Registration No. 333-40426
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM S-3/A
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation
or Organization)
13-3439681
(I.R.S. Employer Identification No.)
390 Greenwich Street
New York, New York 10013
(212) 816-6000
(Address, Including Zip Code, and
Telephone Number, Including Area
Code, of Registrant's Principal
Executive Offices)
Andrew Alter
Assistant Secretary
Salomon Brothers Mortgage Securities VII, Inc.
390 Greenwich Street
New York, New York 10013
(212) 816-6000
(Name, Address, Including Zip Code,
and Telephone Number, Including
Area Code, of Agent For Service)
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Copies to:
Richard M. Horowitz, Esq. William J. Cullen
Thacher Proffitt & Wood Sidley & Austin
Two World Trade Center 875 Third Avenue
New York, New York 10048 New York, New York 10022
<PAGE>
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
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<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Proposed Proposed
maximum maximum
Amount offering aggregate Amount of
Title of securities being price per offering registration
being registered registered (1) unit (2) price (2) fee (1)
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<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates
and Mortgage-Backed Notes, issued
in Series............................... $100,000,000.00 100% $100,000,000.00 $26,400.00(3)
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</TABLE>
(1) 2,853,836,263.03 aggregate principal amount of Mortgage Pass-Through
Certificates and Mortgage-Backed Notes registered by the Registrant under
Registration Statement No. 333-84249 referred to below and not previously
sold are proposed to be consolidated in this Registration Statement
concurrently with the effectiveness hereof pursuant to Rule 429. All
registration fees in connection with such unsold amount of Mortgage
Pass-Through Certificates and Mortgage-Backed Notes have been previously
paid by the Registrant under the foregoing Registration Statement.
Accordingly, the total amount proposed to be registered under the
Registration Statement as so consolidated as of the date of this filing is
$2,953,836,263.03.
(2) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
(3) Previously paid.
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 under the Securities Act of 1933, when this
Registration Statement is declared effective, each Prospectus which is part of
this Registration Statement shall related to any securities which remain unsold
under the Registration Statement on Form S-3 (333-84249) of the Registrant.
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CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(a)
Items and Captions in Form S-3 Location in Prospectuses
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<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................................. Forepart of Registration
Statement and Outside Front
Cover Page of
Prospectuses**
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................................... Inside Front Cover Page of
Prospectuses and Outside
Back Cover Page of
Prospectuses**
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...................................... Summaries of Prospectus;
Special Considerations
4. Use of Proceeds................................................ Use of Proceeds**
5. Determination of Offering Price................................ *
6. Dilution....................................................... *
7. Selling Security Holders....................................... *
8. Plan of Distribution........................................... Method of Distribution**
9. Description of Securities to Be Registered..................... Outside Front Cover Page;
Summaries of Prospectus;
Description of the Trust
Funds; Description of the
Certificates**
10. Interests of Named Experts and Counsel......................... *
11. Material Changes............................................... Financial Information
12. Incorporation of Certain Information by Reference.............. Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities................. See page II-2
</TABLE>
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* Answer negative or item inapplicable.
** To be completed or provided from time to time by Prospectus Supplement.
<PAGE>
EXPLANATORY NOTE
This Registration Statement consists of (i) a basic prospectus
for use in a residential or multifamily transaction, (ii) a basic prospectus for
use in a commercial or multifamily transaction and (iii) four forms of
prospectus supplement (one form to be used in offering a Series of
Senior/Subordinate Certificates, the second form to be used in offering a Series
of Certificates with various combinations of Credit Support, the third form to
be used in offering a series of commercial or multifamily certificates and the
fourth form to be used in offering Mortgage-Backed Notes). Each basic prospectus
used (in either preliminary or final form) will be accompanied by the applicable
prospectus supplement.
<TABLE>
<CAPTION>
Contents of Registration Statement
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Page
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<S> <C>
Forms of Prospectus Supplement:
Version 1: Form of Prospectus Supplement relating to
a typical Senior/Subordinate Series............................................. S-1
Version 2: Form of Prospectus Supplement relating to
Certificates with various combinations
of Credit Support............................................................... S-1
Version 3: Form of Prospectus Supplement relating to
a typical Commercial or Multifamily Series...................................... S-1
Version 4: Form of Prospectus Supplement relating to
an offering of Mortgage-Backed Notes............................................ S-1
Basic Prospectuses:
Version 1: Form of Basic Prospectus for use in a
residential or multifamily transaction.......................................... 1
Version 2: Form of Basic Prospectus for use in a
commercial or multifamily transaction........................................... 1
</TABLE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, Dated September __, 2000
[Version 1]
Prospectus Supplement (to Prospectus dated , ____)
$_______________ (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-
ISSUER
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
This prospectus supplement, together with the accompanying prospectus will
constitute the complete prospectus.
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OFFERED CERTIFICATES The trust created for the Series _____-__
certificates will hold a pool of one- to
four-family residential first mortgage loans. The
trust will issue ______ classes of offered
certificates. You can find a list of these
classes, together with their principal balances,
pass-through rates and other characteristics, on
Page S-__ of this prospectus supplement. Credit
enhancement for the offered certificates will be
provided by ______ classes of subordinated Class
B Certificates. Each class of Class B
Certificates is subordinated to the senior
certificates and any Class B Certificates with a
higher payment priority.
UNDERWRITING _______________________, as underwriter, will offer to the
public the Class A-1 Certificates through Class A-6
Certificates, the Class XS Certificates, the Class B-1
Certificates, the Class B-2 Certificates, the Class B-3
Certificates and the Class R 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 approximately _____% of the principal
balance of the underwritten certificates plus accrued
interest, before deducting expenses. 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.
<PAGE>
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Underwriter
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
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. maintains its principal office at
390 Greenwich Street, 4th Floor, New York, New York 10013. Its telephone number
is (212) 816-6000.
S-2
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Prospectus Supplement........................................................................................S-4
Risk Factors............................................................................................................S-9
The Mortgage Pool......................................................................................................S-18
Yield on the Certificates..............................................................................................S-19
Description of the Certificates........................................................................................S-29
Pooling and Servicing Agreement........................................................................................S-44
Federal Income Tax Consequences........................................................................................S-49
Method of Distribution.................................................................................................S-52
Secondary Market.......................................................................................................S-53
Legal Opinions.........................................................................................................S-53
Legal Investment.......................................................................................................S-54
ERISA Considerations...................................................................................................S-54
</TABLE>
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED BY THIS PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO
UNDERSTAND ALL OF THE TERMS OF THE OFFERED CERTIFICATES, READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE ACCOMPANYING PROSPECTUS.
Title of Series........................Salomon Brothers Mortgage Securities VII,
Inc., Mortgage Pass-Through Certificates,
Series ____-_.
Cut-off Date...........................__________ __, ____.
Closing Date...........................On or about __________ __, ____.
Depositor..............................Salomon Brothers Mortgage Securities VII,
Inc. The depositor will deposit the
mortgage loans into the trust. SEE "THE
DEPOSITOR" IN THE PROSPECTUS.
Mortgage Loan Seller...................
Originator and Master Servicer.........__________________. SEE "THE MORTGAGE
POOL--UNDERWRITING STANDARDS OF _________
AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS" AND "POOLING AND
SERVICING AGREEMENT--THE ORIGINATOR AND
MASTER SERVICER" IN THIS PROSPECTUS
SUPPLEMENT.
Trustee................................__________________. SEE "POOLING AND
SERVICING AGREEMENT--THE TRUSTEE" IN THIS
PROSPECTUS SUPPLEMENT.
Distribution Dates.....................Distributions on the offered certificates
will be made on the __th day of each
month, or, if that day is not a business
day, on the next succeeding business day,
beginning in ______ ----.
Offered Certificates...................The classes of offered certificates and
their pass-through rates and certificate
principal balances or notional amounts
are set forth in the immediately
following table.
S-4
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<TABLE>
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INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE RATE CLASS PRINCIPAL BALANCE RATE
--------------- ----------------------- ------------------ ------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
A-1............ $_________ ____% XS. . . . . $____________ Variable
A-2............ $_________ ____% B-1. . . . . $____________ ____%
A-3............ $_________ ____% B-2. . . . . $____________ ____%
A-4............ $_________ ____% B-3. . . . . $____________ ____%
A-5............ $_________ ____% R. . . . . . $ 100 ____%
A-6............ $_________ ____%
</TABLE>
The initial certificate principal balance of each class of certificates listed
in the immediately preceding table is approximate. The amount listed as the
initial certificate principal balance of the Class XS Certificates in the
immediately preceding table is actually an approximate initial notional amount.
The pass-through rate set forth in the immediately preceding table is calculated
as described in this prospectus supplement.
THE TRUST
The depositor will establish a trust with respect to the certificates, under the
pooling and servicing agreement dated as of __________ __, ____ among the
depositor, the master servicer and the trustee. There are _____ classes of
certificates representing the trust. SEE "DESCRIPTION OF THE CERTIFICATES" IN
THIS PROSPECTUS SUPPLEMENT.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and principal on the offered
certificates will be made only from payments received in connection with the
mortgage loans described in the next section.
THE MORTGAGE LOANS
The trust will contain approximately _____ [conventional] [sub-prime]
[nonconforming], one- to four-family, fixed-rate mortgage loans secured by first
liens on residential real properties. The mortgage loans have an aggregate
principal balance of approximately $__________ as of _________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of __________ __, ____.
Approximate range _____% to
of mortgage rates: _____%.
Approximate ______%.
weighted average
mortgage rate:
Approximate ___ years and ___
weighted average months.
remaining term to
stated maturity:
Approximate range $__________ to
of principal balances: $____________.
Average principal $_____________.
balance:
Approximate range _____% to
of loan-to-value _____%.
ratios:
Approximate ______%.
weighted average
loan-to-value ratio:
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED CERTIFICATES. The offered certificates will have the characteristics
shown in the table appearing on page S-__ in this prospectus
S-5
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supplement. The pass-through rates on each class of offered certificates, other
than the Class XS Certificates, are fixed and shown in the table on page S-__ of
this prospectus supplement. The initial variable pass-through rate for the Class
XS Certificates is approximately _____% per annum. The pass-through rate on the
Class XS Certificates will be calculated for each distribution date as described
under the definition of pass-through rate contained in "Description of the
Certificates--Glossary of Terms" in this prospectus supplement.
The offered certificates will be sold by the depositor to the underwriter on the
closing date. [The underwriter will sell the Class XS Certificates.]
The offered certificates will initially be represented by one or more global
certificates registered in the name of CEDE & Co., as nominee of DTC in minimum
denominations of $[10,000] and integral multiples of $[1.00] in excess of the
minimum denominations. SEE "DESCRIPTION OF THE CERTIFICATES --REGISTRATION OF
THE BOOK-ENTRY CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
The Class XS Certificates will be offered in registered, certificated form, in
minimum denominations of $[10,000] and integral multiples of $[1,000] in excess
of $[10,000].
Investors in the Class XS Certificates should note that these certificates are
only entitled to interest and their yield is extremely sensitive to the rate and
timing of principal prepayments on the mortgage loans. A fast prepayment speed
will reduce the yield on the Class XS Certificates, and may result in the
failure of an investor to fully recover their investment in these certificates.
The Class R Certificates will be offered in registered, certificated form, in
minimum denominations of $[20] and integral multiples in excess of $[20].
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
$____________, evidencing an aggregate initial undivided interest in the trust
of approximately _____%. These certificates will be sold by the depositor to
____________ 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 in the next section 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 in this
prospectus supplement, to the rights of the holders of each class of Class A
Certificates.
In addition, the rights of the holders of subordinate certificates with higher
numerical class designations will be subordinated to the rights of holders of
subordinate certificates with lower numerical class designations, to the extent
described in this prospectus supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
the certificates protection against realized losses on the mortgage loans as
described in the next section.
ALLOCATION OF LOSSES. Except as described in the next paragraph, if subordinate
certificates remain outstanding, losses on the mortgage loans will be allocated
first to the class of subordinate certificates with the lowest payment priority,
and the other classes of certificates will not bear any portion of these
S-6
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losses. If none of the subordinate certificates remain outstanding, losses on
mortgage loans will be allocated to the Class A Certificates.
Not all losses will be allocated in the priority set forth in the immediately
preceding paragraph. Losses due to natural disasters such as floods and
earthquakes, fraud by a mortgagor, bankruptcy of a mortgagor or other
extraordinary events will be allocated as described in the immediately preceding
paragraph only up to specified amounts. Losses of these types in excess of the
specified amount will be allocated to all outstanding classes of certificates,
other than the Class XS Certificates, PRO RATA in proportion to their remaining
principal balances. Therefore, the subordinate certificates do not act as credit
enhancement for these losses.
