payment
of any principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture which continues for a specified
number of days after notice of failure is given in accordance
with the procedures described in the related prospectus
supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
having been incorrect in a material respect as of the time made,
and the breach is not cured within a specified number of days
after notice of breach is given in accordance with the procedures
described in the related prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the issuer; or
o 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 occurs
and is continuing, the trustee or the holders of a majority of the then
aggregate outstanding amount of the notes of the series may declare the
principal amount, or, if the notes of that series are Accrual Securities, the
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 the series
to be due and payable immediately. That declaration may, under the circumstances
set forth in the indenture, 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 the series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been 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
o the holders of 100% of the then aggregate outstanding amount of
the notes of the series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on
the outstanding notes of the series at the date of the sale, or
o the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes
as the payments would have become due if the 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 the series.
If the trustee liquidates the collateral in connection with an event of
default, the indenture may provide that the trustee will have a prior lien on
the proceeds of any liquidation for unpaid fees and expenses. As a
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result, upon the occurrence of 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 an
event of default.
If the principal of the notes of a series is declared due and payable,
the holders of those notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the note
less the amount of the 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 the agreement unless:
o the holder previously has given to the trustee written notice of
default and the default is continuing,
o the holders of notes or equity certificates of any class
evidencing not less than 25% of the aggregate percentage
interests constituting the class (a) have made written request
upon the trustee to institute a proceeding in its own name as
trustee thereunder and (b) have offered to the trustee reasonable
indemnity,
o the trustee has neglected or refused to institute a proceeding
for 60 days after receipt of the request and indemnity, and
o no direction inconsistent with the written request has been given
to the trustee during the 60 day period by the holders of a
majority of the note balances of the 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 at the request, order or
direction of any of the holders of notes or equity certificates
covered by the agreement, unless the 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, and the trustee, upon consent of the provider of credit
support, if any, 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 in the agreement, or to make any other provisions with
respect to matters or questions arising under the agreement which are not
inconsistent with the provisions of the agreement, provided that the 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 amendment may
o 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 the certificate,
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o adversely affect in any material respect the interests of the
holders of any class of certificates in a manner other than as
described in the above bullet point, without the consent of the
holders of certificates of that class evidencing not less than
66% of the aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent
of the holders of all certificates covered by the 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 the 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 to the agreement without the consent
of any of the holders of the notes covered by the agreement, to cure any
ambiguity, to correct, modify or supplement any provision in the agreement, or
to make any other provisions with respect to matters or questions arising under
the agreement which are not inconsistent with the provisions of the agreement,
provided that the action will not adversely affect in any material respect the
interests of any holder of notes covered by the agreement. Each agreement may
also be amended by the parties to the agreement with the consent of the holders
of notes evidencing not less than 66% of the voting rights, for any purpose,
that no amendment may
o 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 that
note,
o adversely affect in any material respect the interests of the
holders of any class of notes in a manner other than as described
in the preceding bullet point, without the consent of the holders
of notes of that class evidencing not less than 66% of the
aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent
of the holders of all notes covered by the 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 under the agreements following the earlier of
o the final payment or other liquidation of the last asset included
in the related trust fund or the disposition of all underlying
property subject to the trust fund assets acquired upon
foreclosure of the trust fund assets, and
o the purchase of all of the assets of the trust fund by the party
entitled to effect the termination, under the circumstances and
in the manner set forth in the related prospectus supplement.
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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 purchase of assets of the trust fund in connection with a
termination, shall be made at the price set forth in the related prospectus
supplement which in most cases will be equal to the greater of:
o the sum of (a) 100% of the stated principal balance of each
mortgage loan as of the day of the purchase plus accrued interest
thereon at the applicable interest rate net of the rates at which
the servicing fees and the retained interest, if any, are
calculated to the first day of the month following the purchase
plus (b) the appraised value of any underlying property subject
to the mortgage loans acquired for the benefit of
securityholders, and
o 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
the termination, in each case taking into account accrued
interest at the applicable interest rate net of the rates at
which the servicing fees and the retained interest, if any, are
calculated to the first day of the month following the purchase.
The exercise of an optimal termination right will effect early
retirement of the securities of that series, but the right of the person
entitled to effect the termination is subject to the aggregate principal balance
of the outstanding trust fund assets for the 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%.
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 described in the preceding paragraph
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 the date
as the Clean-up Call becomes exercisable and thereby effect early retirement of
the securities of the series. Any call of this type will be of the entire trust
fund at one time; multiple calls with respect to any series of securities will
not be permitted. If the call option is exercised, the Call Class must remit to
the trustee a price equal to 100% of the principal balance of the securities
offered by this prospectus as of the day of the purchase plus accrued interest
thereon at the applicable security interest rate during the related period on
which interest accrues on the securities which the trustee will distribute to
securityholders. If funds to terminate 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, an early
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.
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
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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
the documents and to determine whether they conform to the requirements of the
related agreement.
DESCRIPTION OF THE TRUSTEE
The trustee or indenture trustee, each referred to as the trustee,
under each pooling and servicing agreement, trust agreement or indenture will be
named in the related prospectus supplement. 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 that series or for one or
more classes of securities comprising the series, which credit support may
consist of any combination of the following separate components, any of which
may be limited to a specified percentage of the aggregate principal balance of
the mortgage loans covered thereby or a specified dollar amount:
o coverage with respect to realized losses incurred on liquidated
loans;
o coverage 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; and
o coverage with respect to specific actions that may be taken by a
bankruptcy court in connection with a mortgage loan, including a
reduction of the interest rate on a mortgage loan, an extension
of its maturity or a reduction in the principal balance of the
mortgage loan.
As set forth in the following paragraphs and in the related prospectus
supplement, credit support coverage may be provided by subordination of one or
more classes to other classes of securities in a series, one or more insurance
policies, a bankruptcy bond, a letter of credit, a reserve fund,
overcollateralization, cross support, or another method of credit support
described in the related prospectus supplement 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 that
series, and the obligors on the credit support, will be set forth in the related
prospectus supplement. A copy of the policy or agreement, as applicable,
governing the applicable credit support will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the related series.
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 in
the following paragraph, the rights of the subordinate
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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 the series includes more than one class of
subordinate 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 of the applicable subordinate securities has been reduced to
zero. Any additional realized losses will be allocated to the senior securities
or, if the 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, the amount thereof that may be
allocated to the subordinate securities of the related series may be limited to
an amount specified in the related prospectus supplement. If so, any realized
losses of this type in excess of the amount allocable to the subordinate
securities 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 the realized loss was incurred.
As set forth under "Description of the Securities--Distributions of
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 class. The principal
balance of any security will be reduced by all amounts previously distributed on
that security in respect of principal, and by any realized losses allocated to
that security. If there were no realized losses or prepayments of principal on
any of the mortgage loans, the respective rights of the holders of securities of
any series to future distributions would not change. However, to the extent so
provided in the related prospectus supplement, holders of senior securities may
be entitled to receive a disproportionately larger amount of prepayments
received, which will have the effect of accelerating the amortization of the
senior securities and increasing the respective percentage interest in future
distributions evidenced by the subordinate securities in the related trust fund,
with a corresponding decrease in the senior percentage, as well as preserving
the availability of the subordination provided by the subordinate securities. In
addition, as set forth in the paragraph 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, 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 in the preceding paragraphs
and any 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 the series and
the establishment of a reserve fund, any of the other forms of credit support
described in this
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prospectus supplement. If any of the other forms of credit support described
below is maintained solely for the benefit of the senior securities of a
Senior/Subordinate Series, then that coverage described may be limited to the
extent necessary to make required distributions on the senior securities or as
otherwise specified in the related prospectus supplement. If so provided in the
related prospectus supplement, the obligor on any 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 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 those 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 any
differences as will be described in the related prospectus supplement, letters
of credit may cover all or any of the following amounts, in each case up to a
maximum amount set forth in the letter of credit:
(1) 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 (2) below, are not sufficient either to restore
the mortgaged property or to pay the outstanding principal balance of the
mortgage loan plus accrued interest, an amount which, together with all
Liquidation Proceeds, Insurance Proceeds, and other collections on the
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 the liquidated loan,
plus accrued interest at the applicable interest rate net of the rates at which
the servicing fee and retained interest are calculated, 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 the
liquidation loan, which shall be paid to the master servicer;
(2) For 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 the proceeds are not to be applied to restore the
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 the
mortgaged property and (B) the sum of (1) the unpaid principal balance of the
mortgage loan plus accrued interest at the applicable interest rate net of the
rates at which the servicing fees and retained interest, if any, are calculated,
plus (2) the amount of related servicing expenses, if any, not reimbursed to the
master servicer from Insurance Proceeds paid under the related primary hazard
insurance policy or any special hazard insurance policy; and
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(3) For any mortgage loan that has been subject to bankruptcy
proceedings as described above, the amount of any debt service reduction or the
amount by which the principal balance of the mortgage loan has been reduced by
the bankruptcy court.
If the related prospectus supplement so provides, upon payment by the
letter of credit bank 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 (2)(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, 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 (2)(A) above, will remain part of the
related trust fund. The maximum dollar coverages provided under any letter of
credit will each be reduced to the extent of related unreimbursed draws
thereunder.
In the event that the bank that has issued a letter of credit 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
these requirements and providing the same coverage; provided, however, that, if
the fees charged or collateral required by the successor bank shall be more than
the fees charged or collateral required by the predecessor bank, each component
of coverage thereunder may be reduced proportionately to a level as results in
the fees and collateral being not more than the fees then charged and collateral
then required by the predecessor bank.
MORTGAGE POOL INSURANCE POLICY
As to any series of securities to be covered by a mortgage pool
insurance policy with respect to any realized losses on liquidated loans, 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 those 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 in the next paragraph 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:
o 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 the loan-to-value ratio is reduced to 80%;
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o 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;
o 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
o 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 (a) acquire the property securing the defaulted mortgage loan
for a payment equal to the principal balance of the defaulted mortgage loan plus
accrued and unpaid interest at the interest rate on the mortgage loan to the
date of acquisition and 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 under the terms of the applicable primary mortgage insurance policy, or
(b) 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 the expenses exceed the proceeds received from a
sale of the mortgaged property which the insurer has approved. In both (a) and
(b), the amount of payment under a mortgage pool insurance policy will be
reduced by the amount of the 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 (a) 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 (b) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the insurer. A claim must
be paid within a specified period (typically, 30 days) after the claim is made
by the insured.
The amount of coverage under each mortgage pool insurance policy will
generally 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. 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.
See "Legal Aspects of Mortgage Loans--Foreclosure on Mortgages" and
"--Repossession with respect to Manufactured Housing Contracts".
If an insurer under a mortgage pool insurance policy ceases to be a
private mortgage guaranty insurance company duly qualified as such under
applicable laws and approved as an insurer by Freddie Mac or Fannie Mae 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 the mortgage pool insurance policy; provided,
however,
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that if the cost of the replacement policy is greater than the cost of the
original mortgage pool insurance policy, the coverage of the replacement policy
may be reduced to the level that its premium rate does not exceed the premium
rate on the original mortgage pool insurance policy. However, if the insurer
ceases to be a qualified insurer solely because it ceases to be approved as an
insurer by Freddie Mac or Fannie Mae, 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, 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, the policy will not provide
coverage against hazard losses. As set forth in the immediately following
paragraph, 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 the losses. Further, a
special hazard insurance policy, or a letter of credit that covers special
hazard realized losses, will not cover all risks, and the coverage thereunder
will be limited in amount. These 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 losses that are attributable to physical damage to the
mortgaged properties of a type that is not covered by standard hazard insurance
policies, in other words, special hazard realized losses, the related prospectus
supplement may provide that the master servicer will exercise its best
reasonable efforts to maintain or cause to be maintained a special hazard
insurance policy in full force and effect covering the special hazard amount,
unless coverage thereunder has been exhausted through payment of claims;
provided, however, that the master servicer will be under no obligation to
maintain the policy if any insurance instrument covering the series as to any
realized losses on liquidated loans 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 those premiums is otherwise provided for.
Each special hazard insurance policy will, subject to the limitations
described in the next paragraph, protect holders of securities of the related
series from:
o 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
o 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 usually will not cover losses
occasioned by normal wear and tear, war, civil insurrection, governmental
actions, errors in design, nuclear or chemical reaction or contamination, faulty
workmanship or materials, flood, if the property is located in a designated
flood area, and other risks.
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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 (1) the cost of repair to the
property and (2) upon transfer of the property to the insurer, the unpaid
principal balance of the 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 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
(1) of the immediately preceding paragraph will satisfy the condition under an
insurance instrument providing coverage as to credit, or other non-hazard risks,
that the property be restored before a claim thereunder may be validly presented
with respect to the defaulted mortgage loan secured by the property. The payment
described under clause (2) of the immediately preceding paragraph will render
unnecessary presentation of a claim in respect of the mortgage loan under an
insurance instrument providing coverage as to credit, or other non-hazard risks,
as to any realized losses on a liquidated loan. Therefore, so long as the
insurance instrument providing coverage as to credit, or other non-hazard risks,
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 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 the insurer and, to that extent, coverage under the
special hazard insurance policy will be restored. If aggregate claim payments
under a special hazard insurance policy reach the policy limit, coverage
thereunder will be exhausted and any further losses will be borne by
securityholders.
A claim under a special hazard insurance policy generally must be filed
within a specified number of days, typically 60 days, after the insured has
acquired good and merchantable title to the property, and a claim payment is
payable within a specified number of days, typically 30 days, after a claim is
accepted by the insurer. Special hazard insurance policies provide that no claim
may be paid unless primary hazard insurance policy premiums, flood insurance
premiums, if the property is located in a federally designated flood area, and,
as approved by the insurer, real estate property taxes, property protection and
preservation expenses and foreclosure or repossession costs have been paid by or
on behalf of the insured, and unless the insured has maintained the primary
hazard insurance policy and, if the property is located in a federally
designated flood area, flood insurance, as required by the special hazard
insurance policy.
If a special hazard insurance policy is canceled 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 that special hazard insurance
policy with a total coverage that is equal to the then existing coverage of the
replaced special hazard insurance policy; provided, however, that if the cost of
the replacement policy is greater than the cost of that special hazard
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insurance policy, the coverage of the replacement policy may be reduced to a
level so that its premium rate does not exceed the premium rate on that special
hazard insurance policy.
Since each special hazard insurance policy is designed to permit full
recoveries as to any realized losses on liquidated loans under a credit
insurance instrument in circumstances in which 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
governing the trust fund will provide 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 actions that may be taken by a bankruptcy court in connection with a
mortgage loan, 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 those 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 "Legal Aspects of Mortgage Loans--Foreclosure on Mortgages" and
"--Repossession with respect to Manufactured Housing Contracts".
FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance, if any, with respect to a series of
securities will be provided by one or more insurance companies. The financial
guarantee insurance will guarantee, with respect to one or more classes of
securities of the related series, timely distributions of interest and full
distributions of principal on the basis of a schedule of principal distributions
set forth in or determined in the manner specified in the related prospectus
supplement. If so specified in the related prospectus supplement, the financial
guarantee insurance will also guarantee against any payment made to a
securityholder that is subsequently recovered as a voidable preference payment
under federal bankruptcy law. A copy of the financial guarantee insurance policy
for a series, if any, will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the securities of the related series.
RESERVE FUND
If so provided in the related prospectus supplement, the depositor will
deposit or cause to be deposited in an account, a reserve fund, any combination
of cash, one or more irrevocable letters of credit or one or more permitted
investments in specified amounts, or any other instrument satisfactory to the
rating agency or agencies, which will be applied and maintained in the manner
and under the conditions specified in the prospectus supplement. In the
alternative or in addition to a deposit, the prospectus supplement for a
Senior/Subordinate Series may provide that, a reserve fund 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
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other purposes, in the manner specified in the related prospectus supplement. A
reserve fund will typically 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.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest
collections on the mortgage loans may exceed interest payments on the securities
for the related distribution date. The excess interest may be deposited into a
reserve fund or applied as an additional payment of principal on the securities.
If excess interest is applied as principal payments on the securities, the
effect will be to reduce the principal balance of the securities relative to the
outstanding balance of the mortgage loans, thereby creating
overcollateralization and additional protection to the securityholders, as
specified in the related prospectus supplement. If so provided in the related
prospectus supplement, overcollateralization may also be provided on the date of
issuance of the securities by the issuance of securities in an initial aggregate
principal amount which is less than the aggregate principal amount of the
mortgage loans in the related trust fund.
CROSS-SUPPORT FEATURES
If the trust fund assets for a series are divided into separate asset
groups, the beneficial ownership of which is evidenced by a separate class or
classes of a series, credit support may be provided by a cross-support feature
which requires that distributions be made on senior securities evidencing the
beneficial ownership of one asset group prior to distributions on subordinate
securities evidencing the beneficial ownership interest in another asset group
within the trust fund. The related prospectus supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying that cross-support feature. As to any trust fund that includes a
cross-support feature, only assets of the trust fund will be used to provide
cross-support, and cross-support will be provided only to securities issued by
the trust fund. A trust fund will not provide a cross-support feature that
benefits securities issued by any other trust fund, and a trust fund will not
receive cross-support from any other trust fund.
CASH FLOW AGREEMENTS
If so provided in the related prospectus supplement, the trust fund may
include other agreements, such as guarantees, 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 and on one or more classes of
securities. The principal terms of any agreement of this type, and the identity
of each obligor, will be described in the prospectus supplement for a series of
securities.
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DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each mortgage loan will be covered by a primary hazard insurance policy
and, if required as described in the paragraphs following, a primary mortgage
insurance policy.
PRIMARY MORTGAGE INSURANCE POLICIES
As set forth under "Description of the Securities--Procedures for
Realization Upon Defaulted Mortgage Loans", the master servicer will maintain or
cause to be maintained with respect to each mortgage loan, a primary mortgage
insurance policy in accordance with the underwriting standards described in this
prospectus 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 approved expenses, over a specified percentage of
the value of the related mortgaged property.
As conditions 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, to:
o advance or discharge (a) hazard insurance premiums and (b) as
necessary and approved in advance by the insurer, real estate
taxes, property protection and preservation expenses and
foreclosure and related costs,
o 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
o tender to the insurer good and merchantable title to, and
possession of, the mortgaged property.
PRIMARY HAZARD INSURANCE POLICIES
Each pooling and servicing agreement and servicing 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. The primary hazard coverage
will be in general in an amount equal to the lesser of the principal balance
owing on the 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 in the paragraph below, and upon the borrower furnishing
information to the master servicer in respect of a claim.
All amounts collected by the master servicer under any primary hazard insurance
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, and subject to the terms and conditions
of the related Mortgage and mortgage note, will be deposited in the certificate
account. The agreement will provide that the master servicer may satisfy its
obligation to cause each borrower to maintain a hazard insurance policy by the
master servicer's maintaining a blanket policy insuring against hazard losses on
the mortgage loans. If the blanket policy contains a deductible clause, the
master servicer will deposit in the
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certificate account all sums that would have been deposited in the certificate
account but for that 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 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 hazard insurance 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 some cases, vandalism. This list is merely
indicative of the 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 and flood insurance is available, each agreement will
require the master servicer to cause the borrower to acquire and maintain flood
insurance in an amount equal in general to the lesser of (a) the amount
necessary to fully compensate for any damage or loss to the improvements which
are part of the mortgaged property on a replacement cost basis and (b) 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, the co-insurance clause generally provides that
the insurer's liability in the event of partial loss does not exceed the lesser
of (a) the replacement cost of the improvements less physical depreciation and
(b) the proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the 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. However, if a cooperative and the related
borrower on a cooperative note do not maintain hazard insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to the related borrower's
cooperative apartment or the cooperative's building could significantly reduce
the value of the collateral securing the 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, hazard insurance proceeds collected
in connection with a partial loss may be insufficient to restore fully the
damaged property. The terms of the mortgage loans provide that 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
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to present or cause to be presented these 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 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, a number of the mortgage loans
will be insured by the FHA.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase any
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of that debenture.
The master servicer will be required to take steps as are reasonably
necessary to keep FHA insurance in full force and effect.
VA GUARANTEES
The United States Department of Veterans Affairs is an Executive Branch
Department of the United States, headed by the Secretary of Veterans Affairs.
The VA currently administers a variety of federal assistance programs on behalf
of eligible veterans and their dependents and beneficiaries. The VA administers
a loan guaranty program under which the VA guarantees a portion of loans made to
eligible veterans. If so provided in the prospectus supplement, a number 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. The 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 the VA and no realistic
alternative to foreclosure is developed by the loan holder or through the VA s
supplemental servicing of the loan, the VA determines, through an economic
analysis, whether the 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 steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
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LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of legal aspects of
loans secured by residential properties. Because these legal aspects are
governed in part by applicable state law, which laws may differ substantially
from state to state, 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. If there is a
concentration of the mortgage loans included in a trust fund in a particular
state, the prospectus supplement for the related series of securities will
discuss any laws of that state that could materially impact the interest of the
securityholders.
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, 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
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property to the grantee until such time as the underlying debt is repaid. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust, security deed or deed to secure debt are governed by the law of the
state in which the real property is located, the express provisions of the
mortgage, deed of trust, security deed or deed to secure debt and, in some
cases, the directions of the beneficiary.
LEASES AND RENTS
Mortgages and deeds of trust which encumber multifamily property often
contain an assignment of rents and leases, pursuant to which the borrower
assigns its right, title and interest as landlord under each lease and the
income derived therefrom to the lender, while retaining a license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and appoint a receiver
before becoming entitled to collect the rents.
Even after a foreclosure or the enforcement of an assignment of rents
and leases, the potential rent payments from the property may not be sufficient
to service the mortgage debt. For instance, the net income that would otherwise
be generated from the property may be insufficient to service the mortgage debt
if the leases on the property are at below-market rents, or as the result of
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 underlying land, or one or the other, the
cooperative, as project mortgagor, is also responsible for meeting these blanket
mortgage 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.
There may be a lease on the underlying land and the cooperative, as lessee, is
also responsible for meeting the rental obligation. 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 (a) 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 (b) 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 the 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.
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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 the tenant-stockholder's
pro rata share of the cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by an assignment of and a security interest in the occupancy agreement
or proprietary lease and a security interest in the related cooperative shares.
The lender generally takes possession of the share certificate and a counterpart
of the proprietary lease or occupancy agreement and a financing statement
covering the proprietary lease or occupancy agreement and the cooperative shares
is filed in the appropriate state and local offices to perfect the lender's
interest in its collateral. 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 as described under "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. 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 the 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 the 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 servicing
agreement to effect the 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. If the master
servicer fails, due to clerical errors or otherwise, to effect the 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 manufactured housing 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 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, manufactured housing 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
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title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home that is prior to
the security interest originally retained by the seller and transferred to the
depositor.
The depositor will assign or cause to be assigned a security interest
in the manufactured homes to the trustee, on behalf of the securityholders.
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, an assignment is an
effective conveyance of a security interest in a manufactured home 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 several states there exists a risk that, in the absence of an amendment to
the certificate of title, the 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, the security interest would be subordinate to 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.
If the owner of a manufactured home moves it to a state other than the
state in which the 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 the relocation and thereafter until the owner
re-registers the manufactured home in that state. If the owner were to relocate
a manufactured home to another state and re- register the manufactured home in
the new state, and if the depositor did not take steps to re-perfect its
security interest in the new 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 the 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 servicing agreement, the master servicer will be
obligated to take those steps, at the master servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
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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 liens of that type with respect to any manufactured home
securing a manufactured home loan. However, liens could arise at any time during
the term of a manufactured home loan. No notice will be given to the trustee or
securityholders in the event a lien for repairs arises.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust,
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In several 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 several 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, several 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. A mortgagor is usually 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 established a
waiver of fraud, bad faith, oppressive or unconscionable conduct warranted a
court of equity to refuse affirmative relief to the mortgagee. A court of equity
may relieve the mortgagor from an entirely technical default where the default
was not willful.
A foreclosure action or sale in accordance with 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 in accordance with 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 the
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
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burdens of ownership, including obtaining casualty insurance, paying taxes and
making repairs at its own expense as are necessary to render the property
suitable for sale. Depending upon market conditions, the ultimate proceeds of
the sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages if the mortgagor is in
default thereunder. In either event the amounts expended will be added to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, if 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 some governmental liens. The
proceeds received by the referee or trustee from the sale are applied first to
the costs, fees and expenses of sale, real estate taxes 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
proceedings.
If the master servicer were to foreclose on any junior lien it would do
so subject to any related senior lien. In order for the debt related to the
junior mortgage loan to be paid in full at the sale, a bidder at the foreclosure
sale of the junior mortgage loan would have to bid an amount sufficient to pay
off all sums due under the junior mortgage loan and the senior lien or purchase
the mortgaged property subject to the senior lien. If proceeds from a
foreclosure or similar sale of the mortgaged property are insufficient to
satisfy all senior liens and the junior mortgage loan in the aggregate, the
trust fund as the holder of the junior lien and, accordingly, holders of one or
more classes of related securities bear (1) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (2) the risk of
loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in a jurisdiction. In addition, liquidation
expenses with respect to defaulted junior mortgage loans do not vary directly
with the outstanding principal balance of the loans 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 that would be the case with the defaulted junior
mortgage loan having a large remaining principal balance.
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 a few 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, for example, the borrower's failure to adequately maintain the
property or the borrower's execution of a
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second mortgage or deed of trust affecting the property. Finally, a few 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 mortgaged property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of these 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 the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the 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 the sale. This 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 canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by the 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 the
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,
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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 the 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 the
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Under the laws applicable in most states, foreclosure on the
cooperative shares is accomplished by a sale in accordance with the provisions
of Article 9 of the UCC and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
commercially reasonable manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO CONTRACTS
Repossession of manufactured housing is governed by state law. A few
states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the manufactured
home in the event of a default by the obligor will generally be governed by the
UCC. 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 minimal ways, the general repossession procedure established by the UCC is as
follows:
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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
pursuant to a peaceable retaking without court order, voluntary repossession or
through judicial process by means of repossession under a court-issued writ of
replevin. The self-help 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 if 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.