P&I ADVANCES
The master servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, as described in this prospectus supplement. 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
CERTIFICATES--P&I ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF
THE SECURITIES--ADVANCES IN RESPECT OF DELINQUENCIES" IN THE PROSPECTUS.
OPTIONAL TERMINATION
At its option, the master servicer may purchase all of the mortgage loans,
together with any properties in respect 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 [10%] of the aggregate principal balance of the
mortgage loans as of __________ __, ____. SEE "POOLING AND SERVICING AGREEMENT--
TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--
TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the trust as a real estate mortgage investment
conduit for federal income tax purposes. SEE "FEDERAL INCOME TAX
CONSEQUENCES--CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES" IN THE
PROSPECTUS.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN
THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the certificates that the offered
certificates receive the following ratings from [______________] and
[______________]:
OFFERED
CERTIFICATES [RA] [RA]
------------ ---- ----
Class A-1 AAA AAA
through Class
A-7
Class XS AAA AAA[r]
Class B-1 AA AA
Class B-2 A A
Class B-3 BBB BBB
Class R AAA AAA
A security rating does not address the frequency of prepayments on the mortgage
loans, the corresponding effect on yield to investors or whether investors in
the Class XS Certificates may fail to recover fully their initial investment.
S-7
<PAGE>
The ratings on the Class R Certificates do not address the likelihood of receipt
by the holders of these certificates of any amounts in excess of the initial
certificate balance of the Class R Certificates and interest thereon. 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 ___ and Class ___ 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 one or
more nationally recognized statistical rating organizations and, therefore, will
be legal investments for entities to the extent provided in SMMEA and applicable
state laws. The Class ___ Certificates an the Class ___ Certificates will not
constitute mortgage related securities for purposes of SMMEA. SEE "LEGAL
INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption to the
underwriter. This exemption will only apply to the Class A Certificates and the
Class XS Certificates, provided that the conditions set forth under
"Considerations for Benefit Plan Investors" in the prospectus are satisfied.
ACCORDINGLY, THE OTHER CLASSES OF CERTIFICATES MAY NOT BE ACQUIRED BY OR ON
BEHALF OF A PLAN EXCEPT AS DESCRIBED IN THIS PROSPECTUS SUPPLEMENT. SEE "ERISA
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
S-8
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase the offered certificates unless you
understand and are able to bear the prepayment, credit, liquidity and market
risks associated with these securities.
You should carefully consider the following factors in connection with the
purchase of the offered certificates:
[APPROPRIATE RISK FACTORS AS NECESSARY]
[THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC WHICH MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
The originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. The originator provides loans primarily to
borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac
guidelines but who do have equity in their property. While the originator's
primary consideration in underwriting a mortgage loan is the value of the
mortgaged property, the originator also considers, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the mortgaged property. The originator's
underwriting standards do not prohibit a mortgagor from obtaining secondary
financing at the time of origination of the originator's first lien, which
secondary financing would reduce the equity the mortgagor would otherwise have
in the related mortgaged property as indicated in the originator's loan-to-value
ratio determination.
As a result of the underwriting standards described in the immediately
preceding paragraph, the mortgage loans in the mortgage pool are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS OF __________ AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT].
S-9
<PAGE>
[THE PAYMENT PERFORMANCE OF YOUR CERTIFICATES WILL BE RELATED TO THE PAYMENT
PERFORMANCE OF THE MORTGAGE LOANS IN THE TRUST FUND; THE MORTGAGE LOANS IN THE
TRUST FUND WHICH ARE DISCUSSED IN THIS SECTION MAY EXPOSE YOUR CERTIFICATES TO
GREATER LOSSES.
The certificates represent an interest in mortgage loans. In the event that
the mortgaged properties fail to provide adequate security for the mortgage
loans included in the trust fund, any resulting losses, to the extent not
covered by the credit enhancement, will be allocated to the certificates as
described in this prospectus supplement, and consequently may adversely affect
the yield to maturity on your certificate. 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 mortgage loans. Furthermore,
particular mortgage loans, including negative amortization mortgage loans,
buydown mortgage loans and mortgage loans requiring the mortgagor to make a
balloon payment, may have a greater likelihood of delinquency and foreclosure,
and a greater likelihood of loss in the event of delinquency or foreclosure. You
should consider the following risks associated with the mortgage loans included
in the trust fund: [AS APPLICABLE]
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL MAY RESULT IN
OUTSTANDING PRINCIPAL BALANCES IN EXCESS OF THE VALUE OF THE UNDERLYING
MORTGAGED PROPERTY WHICH COULD RESULT IN LOSSES ON YOUR CERTIFICATES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _______________, are subject to negative amortization. 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 the
credit enhancement in the trust fund, holders of the certificates 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.
[THE INABILITY OF A MORTGAGOR TO MAKE LARGER MONTHLY PAYMENTS FOLLOWING THE
BUYDOWN PERIOD OF A BUYDOWN MORTGAGE LOAN MAY RESULT IN LOSSES ON THOSE MORTGAGE
LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _________________ are buydown mortgage loans, subject to temporary buydown
plans under 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.
In most cases, 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 some buydown mortgage loans, during the initial buydown period. The
inability of a mortgagor to make these larger monthly payments could lead to
losses on
S-10
<PAGE>
the mortgage loans, and to the extent not covered by the credit enhancement, may
adversely affect the yield to maturity on your certificates.
[THE INABILITY OF A MORTGAGOR TO MAKE A BALLOON PAYMENT AT MATURITY, MAY EXPOSE
YOUR CERTIFICATES TO LOSSES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ may not be fully amortizing, or may not amortize at all,
over their terms to maturity and, thus, will require substantial payments of
principal and interest, that is, balloon payments, at their stated maturity.
Mortgage loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related mortgaged property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, prevailing economic conditions and the availability
of credit for loans secured by comparable real properties.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE LIMITED
RECOURSE TO THE RELATED BORROWER, WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are 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. If the value of
the mortgaged property and other security has declined, the trust fund couuld
suffer losses on these mortgage loans that, to the extent not covered by [the
credit enhancement] may be allocated to your certificates. However, even with
respect to those mortgage loans that provide for recourse against the mortgagor
and its assets, there can be no assurance that enforcement of the 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.
[THE INABILITY OF A MORTGAGOR TO MAKE VARYING MONTHLY PAYMENTS UNDER A HOME
EQUITY LINE OF CREDIT LOAN MAY RESULT IN LOSSES ON YOUR CERTIFICATES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans that provide the borrower with a line of
credit pursuant to which amounts may be advanced to the borrower by the lender
from time to time. Collection on these types of mortgage loans may vary because,
among other things:
o borrowers may make payments during any month as low as the minimum
monthly payment for that month, or just the interest and fees for that month
during any interest-only period, or
o borrowers may make payments as high as the entire outstanding charges
on the mortgage loan.
It is possible that borrowers may fail to make the required periodic
payment and, to the extent not covered by the credit enhancement, these losses
may adversely affect the yield to maturity on your certificates.
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[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE SECURED BY
JUNIOR LIENS, WHICH MAY EXPOSE THE OFFERED CERTIFICATES TO LOSSES IF THE TRUST
FUND DOES NOT RECEIVE ADEQUATE FUNDS IN CONNECTION WITH A FORECLOSURE OF THE
RELATED SENIOR LIEN TO SATISFY BOTH THE SENIOR AND JUNIOR LIEN.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans secured by junior liens and with respect
to approximately ___% of these junior liens, the related senior liens are not
included in the trust fund. 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 junior lien mortgage loan. 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 junior lien
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 this type of sale, a
bidder at the foreclosure sale of a junior lien mortgage loan would have to bid
an amount sufficient to pay off all sums due under the junior lien mortgage loan
and the senior liens or purchase the mortgaged property subject to the senior
liens. 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. A decline in the value of the mortgaged properties securing the
mortgage loans with junior liens may increase the likelihood that, in the event
of a default by the related mortgagor, liquidation or other proceeds will be
insufficient to satisfy the junior lien mortgage loan after satisfaction of any
senior liens and the payment of any liquidation expenses. In the event that the
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 the certificates bear:
o the risk of delay in distributions while a deficiency judgment against
the borrower is obtained,
o the risk of loss if the deficiency judgment is not realized upon and
o the risk that deficiency judgments may not be available in all
jurisdictions.
Other factors may affect the prepayment rate of junior lien mortgage loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien mortgage loans
may experience a higher rate of prepayments than 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.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL WERE ORIGINATED
OUTSIDE THE UNITED STATES, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________, are mortgage loans secured by properties located in Puerto
Rico and Guam. 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
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for the foreclosure of a real estate mortgage under the laws of the Commonwealth
of Puerto Rico varies from the procedures 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.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE HIGH
LOAN-TO-VALUE RATIOS, SO THAT THE RELATED BORROWER HAS LITTLE OR NO EQUITY IN
THE RELATED MORTGAGED PROPERTY, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, had a loan-to-value ratio or a combined loan-to-value
ratio, in the case of any second lien mortgage loan, at origination in excess of
80%. No mortgage loan in the mortgage pool with a loan- to-value ratio or a
combined loan-to-value ratio, in the case of any second lien mortgage loan, at
origination in excess of 80% will be covered by a primary mortgage insurance
policy. No first lien mortgage loan will have a loan-to-value ratio exceeding
__% at origination and no second lien mortgage loan will have a combined
loan-to-value ratio exceeding _____% at origination. Mortgage loans with higher
loan-to-value ratios may present a greater risk of loss in that an overall
decline in the residential real estate market, a rise in interest rates over a
period of time and the condition of a mortgaged property, as well as other
factors, may have the effect of reducing the value of the mortgaged property
from the appraised value at the time the mortgage loan was originated. If there
is a reduction in value of the mortgaged property, the loan-to-value ratio may
increase over what it was at the time the mortgage loan was originated. This
increase may reduce the likelihood of liquidation or other proceeds being
insufficient to satisfy the mortgage loan and any losses, to the extent not
covered by the credit enhancement, may affect the yield to maturity or your
certificates. Furthermore, investors should note that the value of the mortgaged
property may be insufficient to cover the outstanding balance of the
certificates. There can be no assurance that the loan-to-value ratio of any
mortgage loan determined at any time after origination is less than or equal to
its original loan-to-value ratio.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE DELINQUENT
AS OF THE CUT-OFF DATE, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, were thirty days or more but less than sixty days
delinquent in their monthly payments as of ______ __, ____. Approximately ____%
of the mortgage loans, by aggregate principal balance as of _______ __, ____,
were sixty days or more but less than ninety days delinquent in their monthly
payments as of the _______ __, ____. However, investors in the mortgage loans
should realize that approximately _____% of the mortgage loans, by aggregate
principal balance as of _______ __, ____, have a first payment date occurring on
or after _______ __, ____ and, therefore, these mortgage loans could not have
been delinquent as of _______ __, ____].
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE CONCENTRATED
IN THE STATE OF [NAME OF STATE], WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
Approximately ___% of the mortgage loans are in the state of [Name of
State.] Investors should note that some geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets causing a decline in property values in those areas, and
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans located in other geographic regions. A region's
economic condition
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and housing market may be directly, or indirectly, adversely affected by a
number of factors including 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. A concentration of mortgage loans in
the trust fund in a region experiencing a deterioration in economic conditions
or a decline in real estate values may expose your certificates to losses in
addition to those present for similar mortgage-backed securities without this
concentration. 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 mortgage loans. Any deterioriation of economic conditions in
[name of state] which adversely affects the ability of borrowers to make
payments on the mortgage loans may increase the likelihood of delinquency and
foreclosure of the mortgage loans that may result in losses that, to the extent
not covered by the [credit enhancement] will be allocated to your certificates.