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.
Sale proceeds are to be applied first to repossession expenses like
those expenses incurred in retaking, storage, preparing for sale including
refurbishing costs and selling, and then to satisfaction of the indebtedness.
While several 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 deficiency
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.
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.
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.
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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 several states, after sale in accordance with a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and 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 several 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 several 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
Several states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In several 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
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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 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 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. Several 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 the modifications may include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule and
reducing the lender's security interest to the value of the residence, thus
leaving the lender a general unsecured creditor for the difference between the
value of the residence and the outstanding balance of the loan. Federal
bankruptcy law and limited case law indicate that the foregoing modifications
could not be applied to the terms of a loan secured by property that is the
principal residence of the debtor. In all cases, the secured creditor is
entitled to the value of its security plus post-petition interest, attorneys'
fees and costs to the extent the value of the security exceeds the debt.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission 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 several
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 that
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 the claim below the appraised value of the property at the
time the security interest was made. A strong dissent by some 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 the mortgages are protected from modification such as
those senior mortgages not subject to modification
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under 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 included in a trust fund and the
enforcement of rights therein.
Several tax liens arising under the Code, may 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 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 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. This liability may affect assignees of the
mortgage loans. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding loans against either
originators or assignees.
In addition, the mortgage loans included in a trust fund may also be
subject to the Home Ownership and Equity Protection Act of 1994, if the 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 prescribed levels. The Homeownership Act requires
additional disclosures, specifies the timing of the disclosures and limits or
prohibits inclusion of specific 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. Several 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
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
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proceedings by the holder of the senior mortgage or the sale in accordance with
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".
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. If there is 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 sums, these sums will generally
have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation Z, the Equal Credit Opportunity Act,
Regulation B, the Fair Credit Reporting Act, the Real Estate Settlement
Procedures Act, Regulation X, the Fair Housing Act and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to comply
with their provisions. This liability may affect an assignee's ability to
enforce a contract. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding the contracts against either
the originators or assignees. Further, if the manufactured housing 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. Federal and state
law may specifically limit the amount of late charges that may be collected.
Unless the prospectus supplement indicates otherwise, under the related
servicing 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
has the effect of subjecting a seller, and 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
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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 manufactured housing contracts in a trust fund will be
subject to the requirements of the FTC Rule. Accordingly, the trustee, as holder
of the manufactured housing 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 manufactured housing contract. If an obligor
is successful in asserting this type of claim or defense, and if the mortgage
loan seller had or should have had knowledge of that claim or defense, the
master servicer will have the right to require the mortgage loan seller to
repurchase the manufactured housing 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
manufactured housing contract. The mortgage loan seller would then have the
right to require the originating dealer to repurchase the manufactured housing
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 or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a home, and as part of the rehabilitation plan reduce
the amount of the secured indebtedness to the market value of the home at the
time of bankruptcy, as determined by the court, leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
ENFORCEABILITY OF PROVISIONS
The mortgage loans in a trust fund will in most cases 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 several 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. This legislation, subject to 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 another rate less than the average of the
original rate and the market rate.
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, even though a transfer of the property may have occurred.
These include intra-family transfers, some 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 in accordance with a
due-on-sale clause.
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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
mortgage loans that may be outstanding until maturity.
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. However, this exception applies only to transfers of property
underlying these window period loans occurring between October 15, 1982 and
October 15, 1985 and does not restrict enforcement of a due-on-sale clause in
connection with current transfers of property underlying window period loans
unless the property underlying such window period loan is located in one of the
five "window period states" identified below. Due-on-sale clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Federal Home
Loan Bank Board, predecessor to the Office of Thrift Supervision, which preempt
state law restrictions on the enforcement of due-on-sale clauses. mortgage loans
originated by such institutions are therefore not deemed to be window period
loans.
With the expiration of the exemption for window period loans on October
15, 1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the window period, which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. Freddie Mac has
taken the position in its published mortgage servicing standards that, out of a
total of eleven window period states, five states, Arizona, Michigan, Minnesota,
New Mexico and Utah, have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due- on-sale clauses with
respect to certain categories of window period loans. The Garn-St Germain Act
also sets forth nine specific instances in which a mortgage lender covered by
the Garn-St Germain Act (including federal savings and loan associations and
federal savings banks) may not exercise a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. These include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, 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 the contracts by the obligee on the contract upon any sale or
transfer that is not consented to. The master servicer will, to the extent it
has knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the related
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manufactured housing contract through enforcement of due-on-sale clauses,
subject to applicable state law. 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 manufactured housing
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 exceptions and conditions, state laws prohibiting
enforcement of due-on-sale clauses applicable to the manufactured homes.
Consequently, the master servicer may be prohibited from enforcing a due-on-sale
clause in respect of those manufactured homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, mortgage loans may be prepaid in full or in part without
penalty. Generally, multifamily loans may contain provisions limiting
prepayments on such loans, including prohibiting prepayment for a specified
period after origination, prohibiting partial prepayments entirely or requiring
the payment of a prepayment penalty upon prepayment in full or in part. The
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage to a refinancing lender.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans.
In addition, if the junior loan permits recourse to the mortgagor, as junior
loans often do, and the senior loan does not, a mortgagor may be more likely to
repay sums due on the junior loan than those on the senior loan. Second, acts of
the senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the mortgagor and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent an existing junior lender is harmed
or the mortgagor is additionally burdened. Third, if the mortgagor defaults on
the senior loan or any junior loan, or both, 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 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. Several states have taken action
to reimpose interest rate limits or to limit discount points or other charges.
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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 the mortgage
loans, any such limitation under the state's usury law would not apply to the
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 that state action will be eligible
for inclusion in a trust fund if the 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 do not apply to any loan that is secured by a first lien on
specific kinds of manufactured housing. The manufactured housing contract would
be covered if they satisfy 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 manufactured housing 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 and revolving credit loans originated by non-federally
chartered lenders have historically been subject to a variety of restrictions.
Such restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender complied with applicable law. These difficulties were
simplified substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act. Title VIII provides that, notwithstanding any state law to
the contrary:
o state-chartered banks may originate "alternative mortgage
instruments" (including ARM Loans and revolving credit loans) in
accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage
instruments by national banks,
o 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
o 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.
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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 and revolving
credit 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 and revolving credit 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 and revolving credit 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 components of manufactured housing such 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 manufactured housing 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
manufactured housing contract and may be unable to collect amounts still due
under the manufactured housing contract. The successful assertion of this type
of claim will constitute a breach of a representation or warranty of the
mortgage loan seller, and the securityholders would suffer a loss only to the
extent that:
o the mortgage loan seller breached its obligation to repurchase
the manufactured housing contract in the event an obligor is
successful in asserting the claim, and
o the mortgage loan seller, the depositor or the trustee were
unsuccessful in asserting any claim of contribution or
subrogation on behalf of the securityholders against the
manufacturer or other persons who were directly liable to the
plaintiff for the damages.
Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from the
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, a borrower who enters military service after the origination of that
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 that 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 the applicable 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 specified in the related prospectus supplement, any form of
credit support provided in connection with the 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, cooperation loan or
enforce rights under a manufactured housing contract during the borrower's
period of active duty status, and, sometimes, during an additional three month
period thereafter. Thus, if the Relief Act applies to any mortgage loan that
goes into default, there may be delays in payment and losses incurred by the
related securityholders.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended, and under several state laws, 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 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 become
owners of collateral property, courts are inconsistent as to whether that
ownership renders the secured creditor exemption unavailable. Other federal and
state laws may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates a
mortgaged property on which contaminants other than CERCLA hazardous substances
are present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Environmental cleanup costs may be
substantial. It is possible that the 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,
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there are federal statutes and state statutes that impose an environmental lien
for any cleanup costs incurred by the state on the property that is the subject
of the cleanup costs. All subsequent liens on a property generally are
subordinated to 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 fund in a related parcel of real property that is
subject to 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 these kinds of evaluations prior to the origination
of the mortgage loans. Neither the master servicer nor any replacement servicer
will be required by any servicing agreement to undertake any environmental
evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The
master servicer will 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. 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 a 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 statute can be seized by the government if the property
was used in or purchased with the proceeds of these crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984 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: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in or purchased with the proceeds of illegal drug or RICO
activities.
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 and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Thacher Proffitt & Wood,
counsel to the depositor, with respect to the material federal income tax
consequences of the purchase, ownership and disposition of the securities
offered under this prospectus and the prospectus supplement. This discussion is
for securityholders that hold the securities as capital assets within the
meaning of Section 1221 of the Code and does not purport to discuss all federal
income tax consequences that may be applicable to the individual circumstances
of banks, insurance companies, foreign investors, tax-exempt organizations,
dealers in securities or currencies, mutual funds, real estate investment
trusts, S corporations, estates and trusts, securityholders that hold the
securities as part of a hedge, straddle or, an integrated or conversion
transaction, or securityholders whose functional currency is not the United
States dollar.
The authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Prospective investors should note that no rulings have been
or will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the IRS will
not take contrary positions. Taxpayers and preparers of tax returns 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 (1) 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 (2) is directly relevant to the determination of an
entry on a tax return. Accordingly, it is suggested 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 in
this prospectus. In addition to the federal income tax consequences described in
this prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
securities. See "State and Other Tax Consequences."
The following discussion addresses securities of four general types:
o REMIC certificates representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a
REMIC under the REMIC Provisions of the Code,
o notes representing indebtedness of an owner trust for federal
income tax purposes,
o Grantor Trust Certificates representing interests in a Grantor
trust fund as to which no REMIC election will be made,
o Partnership Certificates representing interests in a Partnership
trust fund which is treated as a partnership for federal income
tax purposes, and
o Debt Certificates representing indebtedness of a Partnership
trust fund for federal income tax purposes.
The prospectus supplement for each series of certificates will indicate
whether one or more REMIC elections will be made for the related trust fund and
will identify all regular interests and residual interests in the REMIC or
REMICs. For purposes of this tax discussion, references to a securityholder or a
holder are to the beneficial owner of a security.
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The following discussion is based in part upon the OID Regulations and
in part upon REMIC Regulations. The OID Regulations do not adequately address
issues relevant to the offered securities. As described at "Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount," in some instances the
OID Regulations provide that they are not applicable to securities like the
offered securities.
REMICS
CLASSIFICATION OF REMICS. On or prior to the date of the related
prospectus supplement with respect to the issuance of each series of REMIC
Certificates, counsel to the depositor will provide its opinion that, assuming
compliance with all provisions of the related pooling and servicing agreement,
for federal income tax purposes, the related trust fund or each applicable
portion of the related trust fund will qualify as a REMIC and the offered REMIC
Certificates will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in that REMIC within the meaning of
the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for status as a REMIC during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and for later years. In that event, the 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 under "Taxation
of Owners of REMIC Regular Certificates" and "Taxation of Owners of REMIC
Residual Certificates". Although the Code authorizes the Treasury Department to
issue regulations providing relief in the event of an inadvertent termination of
REMIC status, these regulations have not been issued. If these regulations are
issued, relief in the event of an inadvertent termination may be accompanied by
sanctions, which may include the imposition of a corporate tax on all or a
portion of the REMIC's income for the period in which the requirements for
status as a REMIC 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. Except as
provided in the following sentence, 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 as the
assets of the REMIC underlying the certificates. If 95% or more of the assets of
the REMIC qualify for either of the treatments described in the previous
sentence 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 the
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 if
transferred to another REMIC on its startup day in exchange for regular or
residual interests of that REMIC. The determination as to the percentage of the
REMIC's assets that constitute assets described in these sections of the Code
will be made for each calendar quarter based on the average adjusted basis of
each category of the assets held by the REMIC during the calendar quarter. The
trustee will report those determinations to certificateholders in the manner and
at the times required by Treasury regulations.
The assets of the REMIC will include mortgage loans, payments on
mortgage loans held prior to the distribution of these payments to the REMIC
Certificates and any property acquired by foreclosure held prior to the sale of
this property, and may include amounts in reserve accounts. It is unclear
whether property acquired by foreclosure held prior to the sale of this property
and amounts in reserve accounts would be considered to be part of the mortgage
loans, or whether these assets otherwise would receive the same
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treatment as the mortgage loans for purposes of all of the Code sections
discussed in the immediately preceding paragraph. The related prospectus
supplement will describe the mortgage loans that may not be treated entirely as
assets described in the sections of the Code discussed in the immediately
preceding paragraph. 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 a series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes, creating a tiered REMIC
structure. As to each series of REMIC Certificates that is a tiered REMIC
structure, in the opinion of counsel to the depositor, assuming compliance with
all provisions of the related pooling and servicing agreement, each of the
REMICs in that series will qualify as a REMIC and the REMIC Certificates issued
by these REMICs will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be real estate assets within the meaning of Section 856(c)(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 the certificates is interest described in
Section 856(c)(3)(B) of the Code, all of the REMICs in that series will be
treated as one REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL. Except as described in "Taxation of Owners of REMIC Residual
Certificates--Possible Pass- Through of Miscellaneous Itemized Deductions,"
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 ordinarily
report income under a cash method of accounting will be required to report
income for REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. A REMIC Regular Certificate may be issued with
original issue discount within the meaning of Section 1273(a) of the Code. Any
holder of a REMIC Regular Certificate issued with original issue discount will
be required to include original issue discount in income as it accrues, in
accordance with the constant yield method, in advance of the receipt of the cash
attributable to that income if the original issue discount exceeds a de minimis
amount. In addition, Section 1272(a)(6) of the Code provides special rules
applicable to REMIC Regular Certificates and 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 for
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 that 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 in the preceding paragraph, those regulations
have not been issued. The committee report indicates that the regulations will
provide that the Prepayment Assumption used for a REMIC Regular Certificate must
be the same as that used in pricing the initial offering of the REMIC Regular
Certificate. 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,
none of the depositor, the
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master servicer or 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.