[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 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 YOUR CERTIFICATES WILL BE
AFFECTED BY THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The rate and timing of distributions allocable to principal on the Class A
Certificates will depend on the rate and timing of principal payments, including
prepayments and collections upon defaults, liquidations and repurchases, on the
mortgage loans and the allocation to pay principal on these certificates as
provided in this prospectus supplement. The rate and timing of distributions
allocable to principal on the other classes of offered certificates, other than
the Class XS Certificates, will depend on the rate and timing of principal
payments, including prepayments and collections upon defaults, liquidations and
repurchases, on all of the mortgage loans and the allocation to pay principal on
these certificates as provided in this prospectus supplement. As is the case
with mortgage pass-through certificates, the offered certificates are subject to
substantial inherent cash- flow uncertainties because the mortgage loans may be
prepaid at any time. However, with respect to approximately _____% of the
mortgage loans, by aggregate principal balance as of ________ __, ____, a
prepayment may subject the related mortgagor to a prepayment charge, which may
act as a deterrent to prepayment of the mortgage loan. SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
Prior to the distribution date in _______ ____, the subordinate
certificates will be entitled to receive distributions allocable to principal
based on a disproportionately small percentage of principal prepayments on the
mortgage loans, and the Class A Certificates will be entitled to receive
distributions allocable to principal based on a disproportionately large
percentage, which may be 100%, of principal prepayments on the mortgage loans.
To the extent that no principal prepayments or a disproportionately small
percentage of prepayments are distributed on the subordinate certificates, the
subordination afforded to the Class A Certificates, in the absence of losses
allocated to these certificates, will be increased.
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[THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS WHICH COULD IMPACT THE RATE AND TIMING OF PRINCIPAL
DISTRIBUTIONS ON YOUR CERTIFICATES.
In most cases, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease. A decrease in the prepayment rates on
the mortgage loans will result in a reduced rate of return of principal to
investors in the Class A Certificates at a time when reinvestment at these
higher prevailing rates would be desirable. A decrease in the prepayment rates
on all of the mortgage loans will result in a reduced rate of return of
principal to investors in the other classes of offered certificates, other than
the Class XS Certificates, at a time when reinvestment at these higher
prevailing rates would be desirable.
Conversely, when prevailing interest rates are declining, prepayment rates
on mortgage loans tend to increase. An increase in the prepayment rates on the
mortgage loans will result in a greater rate of return of principal to investors
in the related Class A Certificates, at time when reinvestment at comparable
yields may not be possible. An increase in the prepayment rates on all of the
mortgage loans will result in a greater rate of return of principal to investors
in the other classes of offered certificates, other than the Class XS
Certificates, at a time when reinvestment at comparable yields may not be
possible.
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 FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION".
[THE YIELD ON YOUR CERTIFICATES WILL VARY DEPENDING ON THE RATE OF PREPAYMENTS.
The yield to maturity on the offered certificates, particularly the Class
XS Certificates, will depend on:
o the applicable purchase price; and
o the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the related
mortgage loans and the allocation to reduce the certificate principal
balance or notional amount of the certificates, as well as other
factors.
The yield to investors on the offered certificates will be adversely
affected by any allocation to the offered certificates of interest shortfalls on
the mortgage loans.
If the offered certificates, other than the Class XS Certificates, are
purchased at a premium and principal distributions thereon occur at a rate
faster than anticipated at the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
the offered certificates, other than the Class XS Certificates, are purchased at
a discount and principal distributions thereon occur at a rate slower than that
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that originally assumed.
The proceeds to the depositor from the sale of the offered certificates
were determined based on a number of assumptions, including a prepayment
assumption of ____% of the standard prepayment assumption, and weighted average
lives corresponding to the prepayment assumption. No representation is made that
the mortgage loans will prepay at that rate or at any other rate, or that the
mortgage loans will prepay at the same rate. The yield assumptions for the
offered
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certificates will vary as determined at the time of sale. SEE "YIELD ON THE
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT].
[THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC TERMS THAT
APPLY TO THAT CLASS, DISCUSSED IN THIS RISK FACTOR.
CLASS XS CERTIFICATES: The yield to maturity on the Class XS Certificates
will be extremely sensitive to the rate of principal payments, including
prepayments and collections upon defaults, liquidations and repurchases, on the
mortgage loans, which may fluctuate significantly from time to time. Moreover,
the amount of interest payable on the Class XS Certificates will decrease more
significantly as a result of principal prepayments on mortgage loans with
relatively high mortgage rates. Prospective investors should consider fully the
risks associated with an investment in the Class XS Certificates, including the
risk that a rapid rate of principal payments on the mortgage loans will have a
materially negative effect on the yield to investors in the Class XS
Certificates and may result in the failure of investors in the Class XS
Certificates to recover fully their initial investment.
SUBORDINATE CERTIFICATES: The weighted average lives of, and the yield to
maturity on, the Class B-1 Certificates, the Class B-2 Certificates and the
Class B-3 Certificates will be progressively more sensitive, in increasing order
of their numerical class designations, to losses due to defaults on the mortgage
loans and the timing of losses on the mortgage loans, to the extent these losses
are not covered by subordinate certificates with a higher numerical class
designation, including covered by the Class B-4, Class B-5 and Class B-6
Certificates which are not offered by this prospectus supplement. Furthermore,
as described in this prospectus supplement, the timing of receipt of principal
and interest by any class of subordinate certificates may be adversely affected
by losses even if the class does not ultimately bear the loss].
[THE CLASS R CERTIFICATES WILL RECEIVE LIMITED DISTRIBUTIONS OF PRINCIPAL AND
INTEREST AND MAY HAVE SIGNIFICANT TAX LIABILITIES.
Holders of the Class R Certificates are entitled to receive distributions
of principal and interest as described in this prospectus supplement, but the
holders of these certificates are not expected to receive any distributions
after the first distribution date. In addition, holders of these certificates
will have tax liabilities with respect to their certificates during the early
years of the term of the trust that substantially exceed the principal and
interest payable thereon during or prior to these periods. SEE "--FEDERAL INCOME
TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT, "YIELD ON THE
CERTIFICATES--ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT AND "FEDERAL INCOME TAX
CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS].
[VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND YOUR CERTIFICATES.
Applicable state laws regulate interest rates and other charges, require
disclosure, and require licensing of the originator. In addition, other state
laws, public policy and principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding
the terms of the mortgage loans;
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o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the originator
to damages and administrative enforcement.
The originator will represent that as of the closing date, each mortgage
loan is in compliance with applicable federal and state laws and regulations. In
the event of a breach of this representation, it will be obligated to cure the
breach or repurchase or replace the affected mortgage loan in the manner
described in the prospectus].
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE MASTER SERVICER TO
PERFORM ITS DUTIES.
As is the case with most companies using computers in their operations, the
master servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the master servicer's computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Any occurrence of this kind could result in major
computer system failure or miscalculations. The master servicer is presently
engaged in various procedures to ensure that its computer systems and software
will be year 2000 compliant. However, in the event that the master servicer, or
any of its suppliers, customers, brokers or agents do not successfully and
timely achieve year 2000 compliance, the performance of obligations of the
master servicer under the pooling and servicing agreement could be materially
adversely affected].
All capitalized terms used in this prospectus supplement will have the
meanings assigned to them under "Description of the Certificates--Glossary of
Terms" or in the prospectus under "Glossary."
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THE MORTGAGE POOL
GENERAL DESCRIPTION OF THE MORTGAGE LOANS
References to percentages of the mortgage loans in the mortgage pool unless
otherwise noted are calculated based on the aggregate principal balance of the
mortgage loans as of ___________ __, ____, which date will also be referred to
in this prospectus supplement as the cut-off date.
The mortgage pool will consist of approximately _____ conventional, one- to
four-family, fixed- rate, fully-amortizing mortgage loans secured by first liens
on residential real properties and having an aggregate principal balance as of
the cut-off date, of approximately $___________, after application of scheduled
payments due on or before the cut-off date whether or not received and subject
to a permitted variance of plus or minus 5%. The mortgage loans in the mortgage
pool have original terms to maturity of not greater than [30] years.
The mortgage loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties. The mortgaged properties in the mortgage pool consist of
one- to four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments. The mortgage loans to be included
in the mortgage pool will be acquired by the depositor from the mortgage loan
seller. The mortgage loan seller, in its capacity as master servicer, will act
as the master servicer for the mortgage loans originated by it under the pooling
and servicing agreement.
All of the mortgage loans in the mortgage pool have scheduled monthly
payments due on the first day of the month. Each mortgage loan in the mortgage
pool will contain a customary due-on- sale clause.
Approximately _____% of the mortgage loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on prepayments. Each
mortgage loan in the mortgage pool that provides for the payment of a prepayment
charge provides for payment of a prepayment charge on partial or full
prepayments made within one year, five years or other designated period as
provided in the related mortgage note from the date of origination of the
particular mortgage loan. The amount of the prepayment charge is as provided in
the related mortgage note, and the prepayment charge will apply if, in any
twelve-month period during the first year, five years or other designated period
as provided in the related mortgage note from the date of origination of the
particular mortgage loan, the mortgagor prepays an aggregate amount exceeding
__% of the original principal balance of the particular mortgage loan. With
respect to _____% of these mortgage loans, the amount of the prepayment charge
will be equal to ___ months' advance interest calculated on the basis of the
mortgage rate in effect at the time of the prepayment on the amount prepaid in
excess of __% of the original principal balance of the mortgage loan for a
period of five years and one year, respectively. The _____________ will be
entitled to all prepayment charges received on the mortgage loans, and these
amounts will not be available for distribution on the certificates. The master
servicer may, in its discretion, waive the collection of any otherwise
applicable prepayment charge or reduce the amount of the prepayment charge
actually collected, and accordingly, there can be no assurance that the
prepayment charges will have any effect on the prepayment performance of the
mortgage loans.
The average principal balance of the mortgage loans at origination was
approximately $______. No mortgage loan had a principal balance at origination
of greater than approximately $_______ or less than approximately $______. The
average principal balance of the mortgage loans as of the cut-off date was
approximately $______. No mortgage loan had a principal balance as of the
cut-off date of greater than approximately $_______ or less than approximately
$______.
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As of the cut-off date, the mortgage loans had mortgage rates ranging from
approximately _____% per annum to approximately ______% per annum and the
weighted average mortgage rate was approximately _____% per annum. The weighted
average remaining term to stated maturity of the mortgage loans will be
approximately __ years and __ months as of the cut-off date. None of the
mortgage loans will have its first payment due prior to ________ ____ or after
_________ ____, or will have a remaining term to maturity of less than __ years
and __ months or greater than __ years as of the cut-off date. The latest
maturity date of any mortgage loan in the mortgage pool is
-------- ----.
The weighted average loan-to-value ratio at origination of the mortgage
loans was approximately ______%. No loan-to-value ratio at origination was
greater than approximately _____% or less than approximately ____%.
The mortgage loans are expected to have as of the cut-off date the
following characteristics listed on Appendix A.
UNDERWRITING STANDARDS OF ___________ AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS
All of the mortgage loans were originated by ________________ in such
capacity as the mortgage loan seller, generally in accordance with the
underwriting criteria specified in the prospectus, except as described herein.
[Description of differences with Prospectus description under the heading
"Underwriting Standards; Representations"].
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as constituted at the close
of business on the cut-off date, as adjusted for the scheduled principal
payments due on or before 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 THE OFFERED CERTIFICATES
The effective yield to holders of the offered certificates of each class
will be less than the yields otherwise produced by their respective Pass-Through
Rates and purchase prices because:
o on the first distribution date, one month's interest is payable on
the offered certificates even though __ days will have elapsed from the date on
which interest begins to accrue on the offered certificates,
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o on each succeeding distribution date the interest payable on the
offered certificates is the interest accrued during the month preceding the
month of the particular distribution date, which ends __ 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
the class actually outstanding for the first __ days of the Interest Accrual
Period.
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 beginning with the date on
which the scheduled monthly payment was due for 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 the mortgage loans affected by
application of the Relief Act. The master servicer is obligated to pay from its
own funds only those interest shortfalls attributable to full and partial
prepayments by the mortgagors on the mortgage loans master serviced by it, but
only to the extent of its aggregate servicing fee for the related due period.
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. Accordingly, the effect of:
o any principal prepayments on the mortgage loans, to the extent that
Prepayment Interest Shortfalls exceed 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 certificates.
Any of these shortfalls will be allocated among the certificates as
provided in this prospectus supplement under "Description of the
Certificates--Interest Distributions". See "Legal Aspects of the Mortgage
Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the prospectus. See
"Pooling and Servicing Agreement--Servicing and Other Compensation and Payment
of Expenses" in this prospectus supplement.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on each class of offered certificates, other
than the Class XS Certificates, the aggregate amount of distributions on each
class of offered certificates and the yield to maturity of each class of offered
certificates will be related to the rate and timing of payments of principal on
the mortgage loans. The rate of principal payments on the mortgage loans in the
mortgage pool will in turn be affected by the amortization schedules of the
mortgage loans 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 mortgage loan seller, the
originator or the master servicer. The mortgage loans may be prepaid by the
mortgagors at any time; however, with respect to approximately _____% of the
mortgage loans, by aggregate principal balance as of the cut-off date, a
prepayment may subject the related mortgagor to a prepayment charge. All of the
mortgage loans contain due-on-sale clauses. Prior to the distribution
S-20
<PAGE>
date in ________ ____, all principal prepayments on the mortgage loans will be
allocated to the senior certificates, other than the Class XS Certificates.