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 class of REMIC Regular
Certificates is sold for cash on or prior to the closing date, the issue price
for that class will be the fair market value of that 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 the 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, 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 the 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
the REMIC Regular Certificates. If the original issue discount rules apply to
the certificates in a particular series, the related prospectus supplement will
describe the manner in which these rules will be applied with respect to the
certificates in that series that bear an adjustable interest rate in preparing
information returns to the certificateholders and the IRS.
The first interest payment on a REMIC Regular Certificate may be made
more than one month after the date of issuance, which is a period longer than
the subsequent monthly intervals between interest payments. Assuming the accrual
period for original issue discount is each monthly period that ends on the day
prior to each distribution date, 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.
If the accrued interest to be paid on the first distribution date is
computed for a period that begins prior to the closing date, a portion of the
purchase price paid for a REMIC Regular Certificate will reflect the accrued
interest. In these cases, information returns to the certificateholders and the
IRS will take the position that the portion of the purchase price paid for the
interest accrued for periods prior to the closing date is part of the overall
cost of the REMIC Regular Certificate, and not 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 the REMIC Regular Certificate. However, the OID
Regulations state that all or a portion of the 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 this 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 a REMIC Regular Certificate is computed as the sum
of the amounts determined, as to each
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payment included in the stated redemption price of the REMIC Regular
Certificate, by multiplying (1) the number of complete years from the issue date
until that payment is expected to be made, presumably taking into account the
Prepayment Assumption, by (2) 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 the 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 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 the de minimis original issue discount
attributable to that certificate and a fraction, the numerator of which is the
amount of the 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 this 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 the 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 the 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 described in the following
paragraph.
An accrual period is a period that ends on the day prior to a
distribution date and begins on the first day following the immediately
preceding accrual period, except that the first accrual period begins on the
closing date. As to each accrual period, a calculation will be made of the
portion of the original issue discount that accrued during the accrual period.
The portion of original issue discount that accrues in any accrual period will
equal the excess of (1) 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 in future periods and (b) the distributions made on the
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (2) the adjusted issue price of the REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
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, using a discount rate equal to the original yield to
maturity of the certificate and 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 the certificate, increased by the aggregate amount of
original issue discount that accrued with respect to the certificate in prior
accrual periods, and reduced by the amount of any distributions made on the
certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual period
will be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for that day.
If a REMIC Regular Certificate issued with original issue discount is
purchased at a cost, excluding any portion of the cost attributable to accrued
qualified stated interest, less than its remaining stated redemption price, the
purchaser will also be required to include in gross income the daily portions of
any original issue discount for the certificate. However, if the cost of the
certificate is in excess of its adjusted issue price, each daily portion will be
reduced in proportion to the ratio the excess bears to the aggregate original
issue
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discount remaining to be accrued on the REMIC Regular Certificate. The adjusted
issue price of a REMIC Regular Certificate on any given day equals the sum of
(1) the adjusted issue price or, in the case of the first accrual period, the
issue price, of the certificate at the beginning of the accrual period which
includes that day and (2) the daily portions of original issue discount for all
days during the accrual period prior to that day.
MARKET DISCOUNT. A certificateholder that purchases a REMIC Regular
Certificate at a market discount will recognize gain upon receipt of each
distribution representing stated redemption price. A REMIC Regular Certificate
issued without original issue discount will have market discount if purchased
for less than its remaining stated principal amount and a REMIC Regular
Certificate issued with original issue discount will have market discount if
purchased for less than its adjusted issue price. Under Section 1276 of the
Code, a certificateholder that purchases a REMIC Regular Certificate at a market
discount in excess of a de minimis amount will be required to allocate the
portion of each 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. If made, the election will apply to all market discount bonds
acquired by the certificateholder on or after the first day of the first taxable
year to which the election applies. In addition, the OID Regulations permit a
certificateholder to elect to accrue all interest and 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 the certificateholder acquires during
the taxable year of the election or later taxable years, 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 the certificateholder owns or acquires. See
"Taxation of Owners of REMIC Regular Certificates--Premium" below. Each of these
elections to accrue interest, discount and premium with respect to a certificate
on a constant yield method or as interest would be irrevocable, except with the
approval of the IRS.
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
the market discount is less than 0.25% of the remaining stated redemption price
of the 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. This 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, the 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:
(1) on the basis of a constant yield method,
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(2) 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
(3) 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 these 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 the 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 the certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of these 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 applies. Any such deferred interest
expense would not exceed the market discount that accrues during the taxable
year and is, in general, allowed as a deduction not later than the year in which
the market discount is includible in income. If a holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by the holder in that taxable year or later taxable years,
the interest deferral rule will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost, excluding any
portion of the 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 a REMIC Regular Certificate may elect under Section 171
of the Code to amortize the premium under the constant yield method over the
life of the certificate. If made, the 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 the 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 the certificates in
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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 the 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 the certificate, without
giving effect to any reduction in distributions attributable to defaults or
delinquencies on the mortgage loans or the certificate underlying the REMIC
Certificates, as the case may be, until it can be established the 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 that holder in the 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 this 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 is not subject to entity-level taxation, except with regard to
prohibited transactions and some other transactions. See "--Prohibited
Transactions Tax and Other 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 the holder owned the 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 that 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 the certificate
from a prior holder of that 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 the REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss. The committee report indicates that some 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 the REMIC
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Residual Certificate from a prior holder of the certificate at a price greater
than, or less than, the adjusted basis, the REMIC Residual Certificate would
have had in the hands of an original holder of the 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 the REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any of these payments would be
includible in income immediately upon its receipt, the IRS might assert that
these payments should be included in income over time according to an
amortization schedule or according to another method. Because of the uncertainty
concerning the treatment of these payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of these
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report, or the tax liability associated with the 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 at "-Noneconomic REMIC Residual
Certificates". The fact that the tax liability associated with the income
allocated to REMIC Residual Certificateholders may exceed the cash distributions
received by the REMIC Residual Certificateholders for the corresponding period
may significantly adversely affect the REMIC Residual Certificateholders'
after-tax rate of return. This 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, whether or not offered by the
prospectus, 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. The 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 offered REMIC Certificates
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 the 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 the 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. However, a REMIC that acquires loans at a market discount must
include the market discount
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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 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 either
discount or premium to the extent that the REMIC's basis in the mortgage loan is
either less than or greater than its stated redemption price. Any discount will
be includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to the 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 the election applies may be amortized under a constant yield
method, presumably taking into account a Prepayment Assumption. This election
would not apply to any mortgage loan originated on or before September 27, 1985,
premium on which should be allocated among the principal payments on that
mortgage loan and be deductible by the REMIC as those payments become due or
upon the prepayment of the mortgage loan.
A REMIC will be allowed deductions for interest, including original
issue discount, on the REMIC Regular Certificates, whether or not offered by
this prospectus, equal to the deductions that would be allowed if these REMIC
Regular Certificates 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
these REMIC Regular Certificates will not apply.
Issue premium is the excess of the issue price of a REMIC Regular
Certificate over its stated redemption price. If a class of REMIC Regular
Certificates is issued with issue premium, the net amount of interest deductions
that are allowed the REMIC in each taxable year for the REMIC Regular
Certificates of that 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 clear, 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."
Subject to the exceptions described in the following sentences, 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, allowing these 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 and the REMIC will be allowed deductions for servicing,
administrative and other non-interest expenses in determining its taxable
income. These 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,
the 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 the 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 the REMIC Residual Certificateholder.
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A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of the calendar quarter, determined without regard
to the net loss. Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds this adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that the distributions will be
treated as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for the REMIC Residual
Certificates and will be increased by the REMIC Residual Certificateholders'
allocable shares of taxable income of the REMIC. However, these bases increases
may not occur until the end of the calendar quarter, or perhaps the end of the
calendar year, with respect to which the REMIC taxable income is allocated to
the REMIC Residual Certificateholders. To the extent the REMIC Residual
Certificateholders' initial bases are less than the distributions to the REMIC
Residual Certificateholders, and increases in initial bases either occur after
the distributions or, together with their initial bases, are less than the
amount of the distributions, gain will be recognized by the REMIC Residual
Certificateholders on these 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 the REMIC Residual Certificate to the REMIC Residual
Certificateholder and the adjusted basis the 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
(1) the daily portions of REMIC taxable income allocable to the REMIC
Residual Certificate over
(2) the sum of the daily accruals for each day during the quarter that
the REMIC Residual Certificate was held by the 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
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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 the REMIC Residual Certificate before the beginning of that quarter.
The issue price of a REMIC Residual Certificate is the initial offering price to
the public, excluding bond houses and brokers, at which a substantial amount of
the REMIC Residual Certificates were sold. The long-term Federal rate is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered to have
significant value.
For REMIC Residual Certificateholders, an excess inclusion:
(1) will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
(2) will be treated as unrelated business taxable income to an
otherwise tax-exempt organization and
(3) 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 the REMIC
Residual Certificates, as reduced, but not below zero, by the real estate
investment trust taxable income, will be allocated among the shareholders of the
trust in proportion to the dividends received by the shareholders from the
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 the shareholder.
"Real estate investment trust taxable income" is defined by Section 857(b)(2) of
the Code, and as used in the prior sentence does not include any net capital
gain. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and 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 the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the 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, 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, on the REMIC
Residual Certificate equals at least the present value of the expected tax on
the anticipated excess inclusions, and the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or
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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 restrictions under the terms of the related pooling and
servicing agreement that are intended to reduce the possibility of a transfer of
REMIC Residual Certificates being disregarded. These restrictions will require
each party to a transfer to provide an affidavit that no purpose of the transfer
is to impede the assessment or collection of tax, including representations as
to the financial condition of the prospective transferee, for which the
transferor is also required to make a reasonable investigation to determine the
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, a prospective purchaser should consider the possibility that a
purported transfer of the REMIC Residual Certificate by that prospective
purchaser to another purchaser at a future date may be disregarded in accordance
with the rule described in the first sentence of this paragraph, which would
result in the retention of tax liability by the 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 assumptions,
and the depositor will make no representation that a REMIC Residual Certificate
will not be considered noneconomic for purposes of the rules described in the
preceding paragraph. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. In general, all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment, must be marked to market in accordance with the applicable
Code provision and the related regulations. However, the IRS recently issued
regulations which provide that for purposes of this mark-to-market requirement a
REMIC Residual Certificate acquired 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 these fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Except as stated in the
related prospectus supplement, these 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,
o an amount equal to the individual's, estate's or trust's share of
the fees and expenses will be added to the gross income of the
holder, and
o the individual's, estate's or trust's share of the fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code.
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Section 67 of the Code permits these 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 (1) 3% of the excess of the
individual's adjusted gross income over that amount or (2) 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 a holder of a REMIC Certificate that is an individual, estate or trust, or a
pass-through entity beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for the holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of the fees and other deductions will be
included in the holder's gross income. Accordingly, these 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. Prospective investors should consult with their own tax advisors prior
to making an investment in the 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 be:
o equal the cost of the REMIC Regular Certificate to the
certificateholder,
o increased by income reported by such certificateholder with
respect to the REMIC Regular Certificate, including original
issue discount and market discount income, and
o reduced, but not below zero, by distributions on the REMIC
Regular Certificate received by the 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, gain or loss from the sale of a REMIC Certificate will be capital
gain or loss, provided the REMIC Certificate is held as a capital asset 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 the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the seller's income with respect to the REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the applicable
Federal rate, determined as of the date of purchase of the REMIC Regular
Certificate, over (2) the amount of ordinary income actually includible in the
seller's income prior to the sale. In addition, gain recognized on the sale of a
REMIC Regular Certificate by a seller who purchased the REMIC Regular
Certificate at a market discount will be taxable as ordinary income in an amount
not exceeding the portion of the discount that accrued during the period the
REMIC Certificate was held by the 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."