After the distribution date in ____________ ____, as further described in this
prospectus supplement, during some periods, subject to loss and delinquency
criteria described in this prospectus supplement, 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. See
"Description of the Certificates--Principal Distributions on the senior
certificates" in this prospectus supplement
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 distributions that otherwise
would be distributed over the remaining terms of these 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 the rate of principal
prepayments. The extent to which the yield to maturity of any class of offered
certificates, other than the Class XS Certificates, may vary from the
anticipated yield will depend upon the degree to which they are purchased at a
discount or premium and the degree to which the timing of payments on these
certificates is sensitive to prepayments on the mortgage loans. Further, an
investor should consider, in the case of any certificate purchased at a
discount, the risk that a slower than anticipated rate of principal payments on
the mortgage loans could result in an actual yield to the investor that is lower
than the anticipated yield. In the case of any 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. In most cases, the earlier a prepayment of principal on the
mortgage loans occurs, the greater the effect on the investor's yield to
maturity. As a result, the effect on an investor's yield of principal payments
occurring at a rate higher or lower than the rate anticipated by the investor
during the period immediately following the issuance of the certificates would
not be fully offset by a subsequent like reduction or increase in the rate of
principal payments. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in this prospectus supplement and in the prospectus.
The yield to maturity on the Class XS Certificates will be extremely
sensitive to prepayments on the mortgage loans and most sensitive to prepayments
on mortgage loans with relatively high mortgage rates. See "--Yield Sensitivity
of the Class XS 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 actual yield to maturity on the offered certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
Because principal distributions are paid to 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 before principal distributions are made on these
certificates. In particular, with respect to the Lockout Certificates, there
will be periods when no principal payments or a disproportionately small portion
of the Senior Principal Distribution Amount will be distributed on the Lockout
Certificates, and there will be other periods when a disproportionately large
portion of the Senior Principal Distribution Amount will be distributed on the
Lockout Certificates. Unless the certificate principal balances of the Class A
Certificates, other than the Lockout Certificates, have been
S-21
<PAGE>
reduced to zero, the Lockout Certificates will not be entitled to receive any
distributions of principal payments prior to the distribution date in ________
____.
The rate of payments, including prepayments, on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the mortgage rates on the
mortgage loans in the mortgage pool, 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. 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.
Defaults on mortgage loans are expected to occur with greater frequency in
their early years. In addition, default rates in most cases are higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a mortgage loan in the mortgage pool, there can be no
assurance that recourse beyond the specific mortgaged property pledged as
security for repayment will be available. See "The Mortgage Pool--Underwriting
Standards of __________ and Representations Concerning the Mortgage Loans" in
this prospectus supplement.
MARKET INTEREST RATE AND SUBORDINATION YIELD CONSIDERATIONS
Because the mortgage rates on the mortgage loans in the mortgage pool and
the Pass-Through Rates on the offered certificates, other than the Class XS
Certificates, are fixed, these rates will not change in response to changes in
market interest rates. Accordingly, if mortgage market interest rates or market
yields for securities similar to the offered certificates were to rise, the
market value of the offered certificates may decline.
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. Furthermore, 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 interruptions in distributions. These
delinquencies may affect the yield to investors on the classes of the
Subordinate certificates, and, even if subsequently cured, will affect the
timing of the receipt of distributions by the holders of the classes of the
subordinate certificates. In addition, a larger than expected rate of
delinquencies or losses will affect the rate of principal payments on each class
of the subordinate certificates if it delays the scheduled reduction of the
Senior Prepayment Percentage, triggers an increase of the Senior Prepayment
Percentage to [100]% or triggers a lockout of one or more classes of subordinate
certificates from distributions of portions of the Subordinate Principal
Distribution Amount. See "Description of the Certificates--Principal
Distributions on the senior certificates" and "--Principal Distributions on the
Subordinate Certificates" 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 the
security will be repaid to the investor. The weighted average life of the
offered certificates of each class will be influenced by the rate at which
principal on the mortgage loans is paid, which may be in the form of scheduled
payments or prepayments,
S-22
<PAGE>
including prepayments of principal by the mortgagor as well as amounts received
by virtue of condemnation, insurance or foreclosure with respect to the mortgage
loans, and the timing of these payments.
Except as otherwise described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" in this
prospectus supplement, distributions of principal will be made to the classes of
Class A Certificates according to the priorities described in this prospectus
supplement, rather than on a PRO RATA basis among the classes of Class A
Certificates, unless the certificate principal balances of the subordinate
certificates have been reduced to zero. The timing of commencement of principal
distributions to each class of the Class A Certificates and the weighted average
life of each class of the Class A Certificates will be affected by the rates of
prepayment on the mortgage loans experienced both before and after the
commencement of principal distributions on each class of the Class A
Certificates. Furthermore, the Lockout Certificates do not receive, unless the
certificate principal balances of the Class A Certificates other than the
Lockout Certificates, have been reduced to zero, any portion of principal
payments prior to the distribution date occurring in ________ ____. After this
date, the Lockout Certificates will receive, unless the certificate principal
balances of the Class A Certificates other than the Lockout Certificates, have
been reduced to zero, a disproportionately small or large portion of principal
payments. As a result, the weighted average life of the Lockout Certificates
will be longer or shorter than would otherwise be the case, and the effect on
the market value of the Lockout Certificates of changes in market interest rates
or market yields for similar securities may be greater or lesser than for the
other classes of Class A Certificates entitled to principal distributions.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
assumes a prepayment rate for the mortgage loans of ___% CPR. No representation
is made that the mortgage loans in the mortgage pool will prepay at this rate or
any other rate. To assume __% CPR or any other CPR percentage is to assume that
the stated percentage of the outstanding principal balance of the pool is
prepaid over the course of a year.
The tables following the next paragraph indicate the percentage of the
initial certificate principal balance of the indicated classes of certificates
that would be outstanding after each of the dates shown at various constant
percentages of the prepayment model and the corresponding weighted average life
of each class of certificates. The table is based on the following assumptions:
o the mortgage pool consists of ____ mortgage loans with the
characteristics set forth in the table following these bullet points
entitled Assumed Mortgage Loan Characteristics,
o distributions on the certificates are received, in cash, on the __th
day of each month, commencing in ________ ____,
o the mortgage loans prepay at the constant percentages of the prepayment
model 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 mortgage loan seller, the originator, the
master servicer or any other person purchases from the trust fund any
mortgage loan based on any obligation or option under the pooling and
servicing agreement, except as indicated in the second sentence
following the table,
S-23
<PAGE>
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in ________ ____, and are computed
prior to giving effect to any prepayments received in the prior month,
o prepayments representing payment in full of individual mortgage loans
are received on the last day of each month commencing in _______ ____,
and include 30 days' interest on the mortgage loan,
o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate and remaining term to
maturity so that the mortgage loan will amortize in amounts sufficient
to repay the remaining principal balance of the mortgage loan by its
remaining term to maturity,
o the certificates are purchased on _______ __, ____ and
o the servicing fee rate is ____% per annum and the trustee's fee rate is
_____% per annum.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL
PRINCIPAL BALANCE TERM REMAINING TERM
AS OF THE MORTGAGE TO MATURITY TO MATURITY
CUT-OFF DATE RATE (MONTHS) (MONTHS)
------------ ---- -------- --------
<S> <C> <C> <C>
$ %
$ %
$ %
$ %
</TABLE>
There will be discrepancies between the characteristics of the actual
mortgage loans and the characteristics assumed in preparing the table
immediately following this paragraph. Any 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 immediately following this paragraph, the classes of certificates may
mature earlier or later than indicated by the table immediately following this
paragraph. Based on the foregoing assumptions, the table immediately following
this paragraph indicates the weighted average life of each class of the Class A
Certificates and the subordinate certificates and sets forth the percentage of
the initial certificate principal balance of each class of certificates that
would be outstanding after each of the dates shown, at various percentages of
the prepayment model. 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 trust fund. Variations in the prepayment
experience and the balance of the mortgage loans that prepay may increase or
decrease the percentages of initial certificate principal balance and weighted
average lives shown in the following table. These variations may occur even if
the average prepayment experience of all of the mortgage loans equals any of the
specified percentages of the prepayment model.
S-24
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT MODEL
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
---------------------- ----------------------
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 0% 25%% 50% 75% 100% 125% 150%
----------------- -- --- --- --- ---- ---- ---- -- ---- --- --- ---- ---- ----
<S> <C> <C>
................................
................................
................................
Weighted Average Life
in Years......................
Weighted Average Life
in Years......................
</TABLE>
<TABLE>
<CAPTION>
CLASS A-3 CERTIFICATES
----------------------
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150%
----------------- -- --- --- --- ---- ---- ----
<S> <C>
................................
................................
................................
Weighted Average Life
in Years......................
Weighted Average Life
in Years......................
</TABLE>
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. The last row of
weighted average lives is calculated using the calculation set forth in the
prior sentence but assumes that the master servicer exercises its option to
purchase the mortgage loans. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT MODEL
CLASS A-4 CERTIFICATES CLASS A-5 CERTIFICATES
---------------------- ----------------------
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 0% 25%% 50% 75% 100% 125% 150%
----------------- -- --- --- --- ---- ---- ---- -- ---- --- --- ---- ---- ----
<S> <C> <C>
................................
................................
................................
Weighted Average Life
in Years......................
Weighted Average Life
in Years......................
</TABLE>
<TABLE>
<CAPTION>
CLASS A-6 CERTIFICATES
----------------------
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150%
----------------- -- --- --- --- ---- ---- ----
<S> <C>
................................
................................
................................
Weighted Average Life
in Years......................
Weighted Average Life
in Years......................
</TABLE>
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. The last row of
weighted average lives is calculated using the calculation set forth in the
prior sentence but assumes that the master servicer exercises its option to
purchase the mortgage loans. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
(TABLE CONTINUED ON NEXT PAGE.)
S-25
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT MODEL
CLASS A-6 CERTIFICATES SUBORDINATE CERTIFICATES
---------------------- ------------------------
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 0% 25%% 50% 75% 100% 125% 150%
----------------- -- --- --- --- ---- ---- ---- -- ---- --- --- ---- ---- ----
<S> <C> <C>
................................
................................
................................
Weighted Average Life
in Years......................
Weighted Average Life
in Years......................
</TABLE>
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. The last row of
weighted average lives is calculated using the calculation set forth in the
prior sentence but assumes that the master servicer exercises its option to
purchase the mortgage loans. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
S-26
<PAGE>
There is no assurance that prepayments of the mortgage loans will conform
to any of the levels of the prepayment model indicated in the immediately
preceding table or to any other level, or that the actual weighted average life
of any class of certificates will conform to any of the weighted average lives
set forth in the immediately preceding table. Furthermore, the information
contained in the table with respect to the weighted average life of each
specified class of certificates is not necessarily indicative of the weighted
average life of each class that might be calculated or projected under different
or varying prepayment assumptions.
The characteristics of the mortgage loans will differ from those assumed in
preparing the immediately preceding table. In addition, it is unlikely that any
mortgage loan will prepay at any constant percentage of the prepayment model
until maturity or that all of the mortgage loans will prepay at the same rate.
The timing of changes in the rate of prepayments may significantly affect the
actual yield to maturity to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors.
YIELD SENSITIVITY OF THE CLASS XS CERTIFICATES
The yield to maturity of the Class XS Certificates will be extremely
sensitive to the prepayment, repurchase and default experience on the mortgage
loans, which may fluctuate significantly from time to time. A rapid rate of
principal payments on the mortgage loans will have a materially negative effect
on the yield to maturity of the Class XS Certificates, and principal prepayments
on mortgage loans with higher mortgage rates will have a greater negative impact
on the yield to maturity of the Class XS Certificates than principal prepayments
on mortgage loans with lower mortgage rates. There can be no assurance that the
mortgage loans will prepay at any particular rate. Prospective investors in the
Class XS Certificates should fully consider the associated risks, including the
risk that investors in the Class XS Certificates may not fully recover their
initial investment.
The following table indicates the sensitivity of the yield of the Class XS
Certificates to various rates of prepayment on the mortgage loans and the
corresponding pre-tax yield on a corporate bond equivalent basis. The table set
forth immediately following this paragraph has been prepared based on the
assumptions set forth on page S-__.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY ON THE CLASS XS CERTIFICATES
AT VARIOUS PERCENTAGES OF THE PREPAYMENT MODEL
ASSUMED AGGREGATE
PURCHASE PRICE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
-------------- ----------------------------------------
0% 25% 50% 75% 100% 125% 150%
-- --- --- --- ---- ---- ----
<S> <C>
$........................... % % % % % % %
</TABLE>
On the basis of a constant prepayment rate of approximately ___% of the
prepayment model and the purchase price assumed in the immediately preceding
table, the yield to maturity of the Class XS Certificates would be approximately
__%. If the actual prepayment rate were to exceed that rate, initial investors
in the Class XS Certificates would not fully recover their initial investment.
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class XS Certificates, would cause the
discounted present value of the assumed stream of cash flows to equal the
assumed purchase price of the Class XS 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
S-27
<PAGE>
rates at which investors may be able to reinvest funds received by them as
distributions on the Class XS Certificates and consequently does not purport to
reflect the return on any investment in the Class XS Certificates when these
reinvestment rates are considered.
The characteristics of the mortgage loans will differ from those assumed in
preparing the table entitled "Pre-tax yield to maturity on the Class XS
Certificates at various percentages of the prepayment model." There can be no
assurance that the cash flows on the Class XS Certificates will correspond to
those used to determine the pre-tax yields shown or that the aggregate purchase
price of the Class XS Certificates will be as assumed. It is unlikely that any
mortgage loan will prepay at the specified percentages of the prepayment model
until maturity or that all of the mortgage loans will prepay at the same rate.
The timing of changes in the rate of prepayments may significantly affect the
actual yield to maturity to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. The portion of
interest payments on the mortgage loans distributable to the Class XS
Certificates will vary from mortgage loan to mortgage loan in the mortgage pool,
and will be greater with respect to mortgage loans in the mortgage pool with
higher mortgage rates. Accordingly, the yield on the Class XS Certificates will
be lower than indicated in the applicable table entitled "Pre-tax yield to
maturity on the Class XS Certificates at various percentages of the prepayment
model" with respect to any particular average prepayment rate if mortgage loans
with higher mortgage rates prepay faster than mortgage loans with lower mortgage
rates, assuming no variation in mortgage loan principal balance. Moreover, the
variable Pass-Through Rate on the Class XS Certificates will usually decrease as
the certificate principal balances of the Class A Certificates with lower fixed
Pass-Through Rates decline. There can be no assurance that the mortgage loans
will prepay at any of the rates shown in the table or at any other particular
rate, or that mortgage loans with relatively high mortgage rates will prepay at
the same rate as the mortgage loans in the mortgage pool. Investors must make
their own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the Class XS Certificates.
YIELD SENSITIVITY OF THE SUBORDINATE CERTIFICATES
If the certificate principal balances of the Class B-6 Certificates, Class
B-5 Certificates, Class B- 4 Certificates, Class B-3 Certificates and Class B-2
Certificates have been reduced to zero, the yield to maturity on the Class B-1
Certificates will become extremely sensitive to losses on the mortgage loans
that are covered by subordination and the timing of losses on the mortgage
loans, 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
that are covered by subordination and the timing of losses on the mortgage
loans, 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 that are covered by
subordination and the timing of losses on the mortgage loans, because the entire
amount of these losses will be allocated to the Class B-3 Certificates. The
initial undivided interest in the trust fund evidenced by the Class B-1
Certificates, the Class B-2 Certificates, the Class B-3 Certificates, the Class
B-4 Certificates, the Class B-5 Certificates and the Class B-6 Certificates is
approximately ____%, approximately ____%, approximately ____%, approximately
____%, approximately ____% and approximately ____%, respectively. Investors in
the subordinate certificates should fully consider the risk that Realized Losses
on the mortgage loans could result in the failure of 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.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
S-28
<PAGE>
The certificateholders' after-tax rate of return on their Residual
Certificates will reflect their pre- tax rate of return, reduced by the taxes
required to be paid with respect to the Residual Certificates.
Holders of Residual Certificates will have tax liabilities with respect to their
Residual Certificates during the early years of the REMIC's term that
substantially exceed any distributions payable on the Residual Certificates
during or prior to this period. In addition, holders of Residual Certificates
will have tax liabilities with respect to their Residual Certificates the
present value of which substantially exceeds the present value of distributions
payable on the Residual Certificates and of any tax benefits that may arise with
respect to the Residual Certificates. Accordingly, the after-tax rate of return
on the Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the mortgage pool.
The Residual Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to the holders of the
Residual Certificates in connection with the transfer of the Residual
Certificates on after-tax rates of return on the Residual Certificates. See
"Federal Income Tax Consequences" in this prospectus supplement and in the
prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL DESCRIPTION OF THE CERTIFICATES
The certificates will consist of ________ classes of certificates,
designated as:
o the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class A-5 Certificates and the
Class A-6 Certificates which will also be referred to in this prospectus
supplement as the Class A Certificates;
o the Class XS Certificates, which, together with the Class A Certificates,
will also be referred to in this prospectus supplement as the senior
certificates;
o 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, which will also be referred to in this prospectus
supplement as the subordinate certificates; and
o the Class R Certificates, which will also be referred to in this
prospectus supplement as the Residual Certificates.
Only the senior certificates, the Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates and the Residual Certificates are
offered by this prospectus supplement. The Class A-6 Certificates will also be
referred to in this prospectus supplement as the Lockout Certificates.
The certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund consisting primarily of a segregated pool of
conventional, one- to four-family, fixed-rate, fully- amortizing, first lien
mortgage loans having original terms to maturity of not greater than 30 years
and an aggregate principal balance as of _______ __, ____, which date shall also
be referred to in this prospectus supplement the cut-off date, after application
of scheduled payments due whether or not received, of approximately
$___________, subject to a permitted variance as described in this prospectus
supplement under "The Mortgage Pool".
Each class of the offered certificates will have the approximate initial
certificate principal balance or Notional Amount, as applicable, as set forth in
the summary of this prospectus supplement and will have the Pass-Through Rate
determined as provided under "Summary of Prospectus Supplement--Pass-Through
Rate" and "--Interest Distributions" in this prospectus supplement.
The Residual Certificates also represent the right to receive additional
distributions in respect of the trust fund on any distribution date after all
required payments of principal and interest have been made on this date in
respect of the other classes of certificates, although it is not anticipated
that funds will be available for any additional distribution to the Residual
Certificates. The Class B-4
S-29
<PAGE>
Certificates, Class B-5 Certificates and Class B-6 Certificates have in the
aggregate an initial certificate principal balance of approximately $__________
and a fixed Pass-Through Rate for each distribution date of ____% per annum. The
Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates, which are not being offered by this prospectus supplement, will be
sold by the depositor to ________________ on __________ __, ____.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of the Depository Trust Company, or DTC, and its participants
and in that capacity, will be referred to in this prospectus supplement as the
book-entry certificates. The book-entry certificates will be issued in minimum
denominations of $_____ and integral multiples of $____ in excess of the minimum
denominations. The Class XS Certificates and the subordinate certificates will
be issued in registered, certificated form, in minimum percentage interests
corresponding to initial certificate principal balances or Notional Amounts, as
applicable, of $______ and integral multiples of $_____ in excess of the minimum
certificate principal balances or Notional Amounts, except that one certificate
of each class of Class XS Certificates and subordinate certificates may be
issued evidencing an amount equal to either:
o the sum of an otherwise authorized denomination of the Class XS
Certificates and the subordinate certificates plus the remainder of the
aggregate initial certificate principal balance or Notional Amount, as
applicable, for that class OR
o the remainder.
The Residual Certificates will be offered in registered, certificated form,
in minimum denominations of $___ and integral multiples in excess of $___.
The depositor has been informed by DTC that DTC's nominee will be CEDE &
Co. No person acquiring an interest in any class of the book-entry certificates
will be entitled to receive a certificate representing that person's interest,
except as set forth in the section of this prospectus supplement entitled
"--Definitive Certificates". Unless and until a certificate is issued in fully
registered certificated form, a definitive certificate, under the limited
circumstances described in this prospectus supplement, all references to actions
by certificateholders with respect to the book-entry certificates shall refer to
actions taken by DTC upon instructions from its participants, and all references
in this prospectus supplement to distributions, notices, reports and statements
to certificateholders with respect to the book-entry certificates shall refer to
distributions, notices, reports and statements to DTC CEDE & Co., as the
registered holder of the book-entry certificates, for distribution to
certificate owners in accordance with DTC procedures. See "--Registration of the
Book-Entry Certificates" and "--Definitive Certificates" in this prospectus
supplement.
The Class XS Certificates, the Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates, the Residual Certificates and the
definitive certificates will be transferable and exchangeable at the offices of
the trustee. The subordinate certificates and the Residual Certificates may not
be purchased by or transferred to a Plan except upon delivery of a certification
of facts or an opinion of counsel, as provided in this prospectus supplement.
See "--Restrictions on Transfer of the subordinate certificates and the Residual
Certificates" and "ERISA Considerations" in this prospectus supplement.
Transfer of the Residual Certificates will be subject to additional
restrictions and transfer of the Residual Certificates to any non-United States
person will be prohibited. For further information regarding the transfer
restrictions on Residual Certificates, see "Federal Income Tax
Consequences--Special Tax Considerations Applicable to Residual Certificates" in
this prospectus supplement and under "Federal Income Tax
Consequences--REMICs--Taxation of Owners of Residual Certificates--Noneconomic
REMIC Residual Certificates" in the prospectus.
No service charge will be imposed for any registration of transfer or
exchange, but the trustee may require payment of a sum sufficient to cover any
tax or other governmental charge imposed in connection with any registration of
this kind.
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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 the related record date.
The record date for each distribution date is:
o with respect to any book-entry certificates, the close of business on
the business day immediately preceding the distribution date or
o with respect to any other class of certificates, including any
definitive certificates, 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
the 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:
o $5,000,000 or
o two-thirds of the initial aggregate certificate principal balance or
Notional Amount, as applicable, of that 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 these certificates at the corporate trust office of the trustee or
another location specified in the notice to certificateholders of the final
distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a clearing
corporation within the meaning of the New York Uniform Commercial Code, and a
clearing agency registered under the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations and to facilitate the clearance and settlement of
securities transactions between its participants through electronic book
entries, thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, including the underwriter
of the certificates offered by this prospectus supplement, banks, trust
companies and clearing corporations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers, and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Certificate owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the book-entry certificates may do so only through participants and indirect
participants. In addition, certificate owners will receive all distributions of
principal of and interest on the book-entry certificates from the trustee
through DTC and DTC participants. The trustee will forward payments to DTC in
same day funds and DTC will forward these payments to participants in next day
funds settled through the New York Clearing House. Each participant will be
responsible for disbursing these payments to indirect participants or to
certificate owners. Unless and until definitive certificates are issued, it is
anticipated that the only certificateholder of the book-entry certificates will
be CEDE & Co., as nominee of DTC. Certificate owners will not be recognized by
the trustee as certificateholders, as the term is used in the pooling and
servicing agreement and certificate owners will be permitted to exercise the
rights of certificateholders only indirectly through DTC and its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the book-entry
certificates among participants and to receive and transmit distributions of
principal of, and interest on, the book-entry certificates. Participants and
indirect participants with which certificate owners have accounts with respect
to the
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book-entry certificates similarly are required to make book-entry transfers and
receive and transmit payments on behalf of their respective certificate owners.
Accordingly, although certificate owners will not possess definitive
certificates, the rules, regulations and procedures creating and affecting DTC
and its operations provide a mechanism by which certificate owners through their
participants and indirect participants will receive payments and will be able to
transfer their interest.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of banks, the ability of a
certificate owner to pledge book-entry certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to these
certificates, may be limited due to the absence of physical certificates for the
book-entry certificates. In addition, under a book-entry format, certificate
owners may experience delays in their receipt of payments since distributions
will be made by the trustee to CEDE & Co., as nominee for DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations , DTC will take action permitted to be taken by a
certificateholder under the pooling and servicing agreement only at the
direction of one or more participants to whose DTC account the book-entry
certificates are credited. Additionally, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC will take actions
with respect to specified voting rights only at the direction of and on behalf
of participants whose holdings of book-entry certificates evidence these
specified voting rights. DTC may take conflicting actions with respect to voting
rights, to the extent that participants whose holdings of book-entry
certificates evidencing these voting rights, authorize divergent action.