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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 this 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 the certificate is held as part of a conversion transaction within the
meaning of Section 1258 of the Code. A conversion transaction includes a
transaction 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 the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate applicable Federal rate 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 the
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 the 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 the 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 the REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. In the event a
REMIC engages in a prohibited transaction, the Code imposes a 100% tax on the
income derived by the REMIC from the prohibited transaction. A prohibited
transaction may occur upon the disposition of a mortgage loan, the receipt of
income from a source other than a mortgage loan or 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, a contribution to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition on the REMIC of
a tax equal to 100% of the value of the contributed property. Each pooling and
servicing agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to this 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.
It is not anticipated that any REMIC will recognize net income from foreclosure
property subject to federal income tax.
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To the extent permitted by then applicable laws, any tax resulting from
a prohibited transaction, tax resulting from a contribution made after the
closing date, tax on net income from foreclosure property or state or local
income or franchise tax that may be imposed on the REMIC will be borne by the
related master servicer or trustee in either case out of its own funds, provided
that the master servicer or the trustee has sufficient assets to do so, and
provided that the tax arises out of a breach of the master servicer's or the
trustee's obligations under the related pooling and servicing agreement and in
respect of compliance with applicable laws and regulations. Any of these taxes
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, a tax would be imposed in an amount equal to the
product of:
o 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, of the total anticipated excess
inclusions with respect to the REMIC Residual Certificate for
periods after the transfer and
o 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 the transfer, the Prepayment Assumption and
any required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents. The tax would be imposed on the transferor
of the REMIC Residual Certificate, except that where the transfer is through an
agent for a disqualified organization, the tax would instead be imposed on the
agent. However, a transferor of a REMIC Residual Certificate would in no event
be liable for the 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 the affidavit is false. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that
o residual interests in the entity are not held by disqualified
organizations and
o information necessary for the application of the tax described in
this prospectus will be made available. Restrictions on the
transfer of REMIC Residual Certificates and 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 includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in the entity, then a tax will
be imposed on the entity equal to the product of (1) the amount of excess
inclusions on the REMIC Residual Certificate that are allocable to the interest
in the pass-through entity held by the disqualified organization and (2) 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 the pass-through entity furnishes to the pass-through
entity
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o the holder's social security number and a statement under
penalties of perjury that the social security number is that of
the record holder or
o a statement under penalties of perjury that the record holder is
not a disqualified organization. Notwithstanding the preceding
two sentences, in the case of a REMIC Residual Certificate held
by an electing large partnership, as defined in Section 775 of
the Code, all interests in the 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 is subject to tax
under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners, in lieu of
allocating to the partners a deduction for the tax paid by the
partnership.
For these purposes, a disqualified organization means:
o the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any
agency or instrumentality of the foregoing, not including,
however, instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation,
o 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
o 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 other
entity described in Section 860E(e)(6)(B) 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 the 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 the REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in the Certificate, the REMIC Residual
Certificateholder should, but may not, be treated as realizing a loss equal to
the amount of the difference, and the 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.
The trustee or other party specified in the related prospectus supplement will
file REMIC federal income tax returns on behalf of the related REMIC, and under
the terms of the related agreement, will either (1) 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 or (2) will be designated as
and will act as the tax matters person with respect to the related REMIC in all
respects and will hold at least a nominal amount of REMIC Residual Certificates.
The trustee, as the tax matters person or as agent for the tax matters
person, subject to notice requirements and various restrictions and limitations,
generally will have the authority to act on behalf of the
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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 be bound by
a settlement agreement between the trustee, as either tax matters person or as
agent for the tax matters person, and the IRS concerning any REMIC item subject
to that settlement agreement. 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 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 the person and other
information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC regular
interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and some 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 the 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.
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, Treasury 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."
The responsibility for complying with the foregoing reporting rules
will be borne by the trustee or other party designated in the related prospectus
supplement.
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 the payments fail to furnish to the
payor information including their taxpayer identification numbers, or otherwise
fail to establish an exemption from the backup withholding tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against the recipient's federal income tax. Furthermore, penalties may be
imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a United States Person 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 be subject to United
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States federal income or withholding tax in respect of a distribution on a REMIC
Regular Certificate, provided that the holder complies to the extent necessary
with identification requirements including delivery of a statement signed by the
certificateholder under penalties of perjury, certifying that the
certificateholder is not a United States Person and providing the name and
address of the certificateholder. 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 the 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 the
United States shareholder's allocable portion of the interest income received by
the 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, it is suggested that
certificateholders who are non-resident alien individuals consult their tax
advisors concerning this question.
Except as 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.
NEW WITHHOLDING REGULATIONS. The IRS has issued new regulations which
make certain modifications to the withholding, backup withholding and
information reporting rules described above. The new regulations attempt to
unify certification requirements and modify reliance standards. These
regulations will generally be effective for payments made after December 31,
2000, subject to transition rules. Prospective investors are urged to consult
their tax advisors regarding these regulations.
NOTES
On or prior to the date of the related prospectus supplement with
respect to the proposed issuance of each series of notes, counsel to the
depositor will provide its opinion that, assuming compliance with all provisions
of the indenture, owner trust agreement and other related documents, for federal
income tax purposes (1) the notes will be treated as indebtedness and (2) the
issuer, as created under 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. For purposes of this tax discussion, references to a
noteholder or a holder are to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS. Notes held by a domestic building and
loan association will not constitute "loans . . . secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); and 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, except that
(1) income reportable on the notes is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (2) the
special rule treating a portion of the gain on sale or exchange of a REMIC
Regular Certificate as ordinary income is
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inapplicable to the notes. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates" and "-- Sales of REMIC Certificates."
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,
counsel to the depositor will provide its opinion that, assuming compliance with
all provisions of the related pooling and servicing agreement, the related
Grantor trust fund will be classified as a grantor trust under subpart E, part I
of subchapter J of Chapter 1 of the Code and not as a partnership or an
association taxable as a corporation.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the depositor will provide its opinion that
Grantor Trust Fractional Interest Certificates will represent interests in
"loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; "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 real estate assets within the meaning of
Section 856(c)(4)(A) of the Code. In addition, counsel to the depositor will
deliver its 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 the 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 preceding paragraph. 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 the
mortgage loans 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 income from the Grantor Trust
Certificates will be characterized the same way. However, the policies
underlying these sections, to encourage or require investments in mortgage loans
by thrift institutions and real estate investment trusts, suggest that this
characterization is appropriate. Counsel to the depositor will not deliver any
opinion on these questions. It is suggested that prospective purchasers to which
the characterization of an investment in Grantor Trust Strip Certificates is
material consult their tax advisors regarding whether the Grantor Trust Strip
Certificates, and the income therefrom, will be so characterized.
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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 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 on the same
certificate 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 some pass-through entities will be allowed a
deduction for the reasonable servicing fees and expenses only to the extent that
the aggregate of the holder's miscellaneous itemized deductions exceeds two
percent of the 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 (1) 3% of the excess of the individual's adjusted gross
income over the amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
reportable by holders of Grantor Trust Fractional Interest Certificates who are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Further, certificateholders other than corporations subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining the 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, the fees and expenses should be allocated among the classes of Grantor
Trust Certificates using a method that recognizes that each class benefits from
the related services. In the absence of statutory or administrative
clarification as to the method to be used, it is intended to base information
returns or reports to the IRS and certificateholders on a method that allocates
the expenses among classes of Grantor Trust Certificates with respect to each
period on the distributions made to each 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 (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) 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 safe harbors. The servicing fees paid
with respect to the mortgage loans for a series of Grantor Trust Certificates
may be higher than those 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
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 in the sixth following paragraph
regarding the possible treatment of stripped bonds as market discount bonds and
the discussion regarding de minimis
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market discount. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates-- 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 the 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 the 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 the 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 the certificate, other than qualified stated interest, if
any, as well as the certificate's share of reasonable servicing fees and other
expenses. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates-- Stripped Bond Rules Do Not Apply" for a definition of qualified
stated interest. In general, the amount of the income that accrues in any month
would equal the product of the holder's adjusted basis in the Grantor Trust
Fractional Interest Certificate at the beginning of the month, see "Sales of
Grantor Trust Certificates", and the yield of the Grantor Trust Fractional
Interest Certificate to the holder. This yield is equal to a rate that,
compounded based on the regular interval between distribution dates and used to
discount the holder's share of future payments on the mortgage loans, causes the
present value of those future payments to equal the price at which the holder
purchased the 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 the 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, Section 1272(a)(6) of the Code requires (1)
the use of a reasonable Prepayment Assumption in accruing original issue
discount and (2) 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 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, for a particular holder, at the time of purchase of the Grantor Trust
Fractional Interest Certificate by that holder. It is suggested that
Certificateholders 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 the
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 price less than or greater than the principal amount of the
certificate, that is, at a discount or a premium, the use of a reasonable
Prepayment Assumption would increase or decrease the yield, and thus accelerate
or decelerate, respectively, the reporting of income.
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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 the certificate and the portion of the
adjusted basis of the certificate that is allocable to the 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 intended to base information reports or returns to the IRS and
certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, none of the depositor,
the master servicer or the trustee will make any representation that the
mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or any other rate and certificateholders should bear in mind that the
use of a representative initial offering price will mean that the 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, stripped bonds may to be
treated as market discount bonds and any purchaser of a stripped bond treated as
a market discount 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 (1) there is no, or only a de minimis amount of, original issue discount
or (2) 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 that 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 "--Characteristics of
Investments in Grantor Trust 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
the 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 the mortgage loans and
their issue price. Under the OID Regulations, the stated
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redemption price is equal to the total of all payments to be made on the
mortgage loan other than qualified stated interest. Qualified stated interest is
interest that is unconditionally payable at least annually at a single fixed
rate, 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 the mortgage
loan. In general, the issue price of a mortgage loan will be the amount received
by the borrower from the lender under the terms of the mortgage loan, less any
points paid by the borrower, and the stated redemption price of a mortgage loan
will equal its principal amount, unless the mortgage loan provides for an
initial below-market rate of interest or the acceleration or the deferral of
interest payments. The determination as to whether original issue discount will
be considered to be de minimis will be calculated using the same test described
in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest
rates, the related prospectus supplement will describe the manner in which the
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 these pools, it is intended to base information reports and returns to the
IRS and certificateholders on the use of a Prepayment Assumption. However, in
the case of certificates not backed by these pools, it currently is not intended
to base the reports and returns on the use of a Prepayment Assumption. It is
suggested that certificateholders 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 the series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the 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 the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, the daily portion
will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the 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 the excess bears to the
certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price,
or, in the case of the first accrual period, the issue price, of the mortgage
loan at the beginning of the accrual period that includes that day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to that day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the 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
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information as the holder may reasonably request from time to time with respect
to original issue discount accruing on Grantor Trust Fractional Interest
Certificates. See "Grantor Trust Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a market
discount, that is, in the case of a mortgage loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price,
or in the case of a mortgage loan issued with original issue discount, at a
purchase price less than its adjusted issue price. If market discount is in
excess of a de minimis amount, the holder generally will be required to include
in income in each month the amount of the discount that has accrued through the
month that has not previously been included in income, but limited, in the case
of the portion of the discount that is allocable to any mortgage loan, to the
payment of stated redemption price on the 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 the holder rather than including it on a deferred basis 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 regulations are issued by the Treasury Department, 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:
(1) on the basis of a constant yield method, (2) 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 (3) 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 the discount income. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect the 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, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the 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 above in "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" with the exception that it is
less likely that a Prepayment Assumption will be used for purposes of these
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. This rule applies without regard to the origination
dates of the mortgage loans.
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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, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the 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 these payments are made, or, for a certificateholder using the
accrual method of accounting, when the 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 this premium, it appears that this 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 "Characterization
of Investments in Grantor Trust Certificates--If Stripped Bond Rules Apply," no
regulations or published rulings under Section 1286 of the Code have been issued
and uncertainty exists as to how it will be applied to securities like the
Grantor Trust Strip Certificates. Accordingly, it is suggested that holders of
Grantor Trust Strip Certificates consult their own tax advisors concerning the
method to be used in reporting income or loss with respect to the 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 "--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 the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. The 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 "Characterization of Investments in Grantor Trust
Certificates--Stripped Bond Rules Apply" above.
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As noted, 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 some categories of debt instruments, and that adjustments be made in
the amount and rate of accrual of the discount when prepayments do not conform
to the 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 apply to Grantor Trust Strip
Certificates. 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 whether use of a Prepayment Assumption may be required or permitted in
the absence of these 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, none of the depositor, the master servicer or
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 the 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 the 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
the 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, or due to their similarity to other mortgage-backed securities,
such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code, that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from these regulations.
Like the OID Regulations, the Contingent Payment Regulations do not specifically
address securities, like the Grantor Trust Strip Certificates, that are subject
to the stripped bond rules of Section 1286 of the Code.
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If the contingent payment rules under the Contingent Payment
Regulations were to apply, the holder of a Grantor Trust Strip Certificate would
be required to apply the noncontingent bond method. Under the noncontingent bond
method, the issuer of a Grantor Trust Strip Certificate determines a projected
payment schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield 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 holder 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, the income any
variation between the payment actually received in that month and the payment
originally projected to be made in that 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 the sale or exchange of a Grantor Trust Certificate by an investor
who holds the 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 the Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in some 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 the 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 at the time
the taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of
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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 the 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. 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 the 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 a holder at any time
during that year, information regarding the amount of any servicing compensation
received by the master servicer and subservicer and any 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 these
items of income and expense. Moreover, these 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 the 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"
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 the
discussion, only to the extent the related mortgage loans were originated after
July 18, 1984 and only to the extent such mortgage loans have not been converted
to real property.