DTC management is aware that computer applications, systems and similar
items for processing data that are dependent upon calendar dates, including
dates before, on and after January 1, 2000, may encounter Year 2000 problems.
DTC has informed its participants and other members of the financial community
that it has developed and is implementing a program so that its computer
applications, systems and similar items for processing data, as the same relate
to the timely payment of distributions, including principal and income payments,
to securityholders, book- entry deliveries and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting and will continue to contact third
party vendors from whom DTC acquires services to impress upon them the
importance of their services being Year 2000 compliant and determine the extent
of their efforts for Year 2000 remediation and, as appropriate, testing of their
services. In addition, DTC is in the process of developing contingency plans as
it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
The depositor, the master servicer and the trustee will have no liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the book-entry certificates held by CEDE &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
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DEFINITIVE CERTIFICATES
Definitive certificates will be issued to certificate owners or their
nominees, respectively, rather than to DTC or its nominee, only if:
o the depositor advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as clearing agency
with respect to the book-entry certificates and the depositor is unable to
locate a qualified successor,
o the depositor, at its option, elects to terminate the book-entry
system through DTC, or
o after the occurrence of an event of default, certificate owners
representing in the aggregate not less than 51% of the Voting Rights of the
book-entry certificates advise the trustee and DTC through participants, in
writing, that the continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the certificate owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the trustee is required to notify all certificate owners through
participants of the availability of definitive certificates. Upon surrender by
DTC of the definitive certificates representing the book-entry certificates and
receipt of instructions for re-registration, the trustee will reissue the
book-entry certificates as definitive certificates issued in the respective
principal amounts owned by individual certificate owners, and thereafter the
trustee will recognize the holders of definitive certificates as
certificateholders under the pooling and servicing agreement. Definitive
certificates will be issued in minimum denominations of $______, except that any
beneficial ownership represented by a book- entry certificate in an amount less
than $______ immediately prior to the issuance of a definitive certificate shall
be issued in a minimum denomination equal to the amount of this beneficial
ownership.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the certificates:
AVAILABLE DISTRIBUTION AMOUNT: The Available Distribution Amount for any
distribution date includes scheduled payments on the mortgage loans due during
the related due period and received on or prior to the related determination
date, prepayments and other unscheduled collections received on the mortgage
loans during the related Prepayment Period, any P&I Advances made by the master
servicer for the distribution date and with respect to each mortgage loan with a
first payment date occurring in _________ ____, a cash amount equal to interest
on that mortgage loan, net of the amount of any prepayment charges received on
the mortgage loans and net of fees payable to the master servicer and the
trustee and other amounts reimbursable to the master servicer, the depositor and
the trustee as provided in the pooling and servicing agreement.
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 XS Certificate, outstanding at any time
represents the then maximum amount that the holder of the certificate is
entitled to receive as distributions allocable to principal from the cash flow
on the mortgage loans and the other assets in the trust fund. The certificate
principal balance of any class of certificates, other than the Class XS
Certificates, as of any date of determination is equal to the initial
certificate principal balance of the certificate, reduced by the aggregate of:
o all amounts allocable to principal previously distributed with respect to
the certificate and
o without duplication of amounts described in the immediately preceding
clause, any reductions in the certificate principal balance of the certificate
deemed to have occurred in connection with allocations to the certificate of:
o Realized Losses on the mortgage loans and
o Extraordinary Trust Fund Expenses.
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CLASS B PERCENTAGE: 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 ____%, approximately ____%, approximately
____%, approximately ____%, approximately ____% and approximately ____%,
respectively, and will in no event exceed 100%, and will be adjusted for each
distribution date to be the percentage equal to the certificate principal
balance of the related class of subordinate certificates immediately prior to
that distribution date divided by the aggregate of the Scheduled Principal
Balance of each of the mortgage loans immediately prior to that distribution
date.
COMPENSATING INTEREST: With respect to any principal prepayments, 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.
EXCESS BANKRUPTCY LOSSES: Bankruptcy Losses in excess of the Bankruptcy
Amount.
EXCESS FRAUD LOSSES: Fraud Losses in excess of the Fraud Amount.
EXCESS LOSSES: Excess Special Hazard Losses, Excess Fraud Losses and Excess
Bankruptcy Losses.
EXCESS SPECIAL HAZARD LOSSES: Special Hazard Losses in excess of the
Special Hazard Amount.
EXTRAORDINARY TRUST FUND EXPENSE: An Extraordinary Trust Fund Expense is an
unanticipated, non-mortgage loan specific trust fund expense, including
reimbursements to the master servicer or depositor described in the prospectus
under "Description of the Securities--Matters Regarding the Master Servicer and
the Depositor", reimbursements to the trustee described under "Pooling and
Servicing Agreement--The Trustee" in this prospectus supplement and taxes that
may be payable by the trust fund as described in this prospectus supplement
under "Federal Income Tax Consequences".
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 that mortgage loan.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for each class of
Certificates for any Distribution Date is the one-month period preceding the
month in which the Distribution Date occurs.
INTEREST DISTRIBUTION AMOUNT: The Interest Distribution Amount for the
certificates of any class on any distribution date is equal to interest accrued
during the related Interest Accrual Period on the certificate principal balance
or Notional Amount, as applicable, of the certificates immediately prior to the
distribution date at the then applicable Pass-Through Rate for each class, plus,
in the case of each class, any 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 each class of shortfalls to the extent not
covered by Compensating Interest paid by the master servicer, shortfalls
resulting from the application of the Relief Act and other interest shortfalls
not covered by the subordination provided by more subordinate classes of
certificates.
LOCKOUT CERTIFICATE PERCENTAGE: The Lockout Certificate Percentage will be
calculated for each distribution date to be the percentage equal to the
aggregate certificate principal balance of the Lockout Certificates divided by
the sum of the aggregate certificate principal balances of the Class A
Certificates.
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LOCKOUT DISTRIBUTION PERCENTAGE: The Lockout Distribution Percentage for
any distribution date occurring prior to the distribution date in _________ ____
will be equal to 0%. The Lockout Distribution Percentage for any distribution
date occurring after the first ____ years following the closing date will be as
follows: for any distribution date during the _______ year after the closing
date, __% of the Lockout Certificate Percentage for that distribution date; for
any distribution date during the ______ year after the closing date, __% of the
Lockout Certificate Percentage for that distribution date; for any distribution
date during the _______ year after the closing date, ___% of the Lockout
Certificate Percentage for that distribution date, and for any distribution date
thereafter, the lesser of:
o 300% of the Lockout Certificate Percentage and
o 100%.
Notwithstanding the previous sentence, if the certificate principal
balances of the Class A Certificates, other than the Lockout Certificates, have
been reduced to zero, the Lockout Distribution Percentage will be equal to 100%.
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 sum of:
o the servicing fee rate and
o the trustee's fee rate.
NOTIONAL AMOUNT: The Notional Amount of the Class XS Certificates as of any
date of determination is equal to the aggregate principal balance of the then
outstanding mortgage loans. Reference to the Notional Amount of the Class XS
Certificates is solely for convenience in calculations and does not represent
the right to receive any distributions allocable to principal.
PASS-THROUGH RATE: The Pass-Through Rate for each class of certificates,
other than the Class XS Certificates, is ____% per annum. The Pass-Through Rate
applicable to the calculation of the Interest Distribution Amount for the Class
XS Certificates for any distribution date is the rate per annum expressed as the
percentage equivalent of a fraction, the numerator of which is equal to:
o the amount of interest accrued on the mortgage loans for the
immediately preceding calendar month at the Net Mortgage Rate MINUS
o the aggregate amount of interest payable on the certificates, other
than the XS Certificates,
and the denominator of which is equal to:
o the Notional Amount of the Class XS Certificates.
The initial variable Pass-Through Rate for the Class XS Certificates is
approximately ______% per annum.
PREPAYMENT INTEREST SHORTFALLS: With respect to any principal prepayments
on the mortgage loans, any resulting shortfall.
PREPAYMENT PERIOD: With respect to any distribution date, the Prepayment
Period is the calendar month immediately preceding the month in which the
distribution date occurs.
REALIZED LOSS: A Realized Loss is any Special Hazard Loss, Fraud Loss or
Bankruptcy Loss or the amount of loss realized 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 on the unpaid principal balance, through the
last day of the month in which the mortgage loan was finally liquidated, after
application of all amounts recovered, net of amounts reimbursable to the master
servicer for P&I Advances, servicing fees and servicing advances, towards
interest and principal owing on the mortgage loan.
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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 INTEREST DISTRIBUTION AMOUNT: The Senior Interest Distribution
Amount on each distribution date is equal to the aggregate of the Interest
Distribution Amounts for the distribution date on all of the senior certificates
and, on the first distribution date, the Residual Certificates.
SENIOR PERCENTAGE: The Senior Percentage, which initially will equal
approximately _____%, and will in no event exceed ___%, will be adjusted for
each distribution date after the first distribution date to be the percentage
equal to the aggregate certificate principal balances of the Class A
Certificates immediately prior to the distribution date divided by the aggregate
of the Scheduled Principal Balance of each of the mortgage loans immediately
prior to the distribution date.
SENIOR PREPAYMENT PERCENTAGE: Except as described in the next two
paragraphs, the Senior Prepayment Percentage for any distribution date occurring
prior to the distribution date in ________ ____ will equal ___%. Except as
described in the next two paragraphs, the Senior Prepayment Percentage for any
distribution date occurring after the first five years will be as follows: for
any distribution date during the _____ year after the closing date, the Senior
Percentage for that distribution date plus ___% of the Subordinate Percentage
for that distribution date; for any distribution date during the _______ year
after the closing date, the Senior Percentage for that distribution date plus
__% of the Subordinate Percentage for that distribution date; for any
distribution date during the ______ year after the closing date, the Senior
Percentage for that distribution date plus __% of the Subordinate Percentage for
that distribution date; for any distribution date during the _______ year after
the closing date, the Senior Percentage for that distribution date plus __% of
the Subordinate Percentage for that distribution date; and for any distribution
date after the _____ year following the closing date, the Senior Percentage for
that distribution date, unless on any distribution date the Senior Percentage
exceeds the initial Senior Percentage, in which case the Senior Prepayment
Percentage for the Distribution Date will equal ___%.
Any scheduled reduction to the Senior Prepayment Percentage shall not be
made as of any distribution date unless:
o the outstanding principal balance of mortgage loans delinquent 60
days or more, including real estate owned and mortgage loans in foreclosure,
averaged over the last six months does not exceed 50% of the sum of the then
current certificate principal balances of the subordinate certificates AND
o Realized Losses on the mortgage loans to date are less than the then
applicable Trigger Amount.
If on any distribution date the allocation to the senior certificates,
other than the Class XS Certificates, of full and partial principal prepayments
and other amounts in the percentage required above would reduce the aggregate
outstanding certificate principal balance of the Class A Certificates below
zero, the Senior Prepayment Percentage for that distribution date will be
limited to the percentage necessary to reduce the aggregate certificate
principal balance of the senior certificates to zero.
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SENIOR PRINCIPAL DISTRIBUTION AMOUNT: With respect to any distribution
date, the lesser of the balance of the Available Distribution Amount remaining
after the Senior Interest Distribution Amount is distributed and the sum of the
following:
(i) the product of the then applicable Senior Percentage and the
aggregate of the following amounts:
o the principal portion of all scheduled monthly payments on the
mortgage loans due during the related due period, whether or not
received;
o the principal portion of all proceeds received in respect of the
repurchase of a mortgage loan or, in the case of a substitution,
amounts received representing a principal adjustment, as required by
the pooling and servicing agreement during the related Prepayment
Period; and
o the principal portion of all other unscheduled collections,
other than amounts described in the clauses (ii) and (iii) of this
section, including insurance proceeds and liquidation proceeds,
received during the related Prepayment Period, to the extent applied as
recoveries of principal;
(ii) the product of the then applicable Senior Prepayment
Percentage and the aggregate of all full and partial principal prepayments
received during the related Prepayment Period;
(iii) with respect to the net liquidation proceeds received and
allocable to principal of any mortgage loan that was finally liquidated
during the related Prepayment Period, the lesser of:
o the then applicable Senior Prepayment Percentage multiplied
by the net liquidation proceeds and
o the then applicable Senior Percentage multiplied by the
Scheduled Principal Balance of the mortgage loan at the time of
liquidation; and
(iv) any amounts allocable to principal for any previous
distribution date, calculated according 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.
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, except as a result of the exclusions described in the next
paragraph, which is not insured against under the standard hazard insurance
policy or blanket policy insuring against hazard losses which the master
servicer is required to cause to be maintained on each mortgage loan. See
"Description of Primary Insurance Policies--Primary Hazard Insurance Policies"
in the prospectus.
Special Hazard Losses will not include any loss resulting from:
o wear and tear, deterioration, rust or corrosion, mold, wet or dry
rot; inherent vice or latent defect; animals, birds, vermin, insects;
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;
Special Hazard Losses also will not include any extraordinary loss resulting
from:
o nuclear or chemical reaction or nuclear radiation or radioactive
or chemical contamination, all whether controlled or uncontrolled and
whether this loss be direct or indirect,
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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 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 an occurrence of this kind, 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.
SUBORDINATE INTEREST DISTRIBUTION AMOUNT: The Subordinate Interest
Distribution Amount on each distribution date is equal to the aggregate of the
Interest Distribution Amounts for the distribution date on all of the
subordinate certificates.
SUBORDINATE PERCENTAGE: The Subordinate Percentage as of any date of
determination is equal to ___% 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: With respect to any distribution
date, 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 following:
(i) the product of the then applicable related Class B Percentage
and the aggregate of the following amounts:
o the principal portion of all scheduled monthly payments on
the mortgage loans due during the related due period, whether
or not received;
o the principal portion of all proceeds received in respect of
the repurchase of a mortgage loan, or, in the case of a
substitution, amounts received representing a principal
adjustment, as required by the pooling and servicing agreement
during the related Prepayment Period; and
o the principal portion of all other unscheduled collections,
other than amounts described in clauses (ii) and (iii) of this
definition, including insurance proceeds and liquidation
proceeds, received during the related Prepayment Period, to
the extent applied as recoveries of principal;
(ii) the portion allocable to that class of subordinate
certificates, of the product of:
o the then applicable Subordinate Prepayment Percentage and
o the aggregate of all full and partial principal prepayments
received during the related Prepayment Period;
(iii) the portion allocable to that class of subordinate
certificates, 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
these net liquidation proceeds exceed the amount distributable to the Class
A Certificates in respect of the
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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 according 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.
TRIGGER AMOUNT: The Trigger Amount for any distribution date occurring
after the first six years will be as follows: for any distribution date during
the _____ year after the closing date, __% of the initial sum of the certificate
principal balances of the subordinate certificates; for any distribution date
during the seventh year after the closing date, __% of the initial sum of the
certificate principal balances of the subordinate certificates; for any
distribution date during the ______ year after the closing date, __% of the
initial sum of the certificate principal balances of the subordinate
certificates; and for any distribution date during the _____ year after the
closing date, __% of the initial sum of the certificate principal balances of
the subordinate certificates. Notwithstanding the foregoing, upon reduction of
the certificate principal balances of the senior certificates to zero, the
Senior Prepayment Percentage will equal 0%.
INTEREST DISTRIBUTIONS
Distributions on each distribution date will be made to the extent of the
Available Distribution Amount for the distribution date.
Distributions in respect of interest will be made:
o on each distribution date to the holders of the senior certificates
and, on the first distribution date, to the holders of the Residual
Certificates, in an aggregate amount equal to the Senior Interest Distribution
Amount and
o on each distribution date to the holders of the subordinate
certificates, in an aggregate amount equal to the Subordinate Interest
Distribution Amount, to the extent of the portion of the Available Distribution
Amount remaining after the distribution on the 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
these certificates for the distribution date.
Any Prepayment Interest Shortfalls for any distribution date to the extent
not covered by Compensating Interest paid by the master servicer will be
allocated among the holders of the certificates on a PRO RATA basis based on the
respective amounts of interest accrued on these certificates for the
distribution date. In addition, any shortfalls resulting from the application of
the Relief Act will be allocated among the holders of all of the certificates on
a PRO RATA.
All distributions of interest will be based on a 360-day year consisting of
twelve 30-day months. 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 prospectus supplement, 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 SENIOR CERTIFICATES
Distributions in respect of principal will be made on each distribution
date to the holders of the class or classes of the Class A Certificates then
entitled to distributions in respect of principal, and on the first distribution
date to the holders of the Residual Certificates, in an aggregate amount equal
to the Senior Principal Distribution Amount.
S-39
<PAGE>
Holders of the Class A Certificates then entitled to distributions in
respect of principal will be entitled to receive on each distribution date, and
holders of the Residual Certificates will be entitled to receive on the first
Distribution Date, distributions allocable to principal in reduction of the
certificate principal balances of the Class A Certificates, and on the first
distribution date the Residual Certificates, equal to the Senior Principal
Distribution Amount.
Holders of the Class XS Certificates are not entitled to receive any
distributions allocable to principal.
The disproportionate allocation of unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the senior
certificates, other than the Class XS Certificates, while, in the absence of
Realized Losses, increasing the respective percentage interest in the principal
balance of the mortgage loans evidenced by the subordinate certificates.
Increasing the respective percentage interest in the trust fund of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates.
For purposes of all principal distributions and for calculating the Senior
Percentage, the Subordinate Percentage and the Senior Prepayment Percentage, the
applicable certificate principal balance for any distribution date shall be
determined after the allocation of losses on the mortgage loans in, and
Extraordinary Trust Fund Expenses attributable to, the mortgage pool to be made
on the distribution date as described under "--Allocation of Losses;
Subordination."
PRIORITY OF PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES AND THE
RESIDUAL CERTIFICATES
Distributions of the Senior Principal Distribution Amount on the Class A
Certificates and the Residual Certificates on each distribution date will be
made as follows:
o First, concurrently, to the holders of each class of the Residual
Certificates on the distribution date in ________ ____, an amount equal to
the entire certificate principal balance of each class of the Residual
Certificates;
o Second, to the holders of the Lockout Certificates, the Lockout
Distribution Percentage of the Senior Principal Distribution Amount, until
the certificate principal balance of the Lockout Certificates has been
reduced to zero;
o Third, to the holders of the Class A-1 Certificates, until the
certificate principal balance of the Class A-1 Certificates has been
reduced to zero;
o Fourth, to the holders of the Class A-2 Certificates, until the
certificate principal balance of the Class A-2 Certificates has been
reduced to zero;
o Fifth, to the holders of the Class A-3 Certificates, until the
certificate principal balance of the Class A-3 Certificates has been
reduced to zero;
o Sixth, to the holders of the Class A-4 Certificates, until the
certificate principal balance of the Class A-4 Certificates has been
reduced to zero;
o Seventh, to the holders of the Class A-5 Certificates, until the
certificate principal balance of the Class A-5 Certificates has been
reduced to zero;
o Eighth, to the holders of the Lockout Certificates, until the
certificate principal balance of the Lockout Certificates has been reduced
to zero.
Notwithstanding the priorities set forth in the immediately preceding
bullet points, upon the reduction of the certificate principal balances of the
subordinate certificates to zero, the priority of distributions of principal
among the Class A Certificates will be disregarded and distributions allocable
to principal will be paid on each succeeding distribution date to holders of the
Class A Certificates, on a PRO RATA basis, based on the certificate principal
balances of the Class A Certificates.
PRINCIPAL DISTRIBUTION ON THE SUBORDINATE CERTIFICATES
S-40
<PAGE>
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 the 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 Subordinate Principal Distribution Amount.
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 of each class of subordinate certificates:
o the Class B-1 Certificates;
o the Class B-2 Certificates, if on the distribution date the aggregate
percentage interest in the trust fund evidenced by the Class B-2 Certificates,
the Class B-3 Certificates, the Class B-4 Certificates, the Class B-5
Certificates and the Class B-6 Certificates equals or exceeds ____% before
giving effect to distributions on that distribution date;
o the Class B-3 Certificates, if on the distribution date the aggregate
percentage interest in the trust fund evidenced by the Class B-3 Certificates,
the Class B-4 Certificates, the Class B-5 Certificates and the Class B-6
Certificates equals or exceeds ____% before giving effect to distributions on
that distribution date;
o the Class B-4 Certificates, if on the distribution date the
percentage interest in the trust fund evidenced by the Class B-4 Certificates,
the Class B-5 Certificates and the Class B-6 Certificates equals or exceeds
____% before giving effect to distributions on that distribution date;
o the Class B-5 Certificates, if on the distribution date the
percentage interest in the trust fund evidenced by the Class B-5 Certificates
and the Class B-6 Certificates equals or exceeds ____% before giving effect to
distributions on that distribution date; and
o the Class B-6 Certificates, if on the distribution date the
percentage interest in the trust fund evidenced by the Class B-6 Certificates
equals or exceeds ____% before giving effect to distributions on that
distribution date.
For purposes of all principal distributions and for calculating the
Subordinate Percentage, the applicable certificate principal balance for any
distribution date shall be determined after the allocation of losses on the
mortgage loans in, and Extraordinary Trust Fund Expenses attributable to, the
mortgage pool to be made on the distribution date as described under
"--Allocation of Losses; Subordination."
For each distribution date occurring prior to the distribution date in
________ ____, the Senior Prepayment Percentage will equal 100%, and until the
earlier of that date and the date on which the Class A Certificates are paid in
full, no distributions based on principal prepayments or, in some instances, net
liquidation proceeds, on the mortgage loans will be distributed to the
subordinate certificates. After that date, unless the certificate principal
balances of the senior certificates have been reduced to zero, the Subordinate
Prepayment Percentage may continue to be 0% or otherwise be disproportionately
small relative to the Subordinate Percentage. See "--Principal Distributions on
the Senior Certificates" 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 distribution date.
S-41
<PAGE>
P&I ADVANCES
Subject to the limitations described in the next 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 that 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 period on the mortgage loans master serviced by it 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. 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 the 15th day is not a
business day, on the immediately preceding business day.
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 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 the master servicer fails in its obligation to make any P&I
Advance, the trustee will be obligated to make any P&I Advance, to the extent
required in the pooling and servicing agreement.
ALLOCATION OF LOSSES; SUBORDINATION
Realized Losses, other than Excess Losses, and any Extraordinary Trust Fund
Expenses will be allocated on any distribution date as follows:
first, to the Class B-6 Certificates;
second, to the Class B-5 Certificates;
third, to the Class B-4 Certificates;
fourth, to the Class B-3 Certificates;
fifth, to the Class B-2 Certificates; and
sixth, to the Class B-1 Certificates
in each case, until the certificate principal balance of each class has
been reduced to zero.
After the certificate principal balance of each class listed above has been
reduced to zero, Realized Losses and any Extraordinary Trust Fund Expenses will
be allocated on any distribution date among the Class A Certificates on a PRO
RATA basis. Excess Losses will be allocated on any distribution date among all
the certificates, other than the Class XS Certificates, on a PRO RATA basis. Any
allocation of a Realized Loss to a certificate will be made by reducing the
certificate principal balance of that certificate by the amount so allocated as
of the distribution date in the month following the calendar month in which the
Realized Loss was incurred.
An allocation of a Realized Loss on a PRO RATA basis among two or more
classes of certificates means an allocation to each class of certificates on the
basis of its then outstanding certificate principal balance prior to giving
effect to distributions to be made on the distribution date.
S-42
<PAGE>
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 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 of
these shortfalls 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 of these shortfalls would not result in
a reduction of the certificate principal balance of the class. In this event,
the percentage interest represented by the class would increase relative to the
respective certificate principal balances of the more subordinate classes of
certificates. With respect to the most subordinate class of the certificates
outstanding at the time any Realized Loss is incurred, the total amount of the
Realized Loss allocated to that class may be greater than the concurrent
reduction in the certificate principal balance of that class because the
reduction will not reflect any undistributed Interest Distribution Amount on
that class. Any undistributed Interest Distribution Amount on the most
subordinate class of the certificates outstanding will not be distributable on
any future distribution date. As a result, it is possible that the total amount
of Realized Losses that may be allocated to any class of subordinate
certificates may exceed the initial certificate principal balance of that class
of subordinate certificates.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount and the Senior Principal Distribution Amount, on
each distribution date, holders of senior certificates have a right to
distributions of the Available Distribution Amount that is prior to the rights
of the holders of the subordinate certificates, to the extent necessary to
satisfy the Senior Interest Distribution Amount and the Senior Principal
Distribution Amount.