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, the 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, counsel to the depositor will provide 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 the nature of the income of the trust
fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
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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 any
outstanding debt securities. Any corporate income tax could materially reduce
cash available to make distributions on the Partnership Certificates and
certificateholders could be liable for any tax that is unpaid by the trust fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES. For
federal income tax purposes,
(1) Partnership 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);
(2) Partnership Certificates held by a real estate investment trust
will constitute real estate assets within the meaning of Code Section
856(c)(4)(A) and interest on Partnership Certificates will 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), based on the
real estate investments trust s proportionate interest in the assets of the
Partnership trust fund based on capital accounts; and
(3) Partnership Certificates held by a regulated investment company
will not constitute Government securities within the meaning of Code Section
851(b)(3)(A)(i).
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
Treatment of the Partnership trust fund as a Partnership. If specified
in the 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. However, the proper characterization of the arrangement
involving the Partnership trust fund, the Partnership Certificates and the
depositor is not clear, because there is no authority on transactions closely
comparable to that contemplated in the prospectus.
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 alternative
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. 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 the 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 any outstanding debt securities, servicing
and other fees, and losses or deductions upon collection or disposition of any
outstanding debt securities.
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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,
which will include a 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 (1) the interest that accrues on
the Partnership Certificates in accordance with their terms for the due period,
including interest accruing at the applicable pass-through rate for the due
period and interest on amounts previously due on the Partnership Certificates
but not yet distributed; (2) 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 (3)
any other amounts of income payable to the certificateholders for the due
period. The 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 that method of allocation, certificateholders may be
allocated income equal to the entire pass-through rate plus the other items
described under that method even though the trust fund might not have sufficient
cash to make current cash distributions of these amounts. 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 these 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 that 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,
deductions for these expenses might be disallowed to the individual in whole or
in part and might result in that holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the 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 under "--
Grantor trust funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding this
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 for 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
these calculations be made separately for each mortgage loan, the Partnership
trust fund might be required to incur additional expense, but it is believed
that there would not be a material adverse effect on certificateholders.
DISCOUNT AND PREMIUM. Unless indicated otherwise in the applicable
prospectus supplement, it is not anticipated that the mortgage loans will have
been issued with original issue discount and, therefore, the Partnership trust
fund should not have original issue discount income. However, the purchase price
paid by the Partnership trust fund for the mortgage loans may be greater or less
than the remaining principal balance of the mortgage loans at the time of
purchase. If so, the mortgage loans will have been acquired at a premium or
discount, as the case may be. See "--Grantor trust funds -- Taxation of Owners
of Grantor
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Trust Fractional Interest Certificates -- Market Discount" and "Premium." As
stated in the previous paragraph, the Partnership trust fund intends to make any
calculation of original issue discount 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
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
stated in the second preceding paragraph, a portion of the 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. A 50% or greater transfer 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. These interests would be deemed
distributed to the partners of the old partnership in liquidation thereof, which
would not constitute a sale or exchange.
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 the 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 any
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 the
aggregate tax basis to the Partnership Certificates sold, rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate.
Any gain on the sale of an Partnership Certificate attributable to the
holder s share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership trust fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership trust fund will elect to include market discount in income as it
accrues.
If a certificateholder is required to recognize an aggregate amount of
income, not including income attributable to disallowed itemized deductions,
over the life of the Partnership Certificates that exceeds the aggregate cash
distributions with respect thereto, the 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.
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The use of 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 the Partnership
Certificate exceeds the adjusted basis of the certificateholder s interest in
the Partnership Certificate. To the extent that the amount of money distributed
exceeds the 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, the purchasing certificateholder will have
a higher basis in the Partnership Certificates than the selling
certificateholder had. An opposite result will follow if the Partnership
Certificate is sold at a loss. 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, a certificateholder might be allocated a greater or lesser amount
of Partnership trust fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the Partnership trust fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Partnership trust fund will be the calendar year. The trustee
will file a partnership information return, IRS Form 1065, with the IRS for each
taxable year of the Partnership trust fund and will report each
certificateholder s allocable share of items of Partnership trust fund income
and expense to holders and the IRS on Schedule K-1. The trustee will provide the
Schedule K-1 information to nominees that fail to provide the Partnership trust
fund with the information statement described below and the nominees will be
required to forward this 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 information on
the nominee, the beneficial owners and the Partnership Certificates so held.
Such information includes (1) the name, address and taxpayer identification
number of the nominee and (2) as to each beneficial owner (x) the name, address
and identification number of that person, (y) whether that 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) information relating to Partnership Certificates that were
held, bought or sold on behalf of that 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
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,
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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 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 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-United States Persons, because there is no clear authority
dealing with that issue under facts substantially similar to those in this case.
Although it is not expected that the Partnership trust fund would be engaged in
a trade or business in the United States for these purposes, the Partnership
trust fund will withhold as if it were so engaged in order to protect the
Partnership trust fund from possible adverse consequences of a failure to
withhold. The Partnership trust fund expects to withhold on the portion of its
taxable income that is allocable to foreign certificateholders pursuant to
Section 1446 of the Code as if this 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 payments 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 that event, 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 the certificateholder fails to comply with
certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
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It is suggested that prospective purchasers consult their tax advisors
with respect to the tax consequences to them of the purchase, ownership and
disposition of REMIC Certificates, notes, Grantor Trust Certificates and
Partnership 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 described under "Federal
Income Tax Consequences" does not purport to describe any aspect of the tax laws
of any state or other jurisdiction. Therefore, prospective investors should
consult their own tax advisors with respect to the various tax consequences of
investments in the securities offered hereunder.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
INVESTORS AFFECTED
A federal law called the Employee Retirement Income Security Act of
1974, as amended, the Code and a variety of state laws may affect your decision
whether to invest in the securities if you are investing for:
o a pension or other employee benefit plan of employers in the
private sector that is regulated under ERISA, referred to as an
ERISA plan,
o an individual retirement account or annuity, called an IRA, or a
pension or other benefit plan for self-employed individuals,
called a Keogh plan,
o a pension and other benefit plan for the employees of state and
local governments, called a government plan, or
o an insurance company general or separate account, a bank
collective investment fund or other pooled investment vehicle
which includes the assets of ERISA plans, IRAs, Keogh plans,
and/or government plans.
A summary of the effects of those laws follows.
FIDUCIARY STANDARDS FOR ERISA PLANS AND RELATED INVESTMENT VEHICLES
ERISA imposes standards of fiduciary conduct on those who are
responsible for operating ERISA plans or investing their assets. These standards
include requirements that fiduciaries act prudently in making investment
decisions and diversify investments so as to avoid large losses unless under the
circumstances it is clearly prudent not to do so. If you are a fiduciary of an
ERISA plan, you are subject to these standards in deciding whether to invest the
plan's assets in securities. You may find the full text of the applicable
standards of fiduciary conduct in section 404 of ERISA. If you are a fiduciary
of an ERISA Plan, you should consult with your advisors concerning your
investment decision in the context of section 404 of ERISA.
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PROHIBITED TRANSACTION ISSUES FOR ERISA PLANS, KEOGH PLANS, IRAS AND RELATED
INVESTMENT VEHICLES
GENERAL. Transactions involving the assets of an ERISA plan, a Keogh
plan or an IRA, called prohibited transactions, may result in the imposition of
excise taxes and, in the case of an ERISA plan, civil money penalties and
certain other extraordinary remedies. A prohibited transaction occurs when a
person with a pre-existing relationship to an ERISA plan, a Keogh plan or IRA,
known as a party in interest or a disqualified person, engages in a transaction
involving the assets of the plan or IRA. You may find the laws applicable to
prohibited transactions in section 406 of ERISA and section 4975 of the Code.
There are statutory and regulatory prohibited transaction exemptions, as well as
administrative exemptions granted by the United States Department of Labor.
Prohibited transactions exemptions waive the excise taxes, civil money penalties
and other remedies for certain prohibited transactions which are structured to
satisfy prescribed conditions.
PURCHASE AND SALE OF SECURITIES. If an ERISA plan, a Keogh plan, an IRA
or a related investment vehicle acquires securities from, or sells securities
to, a party in interest or a disqualified person, a prohibited transaction may
occur. In such a case, the party in interest or disqualified person might be
liable for excise taxes unless a prohibited transaction exemption is available.
Where a prohibited transaction involves an ERISA plan or related investment
vehicle, the fiduciary who causes or permits the prohibited transaction may also
be liable for civil money penalties.
TRANSACTIONS INCIDENTAL TO THE OPERATION OF THE TRUST. Transactions
involving the assets of a trust may also give rise to prohibited transactions to
the extent that an investment in securities causes the assets of the trust to be
considered assets, commonly known as plan assets, of an ERISA plan, a Keogh
plan, an IRA or a related investment vehicle. Whether an investment in
securities will cause a trust's assets to be treated as plan assets depends on
whether the securities are debt or equity investments for purposes of ERISA. The
United States Department of Labor has issued regulations, commonly known as the
plan asset regulations, which define debt and equity investments. The plan asset
regulations appear at 29 C.F.R. ss.2510.3-101.
Under the plan asset regulations, a trust's assets will not be plan
assets of an ERISA plan, Keogh plan, IRA or related investment vehicle that
purchases securities if the securities are considered debt. For this purpose,
the securities will be debt only if they are treated as indebtedness under
applicable local law and do not have any substantial equity features. The term
substantial equity features has no definition under the plan asset regulations.
In the absence of such a definition, we cannot assure you that the securities,
either when they are issued or at any later date, will have no substantial
equity features. The prospectus supplement for a particular offering of
securities may tell you whether we believe the securities are debt for ERISA
purposes.
To the extent that the securities do not constitute debt for purposes
of ERISA, they will constitute equity investments. In this case, an ERISA plan,
Keogh plan, IRA or related investment vehicle that acquires securities would
also acquire an undivided interest in each asset of the trust unless (1) the
trust is an operating company or a venture capital operating company as defined
in the plan asset regulations, (2) the securities are publicly offered
securities as defined in the plan asset regulations, or (3) benefit plan
investors as defined in the plan asset regulations do not own 25% or more of the
securities or any other class of equity security issued by the trust. If the
securities may be treated as an equity investment under the plan asset
regulations, the prospectus supplement may tell you whether we believe any of
these exceptions will apply.
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POSSIBLE EXEMPTIVE RELIEF
The United States Department of Labor has issued prohibited transaction
exemptions, which conditionally waive excise taxes and civil money penalties
that might otherwise apply to a type of transactions.
CLASS EXEMPTIONS. The United States Department of Labor has issued
Prohibited Transaction Class Exemptions, or PTCEs, which provide that exemptive
relief is available to any party to any transaction which satisfies the
conditions of the exemption. A partial listing of the PTCEs which may be
available for investments in securities follows. Each of these exemptions is
available only if specified conditions are satisfied and may provide relief for
some, but not all, of the prohibited transactions that a particular transaction
may cause. The prospectus supplement for a particular offering of securities may
tell you whether the securities themselves satisfy the conditions of these
exemptions. You should consult with your advisors regarding the specific scope,
terms and conditions of an exemption as it applies to you, as an investor,
before relying on that exemption's availability.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES. The following
exemptions may apply to a purchase or sale of securities between an ERISA plan,
a Keogh plan, an IRA or related investment vehicle, on the one hand, and a party
in interest or disqualified person, on the other hand:
o PTCE 84-14, which exempts certain transactions approved on behalf
of the plan by a qualified professional asset manager, or QPAM.
o PTCE 86-128, which exempts certain transactions between a plans
and certain broker-dealers.
o PTCE 90-1, which exempts certain transactions entered into by
insurance company pooled separate accounts in which plans have
made investments.
o PTCE 91-38, which exempts certain transactions entered into by
bank collective investment funds in which plans have made
investments.
o PTCE 96-23, which exempts certain transaction approved on behalf
of a plan by an in-house investment manager, or INHAM.
These exemptions do not expressly address prohibited transactions that might
result from transactions incidental to the operation of a trust. We cannot
assure you that a purchase or sale of securities in reliance on one of these
exemptions will not give rise to indirect, non-exempt prohibited transactions.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES AND TRANSACTIONS
INCIDENTAL TO THE OPERATION OF THE TRUST. The following exemptions may apply to
a purchase or sale of securities between an ERISA plan, a Keogh plan, an IRA or
related investment vehicle, on the one hand, and a party in interest or
disqualified person, on the other hand, and may also apply to prohibited
transactions that may result from transactions incident to the operation of the
trust
o PTCE 95-60, which exempts certain transactions involving
insurance company general accounts.
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o PTCE 83-1, which exempts certain transactions involving the
purchase of pass-through certificates in mortgage pool investment
trusts from, and the sale of such certificates to, the pool
sponsor, as well as transactions in connection with the servicing
and operation of the pool.
ADMINISTRATIVE EXEMPTION FOR OFFERINGS MANAGED BY SALOMON SMITH BARNEY
INC. The DOL has also issued an individual exemption, Prohibited Transaction
Exemption 91-23 (56 Fed. Reg. 15936, April 19, 1991), to Salomon Smith Barney
Inc. (formerly known as Smith Barney Inc.), for specific offerings in which
Salomon Smith Barney Inc. or any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
Salomon Smith Barney Inc. is an underwriter, placement agent or a manager or
co-manager of the underwriting syndicate or selling group where the trust and
the offered certificates meet specified conditions. This is called the
Underwriters' Exemption. An amendment to the Underwriters' Exemption may be
found at 62 Fed. Reg. 39021 (July 21, 1997). The Underwriters' Exemption, as
amended, provides a partial exemption for transactions involving certificates
representing a beneficial interest in a trust and entitling the holder to
pass-through payments of principal, interest and/or other payments with respect
to the trust's assets. When applicable, the Underwriters' Exemption applies to
the initial purchase, holding and subsequent resale of certificates, and certain
transactions incidental to the servicing and operation of the assets of such a
trust.
In order for the Underwriters' Exemption to be available to a purchase
of securities, the trust's assets must consist solely of certain types of
assets, including obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family residential and
commercial property (including certain obligations secured by leasehold
interests on commercial property); fractional undivided interests in any of
these obligations; property which had secured any of these obligations;
undistributed cash; rights under any insurance policies, third-party guarantees,
contracts of suretyship or other credit support arrangements with respect to any
of the these obligations; and a pre-funding account.
CONDITIONS FOR PRE-FUNDING ACCOUNTS. If the trust includes a
pre-funding account, the following conditions also apply:
o The ratio of the amount allocated to the pre-funding account to
the total principal amount of the securities being offered must
be less than or equal to 25%.
o All additional obligations transferred to the trust after the
closing date of the offering of securities must meet the same
terms and conditions of eligibility for inclusion in the trust as
the obligations placed in the trust at or prior to the closing
date, and these terms and conditions must have been approved by
Standard & Poor's Ratings Services, Inc., Moody's Investors
Service, Inc. or Fitch, Inc., called the Exemption Rating
Agencies. These terms and conditions may be changed if the
changes receive prior approval of either an Exemption Rating
Agency or a majority vote of outstanding certificateholders.
o After the transfer of additional obligations to the trust, the
securities must have a credit rating from one of the Exemption
Rating Agencies at least a high as the rating assigned at the
time of the initial issuance of the securities.
o The use of pre-funding does not, in and of itself, cause a
reduction of 100 basis points or more in the weighted average
annual percentage interest rate of all of the obligations
included in the trust between the time of initial issuance of
the securities and the end of the pre-funding period.
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o Either the characteristics of the obligations added to the trust
during the pre-funding period must be monitored by an independent
insurer or other independent credit support provider, or an
independent accountant must furnish a letter, prepared using the
same type of procedures as were applicable to the obligations
which were transferred to the trust as of the closing date of the
initial offering of securities, stating whether or not the
characteristics of the additional obligations conform to the
characteristics described in the prospectus or prospectus
supplement.
o The pre-funding period must end no later than three months, or 90
days if later, after the closing date of the initial issuance of
securities, or earlier in certain circumstances if the unused
balance in the pre-funding account falls below a specified
minimum level or an event of default occurs.
o 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 described in the pooling
and servicing agreement, are permitted by the Exemption Rating
Agencies rating the securities and 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 or else
are either 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.
o The prospectus or prospectus supplement must describe the
duration of the pre-funding period.
o 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 and the trustee, as legal owner of the assets of the trust,
must enforce all the rights created in favor of securityholders
of the trust, including ERISA plans.
ADDITIONAL CONDITIONS FOR THE UNDERWRITERS' EXEMPTION. If the
requirements applicable to the trust and pre-funding account are met, the
Underwriters' Exemption will apply to a particular transaction only if the
transaction meets the following additional conditions:
o The acquisition of securities by an ERISA Plan, a Keogh Plan, an
IRA or a related investment vehicle is on terms, including price,
that are at least as favorable to the buyer as they would be in
an arm's-length transaction with an unrelated party.
o The rights and interests evidenced by the securities acquired by
the ERISA Plan, Keogh Plan, IRA or related investment vehicle are
not subordinated to the rights and interests evidenced by other
securities of the same trust.
o The securities acquired by the ERISA Plan, Keogh Plan, IRA or
related investment vehicle have received a rating that is in one
of three highest generic rating categories from the Exemption
Rating Agencies.
o The trustee of the trust is not an affiliate of the trust
sponsor, any servicer, any underwriter, any insurer or any
obligor with respect to obligations or receivables constituting
more than 5% of the aggregate unamortized principal balance of
the assets in the trust, determined on the date of initial
issuance of securities, or any affiliate of any of these
entities.
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o The sum of all payments made to and retained by the
underwriter(s) or selling agents must represent not more than
reasonable compensation for underwriting the securities; the sum
of all payments made to and retained by the sponsor pursuant to
the assignment of the assets to the trust must represent not more
than the fair market value of such obligations; and the sum of
all payments made to and retained by all servicers must represent
not more than reasonable compensation for such persons' services
and reimbursement of such person's reasonable expenses in
connection with such services.
o The investing ERISA plan, Keogh plan, IRA or related investment
vehicle 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.
LIMITS ON SCOPE OF THE UNDERWRITERS' EXEMPTION. The Underwriters'
Exemption will not provide complete exemptive relief even where a trust
satisfies all of the conditions applicable to the trust and all of the general
conditions are met. It does not provide relief for the purchase of securities
from, or the sale of securities to, a party in interest or disqualified person
where the party in interest or disqualified person is a fiduciary of the
purchaser or seller in which the fiduciary receives consideration for its
personal account from any party other than the purchaser or the seller.
The Underwriters' Exemption also will not provide exemptive relief for
the purchase and holding of securities by a fiduciary on behalf of a plan
sponsored by the trust's sponsor, the trustee, any insurer, any servicer, any
obligor with respect to obligations or receivables included in the trust
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the trust, determined on the date of initial issuance of the
securities, and any affiliate of any of these entities. The Underwriters'
Exemption generally provides exemptive relief in other cases for the purchase of
securities from, or the sale of securities to, a party in interest or
disqualified person where the party in interest or disqualified person is a
fiduciary of the purchaser or seller and is also an obligor with respect to 5%
or less of the fair market value of obligations or receivables contained in the
trust or an affiliate only when the following additional conditions are met:
o The purchaser or seller is not an ERISA plan, an IRA or a Keogh
plan that is sponsored by an underwriter or selling agent, a
trust's sponsor, the trustee, any insurer, any servicer or any
obligor with respect to obligations or receivables included in
the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust, determined on the
date of initial issuance of the securities, or any affiliate of
any of these entities.
o Solely in the case of initial issuance of securities, at least
50% of each class of securities issued by the trust is acquired
by persons independent of the underwriters or selling agents, the
trust's sponsor, the trustee, any insurer, any servicer, any
obligor with respect to obligations or receivables included in
the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust, determined on the
date of initial issuance of the securities, and any affiliate of
any of these entities.
o The purchaser's investment in each class of securities issued by
the trust does not exceed 25% of all of the securities in such
class outstanding at the time of the issuance.
o Immediately after the acquisition, no more than 25% of the
purchaser's assets are invested in securities issued by trusts
containing assets sold or serviced by an entity that has
discretionary authority or over the purchaser or renders
investment advice to the purchaser for a fee.
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The Underwriters' Exemption provide relief for transactions in
connection with the servicing, operation and management of a trust only if:
o The transactions are carried out in accordance with the terms of
a binding pooling and servicing agreement.
o The pooling and servicing agreement is provided to, or fully
described in the prospectus or offering memorandum provided to,
investing ERISA plans, Keogh plans, IRAs and related investment
vehicles before they purchase securities issued by the trust.
STATUTORY EXEMPTION FOR INSURANCE COMPANY GENERAL ACCOUNTS. In addition
to the PTCEs and the Underwriters' Exemption, a temporary statutory exemption
may be available if you are investing on behalf of an insurance company general
account that includes plan assets. This exemption appears in section 401(c) of
ERISA. Pursuant to Section 401(c) of ERISA, the United States Department of
Labor issued regulations on January 5, 2000 defining when an insurance company
general account will be deemed to include plan assets and, hence, be subject to
the ERISA prohibited transaction rules. If you are investing on behalf of an
insurance company general account, section 401(c) generally provides an
exemption for your purchases and sales of securities, as well as prohibited
transactions resulting from transactions incident to the operation of the trust,
until July 5, 2001. This will be the case as long as you have not acted to avoid
the regulations or committed a breach of fiduciary responsibilities which would
also constitute a violation of federal or state criminal law. If you are
investing on behalf of an insurance company general account, we cannot assure
that the purchase or sale of securities, the continued holding of securities
previously purchased, or transactions incidental to the operation of the trust,
on or after July 5, 2001 would qualify for further statutory exemptive relief.
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 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.
GOVERNMENT PLANS
Government plans are generally not subject to the fiduciary standards
of ERISA or the prohibited transaction rules of ERISA or the Code. However, many
states have enacted laws which established standards of fiduciary conduct, legal
investment rules, or other requirements for investment transactions involving
the assets of government plans. If you are considering investing in securities
on behalf of a government plan, you should consult with your advisors regarding
the requirements of applicable state law.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH SUBSTANTIAL EQUITY FEATURES OR
CERTAIN SECURITIES
Because the exemptive relief afforded by the Underwriters' Exemption or
any similar exemption that might be available will not apply to the purchase,
sale or holding of certain securities, including but not limited to notes with
substantial equity features, subordinate securities, REMIC Residual
Certificates, and
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any securities which are not rated in one of the three highest generic rating
categories by the Exemption Rating Agencies, transfers of these securities to an
ERISA Plan, an IRA or a Keogh Plan, to a trustee or other person acting on
behalf of any ERISA Plan, IRA or Keogh Plan, or to any other person investing
plan assets to effect the 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 the
securities by or on behalf of the ERISA Plan, IRA or Keogh 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 an opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of securities by or
on behalf of the ERISA Plan, IRA or Keogh 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 and the following statements are correct: (i) the
transferee is an insurance company; (ii) the source of funds used to purchase
the securities is an "insurance company general account" as defined in PTCE
95-60; (iii) the conditions set forth in PTCE 95-60 have been satisfied; and
(iv) there is no ERISA Plan, IRA or Keogh Plan with respect to which the amount
of such general account's reserves and liabilities for contracts held by or on
behalf of the ERISA Plan, IRA or Keogh Plan and all other ERISA Plans, IRAs and
Keogh 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 of the date of
the acquisition of the securities, as determined under PTCE 95-60.
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 the purchase that
either (a) the purchaser is not an ERISA Plan, an IRA or a Keogh Plan and is not
purchasing the securities on behalf of, or with plan assets of, any ERISA Plan,
IRA or Keogh Plan or (b) the purchase of the security by or on behalf of, or
with plan assets of, any ERISA Plan, IRA or Keogh 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
An ERISA Plan, an IRA or a Keogh Plan that is exempt from federal
income taxation under section 501 of the Code nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income" under section 512 of the Code. All "excess inclusions" of a
REMIC allocated to a REMIC Residual Certificate and held by such an ERISA Plan,
an IRA or a Keogh Plan will be considered unrelated business taxable income 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.
REQUIRED DEEMED REPRESENTATIONS OF INVESTORS
Any purchaser of the Certificates will be deemed to have represented
that either (a) it is not an ERISA Plan, an IRA or a Keogh Plan and is not
purchasing such securities by or on behalf of or with plan assets of an ERISA
Plan, an IRA or a Keogh Plan or (b) the purchase of any such securities by or on
behalf of or with plan assets of an ERISA Plan, an IRA or a Keogh Plan is
permissible under applicable law, will not result in
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any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the 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 securities must make
its own determination that the conditions for purchase will be satisfied with
respect to such securities.
THIS DISCUSSION IS A GENERAL DISCUSSION OF SOME OF THE RULES WHICH
APPLY TO ERISA PLANS, KEOGH PLANS, IRAS, GOVERNMENT PLANS AND THEIR RELATED
INVESTMENT VEHICLES. PRIOR TO MAKING AN INVESTMENT IN SECURITIES, PROSPECTIVE
PLAN INVESTORS SHOULD CONSULT WITH THEIR LEGAL AND OTHER ADVISORS CONCERNING THE
IMPACT OF ERISA AND THE CODE AND, PARTICULARLY IN THE CASE OF GOVERNMENT PLANS
AND RELATED INVESTMENT VEHICLES, ANY ADDITIONAL STATE LAW CONSIDERATIONS, AND
THE POTENTIAL CONSEQUENCES IN THEIR SPECIFIC CIRCUMSTANCES.
LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify
which classes of securities of the series, if any, will constitute mortgage
related securities for purposes of 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 entities with respect to mortgage related
securities, the securities would constitute legal investments for entities
subject to that legislation only to the extent provided in that legislation.
SMMEA provides, however, that in no event will the enactment of any legislation
of this kind 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 that contractual commitment was made
or the securities were acquired prior to the enactment of that 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 those
securities, and national banks may purchase those 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
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 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 and the Office of Thrift Supervision 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
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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 issued Thrift
Bulletin 13a, entitled, "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities", which is applicable to thrift
institutions regulated by the OTS. Thrift Bulletin 13a has an effective date of
December 1, 1998. One of the primary purposes of Thrift Bulletin 13a is to
require thrift institutions, prior to taking any investment position, to (1)
conduct a pre-purchase portfolio sensitivity analysis for any significant
transaction involving securities or financial derivatives and (2) conduct a
pre-purchase price sensitivity analysis of any complex security or financial
derivative. For the purposes of Thrift Bulletin 13a, complex security includes
among other things any collateralized mortgage obligation or REMIC security,
other than any plain vanilla mortgage pass-through security, that is, securities
that are part of a single class of securities in the related pool, that are
non-callable and do not have any special features. Accordingly, the offered
securities may be viewed as complex securities. The OTS recommends that while a
thrift institution should conduct its own in-house pre- acquisition analysis, it
may rely on an analysis conducted by an independent third-party as long as
management understands the analysis and its key assumptions. Further, Thrift
Bulletin 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. Thrift Bulletin 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 those
investors or are subject to investment, capital or other restrictions, and, if
applicable, whether SMMEA has been overridden in any jurisdiction relevant to
that investor.
METHODS OF DISTRIBUTION
The securities offered by this prospectus 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. 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
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Smith Barney will receive a selling commission with respect to each series of
securities, depending on market conditions, expressed as a percentage of the
aggregate principal balance of the related mortgage loans as of the cut-off
date. The exact percentage for each series of securities will be disclosed in
the related prospectus supplement. To the extent that Salomon Smith Barney
elects to purchase securities as principal, Salomon Smith Barney may realize
losses or profits based upon the difference between its purchase price and the
sales price. The prospectus supplement with respect to any series offered other
than through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the depositor and
purchasers of securities of such series.
The depositor will indemnify Salomon Smith Barney and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Salomon Smith Barney and any
underwriters may be required to make in respect thereof.
In the ordinary course of business, Salomon Smith Barney and the
depositor may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the securities.
The depositor anticipates that the securities will be sold primarily to
institutional investors. Purchasers of securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each series of securities, only those classes rated in one of the
four highest rating categories by any rating agency will be offered by this
prospectus. 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 by this prospectus. 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
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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 Commission. Such reports and other information filed
by the depositor can be inspected and copied at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and its Regional Offices located as follows:
Chicago Regional Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661;
New York Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates and electronically through the Commission's
Electronic Data Gathering, Analysis and Retrieval System at the Commission's Web
site (http:\\www.sec.gov). The depositor does not intend to send any financial
reports to securityholders.
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 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 of the related series.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated in this prospectus 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, a copy of any or all documents or reports
incorporated in this prospectus 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 by this prospectus.
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GLOSSARY
ACCRUAL SECURITIES: A class of securities as to which accrued interest or a
portion thereof will not be distributed but rather will be added to the
principal balance of the security on each distribution date in the manner
described in the related prospectus supplement.
APPLICABLE FEDERAL RATE: A rate based on the average of current yields on
Treasury securities, which rate is computed and published monthly by the IRS.
ARM LOAN: A mortgage loan with an interest rate that adjusts periodically, with
a corresponding adjustment in the amount of the monthly payment, to equal the
sum of a fixed percentage amount and an index.
BIF: Bank Insurance Fund Savings Association Insurance Fund ("SAIF")
CALL CLASS: The holder of a non-offered class of securities that has the right,
at its discretion, to terminate the related trust fund on and effect early
retirement of the securities of such series in the manner described under
"Description of the Securities--Termination" in this prospectus.
CERCLA: The Comprehensive Environmental Response, Compensation and Liability
Act, as amended.
CHARTER ACT: Federal National Mortgage Association Charter Act.
CLEAN-UP CALL: The right of the party entitled to effect a termination of a
trust fund upon the aggregate principal balance of the outstanding trust fund
assets for the series at that time being less than the percentage, as specified
in the related prospectus supplement, of the aggregate principal balance of the
trust fund assets at the cut-off date for that series and which percentage will
be between 25% and 0%.
CLOSING DATE: With respect to any series of securities, the date on which the
securities are issued.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: The Securities and Exchange Commission.
CONTRACT: Any conditional sales contracts and installment loan agreements with
respect to manufactured homes.
CPR: The Constant Prepayment Rate model, which assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate.
CRIME CONTROL ACT: The Comprehensive Crime Control Act of 1984.
DIDMC: The Depository Institutions Deregulation and Monetary Control Act of
1980.
DOL: The U.S. Department of Labor.
DOL REGULATIONS: The regulations promulgated by the U.S. Department of Labor at
29 C.F.R.ss.2510. 3-101.
DTC: Depository Trust Company.
DUE PERIOD: The second day of the month immediately preceding the month in which
the distribution date occurs, or the day after the cut-off date in the case of
the first Due Period, and ending on the first day of the month of the related
distribution date, unless the prospectus supplement specifies otherwise.
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EQUITY CERTIFICATES: Where the issuer is an owner trust, the certificates
evidencing ownership of the trust fund.
ERISA: Employment Retirement Income Security Act of 1974, as amended
ERISA PERMITTED INVESTMENTS: The types of investments permitted by the rating
agencies named in the Prohibited Transaction Exemption 91-23 issued by the DOL
in which funds in a pre-funding account may be invested.
FANNIE MAE: Federal National Mortgage Association.
FDIC: Federal Deposit Insurance Corporation.
FHA: Federal Housing Administration.
FHA LOANS: Any mortgage loan originated by the FHA.
FREDDIE MAC: Federal Home Loan Mortgage Corporation.
FREDDIE MAC ACT: Title III of the Emergency Home Finance Act of 1970, as
amended.
FTC RULE: The "Holder in the Due Course" Rule of the Federal Trade Commission.
GARN-ST. GERMAIN ACT: The Garn-St. Germain Depositor Institutions Act of 1982.
GNMA: Government National Mortgage Association.
GRANTOR TRUST CERTIFICATE: A certificate representing an interest in a Grantor
Trust Fund.
GRANTOR TRUST FRACTIONAL CERTIFICATE: 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 on the
Grantor Trust Certificates at a pass-through rate.
GRANTOR TRUST STRIP CERTIFICATE: A 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 retained interest of the depositor) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. 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.
GRANTOR TRUST FUND: A trust fund as to which no REMIC election will be made and
which qualifies as a grantor trust within the meaning of Subpart E, part I,
subchapter J of Chapter 1 of the Code.
HIGH COST LOAN: A mortgage loan subject to the Home Ownership and Equity
Protection Act of 1994.
HOMEOWNERSHIP ACT: The Home Ownership and Equity Protection Act of 1994.
HOUSING ACT: Title II of the National Housing Act of 1934, as amended.
INSURANCE PROCEEDS: Proceeds received with respect to a mortgage loan under any
hazard insurance policy, special insurance policy, primary insurance policy, FHA
insurance policy, VA guarantee, bankruptcy bond or mortgage pool insurance
policy, to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with normal servicing
procedures.
LIQUIDATED LOAN: A defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise.
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LIQUIDATION PROCEEDS: All amounts, other than Insurance Proceeds, received and
retained in connection with the liquidation of a defaulted mortgage loan, by
foreclosure or otherwise.
LOCKOUT DATE: The date of expiration of the Lockout Period with respect to a
mortgage loan.
LOCKOUT PERIOD: The period specified in a mortgage note during which prepayment
of the mortgage loan is prohibited.
LTV: loan to value ratio.
MORTGAGE: The mortgage, deed of trust or similar instrument securing a mortgage
loan.
MULTIFAMILY LOANS: Mortgage loans relating to Multifamily Properties.
MULTIFAMILY PROPERTIES: Rental apartments or projects (including apartment
buildings owned by cooperative housing corporations) containing five or more
dwelling units.
NBRC: The National Bankruptcy Review Commission.
NCUA: The National Credit Union Administration.
NONRECOVERABLE ADVANCE: An advance made or to be made with respect to a mortgage
loan which the master servicer determines is not ultimately recoverable from
Related Proceeds.
OID REGULATIONS: The rules governing original issue discount that are set forth
in Sections 1271-1273 and 1275 of the Code and in the related Treasury
regulations.
PARTNERSHIP CERTIFICATE: A certificate representing an interest in a Partnership
Trust Fund.
PARTNERSHIP TRUST FUND: A trust fund as to which no REMIC election will be made
and which qualifies as a partnership within the meaning of subchapter K of
Chapter 1 of the Code.
PLANS: Employee pension and welfare benefit plans subject to ERISA and
tax-qualified retirement plans described in Section 401(a) of the Code or
Individual Retirement Accounts described in Section 408 of the Code.
PREPAYMENT ASSUMPTION: With respect to a REMIC Regular Certificate or a Grantor
Trust Certificate, the assumption as to the rate of prepayments of the principal
balances of mortgage loans held by the trust fund used in pricing the initial
offering of that security.
PREPAYMENT PERIOD: The calendar month immediately preceding the month in which
the distribution date occurs, unless the prospectus supplement specifies
otherwise.
PTCE: Prohibited Transaction Class Exemption
PURCHASE PRICE: As to any mortgage loan, an amount equal to the sum of (1) the
unpaid principal balance of the mortgage loan, (2) unpaid accrued interest on
the Stated Principal Balance at the rate at which interest accrues on the
mortgage loan, net of the servicing fee and any retained interest, from the date
as to which interest was last paid to the calendar month in which the relevant
purchase is to occur, (3) any unpaid servicing fees and unreimbursed servicing
expenses payable or reimbursable to the master servicer with respect to that
mortgage loan, (4) any unpaid retained interest with respect to that mortgage
loan, (5) any realized losses incurred with respect to that mortgage loan and
(6) 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.
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RECORD DATE: The last business day of the month preceding the month in which a
distribution date occurs, unless the prospectus supplement specifies otherwise.
RELATED PROCEEDS: Recoveries on a mortgage loan related to amounts which the
master servicer has previously advanced to the related trust fund.
RELIEF ACT: The Soldiers' and Sailors' Civil Relief Act of 1940.
REMIC: A real estate mortgage investment conduit as defined in Sections 860A
through 860G of the Code.
REMIC CERTIFICATES: Certificates evidencing interests in a trust fund as to
which a REMIC election has been made.
REMIC PROVISIONS: Sections 860A through 860G of the Code.
REMIC REGULAR CERTIFICATE: A REMIC Certificate designated as a regular interest
in the related REMIC.
REMIC RESIDUAL CERTIFICATE: A REMIC Certificate designated as a residual
interest in the related REMIC.
REMIC REGULATIONS: The REMIC Provisions and the related Treasury regulations.
RETAINED INTEREST: A portion of the interest payments on a trust fund asset that
may be retained by the depositor or any previous owner of the asset.
RICO: The Racketeer Influenced and Corrupt Organizations statute.
SAIF: The Savings Association Insurance Fund.
SCHEDULED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, 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.
SENIOR/SUBORDINATE SERIES: A series of securities of which one or more classes
is senior in right of payment to one or more other classes to the extent
described in the related prospectus supplement.
SINGLE FAMILY PROPERTIES: One- to four-family residential properties 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.
SMMEA: Secondary Mortgage Market Enhancement Act of 1984.
SPECIAL HAZARD SUBORDINATION AMOUNT: The amount of any Special Hazard Realized
Loss that is allocated to the subordinate securities of a series.
STATED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the principal balance of the mortgage loan or manufactured housing
contract 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 thereon has been, or
had it not been covered by a form of credit support, would have been, allocated
to one or more classes of securities on or before the determination date.
STRIP SECURITIES: A class of securities which are entitled to (a) principal
distributions, with disproportionate, nominal or no interest distributions, or
(b) interest distributions, with disproportionate, nominal or no principal
distributions.
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STRIPPED INTEREST: The distributions of interest on a Strip Security with no or
a nominal principal balance.
UNITED STATES PERSON: A citizen or resident of the United States; a corporation
or partnership, including an entity treated as a corporation or partnership for
federal income tax purposes, created or organized in, or under the laws of, the
United States or any state thereof or the District of Columbia, except, in the
case of a partnership, to the extent provided in Treasury regulations; an estate
whose income is subject to United States federal income tax regardless of its
source; or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust. To the extent prescribed in regulations by the Secretary of the Treasury,
which 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 20, 1996 may elect to continue to be treated as a United
States person notwithstanding the previous sentence.
VA: Veterans' Administration.
VA LOANS: Any mortgage loan originated by the VA.
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$388,141,000 (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 2000-BOA1
PROSPECTUS SUPPLEMENT
DATED NOVEMBER 21, 2000
BANK OF AMERICA, N.A.
ORIGINATOR AND MASTER SERVICER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered by this prospectus supplement
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 February 21, 2001.