The application of the Senior Prepayment Percentage, when it exceeds the
Senior Percentage, to determine the Senior Principal Distribution Amount will
accelerate the amortization of the Class A Certificates relative to the actual
amortization of the mortgage loans. To the extent that the Class A Certificates
are amortized faster than the mortgage loans, in the absence of offsetting
Realized Losses allocated to the subordinate certificates, the percentage
interest evidenced by the Class A Certificates in the trust fund will be
decreased, with a corresponding increase in the percentage interest in the trust
fund evidenced by the subordinate certificates, thereby increasing, relative to
their respective certificate principal balances, the subordination afforded the
senior certificates by the subordinate certificates.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses, or the Special Hazard Amount, through
subordination shall initially be equal to approximately $_________. As of any
date of determination following the cut-off date, the Special Hazard Amount
shall equal approximately $_________ less the sum of:
o any amounts allocated through subordination in respect of Special
Hazard Losses AND
o the adjustment amount.
The adjustment amount will be equal to an amount calculated under the terms
of the pooling and servicing agreement.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses, or the Fraud Loss Amount, through subordination
shall initially be equal to approximately $_________. As of any date of
determination after the cut-off date, the Fraud Loss Amount shall equal:
o prior to the first anniversary of the cut-off date an amount equal to
____% of the aggregate principal balance of all of the mortgage loans as of the
cut-off date minus the aggregate amounts allocated through subordination with
respect to Fraud Losses on the mortgage loans up to the date of determination,
o from the first to the second anniversary of the cut-off date, an
amount equal to:
S-43
<PAGE>
(1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the cut- off date and (b) ____% of the aggregate principal
balance of all of the mortgage loans as of the most recent anniversary of the
cut-off date MINUS
(2) the aggregate amounts allocated through subordination with
respect to Fraud Losses on the mortgage loans since the most recent anniversary
of the cut-off date up to the date of determination and
o from the second to the fifth anniversary of the cut-off date, an
amount equal to:
(1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the cut- off date, and (b) ____% of the aggregate principal
balance of all of the mortgage loans as of the most recent anniversary of the
cut-off date MINUS
(2) the aggregate amounts allocated through subordination with
respect to Fraud Losses on the mortgage loans since the most recent anniversary
of the cut-off date up to the date of determination. On and after the fifth
anniversary of the cut-off date, the Fraud Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses, or the Bankruptcy Amount, through
subordination will initially be equal to approximately $_______. As of any date
of determination, the Bankruptcy Amount shall equal the initial Bankruptcy
Amount less the sum of any amounts allocated through subordination for these
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 Standard & Poor's and Fitch that this
reduction or modification will not adversely affect the then-current ratings
assigned to the offered certificates. A reduction or modification of this kind
may adversely affect the coverage provided by the subordination with respect to
Special Hazard Losses, Fraud Losses and Bankruptcy Losses.
RESTRICTIONS ON TRANSFER OF THE SUBORDINATE CERTIFICATES AND THE RESIDUAL
CERTIFICATES
Because the subordinate certificates are subordinate to the senior
certificates, the subordinate certificates of any class may not be purchased by
or transferred to a fiduciary of any employee benefit plan or any other plan or
arrangement subject to ERISA or Section 4975 of the Code--each being referred to
in this prospectus supplement as a Plan--except upon the delivery of a
certification of facts or an opinion of counsel, as provided in this prospectus
supplement. In addition, the Residual Certificates may not be purchased by or
transferred to a Plan except upon the delivery of a certification of facts or an
opinion of counsel, as provided in this prospectus supplement. See "ERISA
Considerations" in this prospectus supplement.
In addition, the Residual Certificates will be subject to additional
restrictions. For a description of these additional restrictions, see "Federal
Income Tax Consequences--Special Tax Considerations Applicable to the Residual
Certificates" in this prospectus supplement and "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The certificates will be issued under the pooling and servicing agreement,
a form of which is filed as an exhibit to the registration statement. A current
report on Form 8-K relating to the certificates containing a copy of the 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:
S-44
<PAGE>
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 of the mortgage loans,
o any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received on the
mortgaged properties,
o the rights of the trustee under all insurance policies required to be
maintained under the pooling and servicing agreement and
o the rights of the depositor under the mortgage loan purchase
agreement among the depositor, the mortgage loan seller and the originator,
other than rights of the depositor to indemnification by the originator.
Reference is made to the prospectus for important information in addition
to that set forth in this prospectus supplement regarding the trust fund, the
terms and conditions of the pooling and servicing agreement and the offered
certificates. The offered certificates will be transferable and exchangeable at
the corporate trust offices of the trustee, located in Minneapolis, Minnesota.
The depositor will provide to a prospective or actual certificateholder without
charge, on written request, a copy, without exhibits, of the pooling and
servicing agreement. Requests should be addressed to the 390 Greenwich Street,
4th Floor, New York, NY 10013.
ASSIGNMENT OF THE MORTGAGE LOANS
The depositor will deliver to the trustee or to a custodian with respect to
each mortgage loan:
o the mortgage note endorsed without recourse to the trustee to reflect
the transfer of the mortgage loan,
o the original mortgage with evidence of recording indicated on the
mortgage and
o an assignment of the mortgage in recordable form to the trustee,
reflecting the transfer of the mortgage loan. These assignments of mortgage
loans are required to be recorded by or on behalf of the depositor in the
appropriate offices for real property records.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided by
____________________. None of the depositor, the mortgage loan seller, the
trustee or any of their respective affiliates has made or will make any
representation as to the accuracy or completeness of such information.
The following table summarizes the master servicer's one- to four-family
residential mortgage loan origination and sales activity for the periods shown
below. Sales activity may include sales of mortgage loans purchased by the
master servicer from other loan originators.
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations.........
Sales................
</TABLE>
The following table sets forth the master servicer's delinquency and loss
experience at the dates indicated on its servicing portfolio of mortgage loans
originated under the master servicer programs
S-45
<PAGE>
(the majority of such mortgage loans reflected in the following table are
adjustable rate mortgage loans):
<TABLE>
<CAPTION>
At
At December 31, June 30,
----------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance................................
Number of Loans..........................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding Principal
Balance.......................
Delinquency as a Percentage
of Number of Loans............
61-90 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
91 Days or More
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
Total Delinquencies:
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
FORECLOSURES PENDING(1)
Principal Balance...............
Number of Loans.................
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.........................
Foreclosures Pending as
a Percentage of Number of
Loans...........................
NET LOAN LOSSES for the Period(2)........
NET LOAN LOSSES as a Percentage
of Total Outstanding Principal
Balance................................
</TABLE>
-------------------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net loan losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of ___________ loans serviced by __________ have been
conveyed to REMIC trust funds.
S-46
<PAGE>
The following table sets forth the master servicer's delinquency and loss
experience at the dates indicated on its entire residential (including
multi-family) mortgage loan servicing portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1996 1997 1998 1999 2000
----------------------------------------------------------------------------------
(Dollars in Thousands)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance...............................
Number of Loans.........................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal
Balance.......................
Delinquency as a Percentage
of Number of Loans............
61-90 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
91 Days or More
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
Total Delinquencies:
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
FORECLOSURES PENDING(1)
Principal Balance...............
Number of Loans.................
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.......................
Foreclosures Pending as
a Percentage of Number of
Loans...........................
NET LOAN LOSSES for the
Period(2).............................
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance.....................
</TABLE>
---------------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net loan losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a)
S-47
<PAGE>
the principal balance plus accrued interest through the date of liquidation
plus all liquidation expenses related to such loan and (b) all amounts
received in connection with the liquidation of such loan. The majority of
residential loans serviced by __________ have been conveyed to REMIC trust
funds.
THE TRUSTEE
___________________, a national banking association, will act as trustee
for the certificates under the pooling and servicing agreement. The trustee's
offices for notices under the pooling and servicing agreement are located at .
The principal compensation to be paid to the trustee, or the trustee's fee,
in respect of its obligations under the pooling and servicing agreement will be
equal to accrued interest at the trustee's fee rate of ______% per annum on the
stated principal balance of each mortgage loan. The 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 a breach of the master servicer's obligations and
duties under the pooling and servicing agreement,
o that constitutes a specific liability of trustee under the pooling
and servicing agreement or
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.
This indemnification will not include expenses, disbursements and advances
incurred or made by the trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the trustee's
performance in accordance with the provisions of the pooling and servicing
agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the master servicer, or the
servicing fee, in respect of its servicing activities for the certificates will
be equal to accrued interest at the servicing fee rate of ____% per annum with
respect to each mortgage loan master serviced by it for each calendar month on
the same principal balance on which interest on the 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 master serviced by it, to the extent collected from mortgagors,
together with any interest or other income earned on funds held in the
certificate account and any escrow accounts in respect of mortgage loans master
serviced by it. The master servicer is obligated to offset any Prepayment
Interest Shortfall in respect of mortgage loans master serviced by it on any
distribution date with Compensating Interest to the extent of its aggregate
servicing fee for the distribution date. The master servicer is obligated to pay
insurance premiums and ongoing expenses associated with the mortgage pool in
respect of mortgage loans master serviced by it and incurred by the master
servicer in connection with its responsibilities under the pooling and servicing
agreement. The master servicer is entitled to reimbursement for these expenses
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.
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VOTING RIGHTS
At all times, __% of all voting rights will be allocated among the holders
of the certificates, other than the Class XS Certificates and the Residual
Certificates, in proportion to the then outstanding certificate principal
balances of their respective certificates, __% of all voting rights will be
allocated among the holders of the Class XS Certificates in proportion to the
then outstanding Notional Amounts of their respective certificates and __% of
all voting rights will be allocated among the holders of the Residual
Certificates in proportion to the percentage interests in each class evidenced
by their respective certificates.
TERMINATION
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 properties
at the time of purchase is reduced to less than __% of the aggregate principal
balance of the mortgage loans as of the cut-off date. If the master servicer
elects to exercise this option, the 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, notwithstanding the terms of the prospectus, the
purchase price payable in connection with the termination will be equal to par
plus accrued interest for each mortgage loan at the related mortgage rate to but
not including the first day of the month in which the repurchase price is
distributed. 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 XS
Certificates, 100% of the then outstanding certificate principal balance of the
class, 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 of the
class at the then applicable Pass-Through Rate for the class plus any previously
accrued but unpaid interest on the class.
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. For further information
regarding the circumstances under which the obligations created by the pooling
and servicing agreement will terminate in respect of the certificates see,
"Description of the Certificates--Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
A separate elections will be made to treat designated portions of the trust
fund as a real estate mortgage investment conduit or REMIC for federal income
tax purposes. Prior to the sale of the certificates, Thacher Proffitt & Wood,
counsel to the depositor, will deliver its opinion to the effect that, assuming
compliance with all provisions of the pooling and servicing agreement, for
federal income tax purposes, the REMIC will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986, or the Code.
For federal income tax purposes:
o the Class R Certificates will be the sole class of residual interests
in the REMIC and
o the senior certificates and the subordinate certificates will
evidence the regular interests in, and will be treated as debt instruments of,
the REMIC. See "Federal Income Tax Consequences--REMIC--Classification of
REMICs" in the prospectus.
For federal income tax reporting purposes, the Class XS Certificates will,
and the Class A Certificates, the Class B-1 Certificates, the Class B-2
Certificates and the Class B-3 Certificates will not, be treated as having been
issued with original issue discount. The prepayment assumption that will be used
in determining the rate of accrual of original issue discount, premium and
market discount, if any, for federal income tax purposes will be based on the
assumption that, subsequent to the date of any determination, the mortgage loans
will prepay at a rate equal to ____% of CPR.
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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 IRS has issued regulations, referred to in this prospectus supplement
as the OID Regulations, under Sections 1271 to 1275 of the Code addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class XS Certificates should be aware that the OID Regulations do not
adequately address all issues relevant to, or are not applicable to, securities
such as the Class XS Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC regular
certificates that provide for payments based on a variable rate such as the
Class XS Certificates. Prospective purchasers of the Class XS Certificates are
advised to consult their tax advisors concerning the tax treatment of these
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 and in particular, the holders of the Class XS Certificates,
the amount of original issue discount allocable to this period would be zero,
and the certificateholder will be permitted to offset these amounts only against
the respective future income, if any, from the 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 suggest that original issue discount with respect to
securities such as the Class XS Certificates that represent multiple
uncertificated REMIC regular interests, in which ownership interests will be
issued simultaneously to the same buyer should be computed on an aggregate
method. In the absence of further guidance from the IRS, original issue discount
with respect to the uncertificated regular interests represented by the Class XS
Certificates will be reported to the IRS and the certificateholders on an
aggregate method based on a single overall constant yield and the prepayment
assumption, treating all uncertificated regular interests as a single debt
instrument as set forth in the OID Regulations.
The OID Regulations may 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 the certificates in this regard.
Some classes of certificates may be treated for federal income tax purposes
as having been issued with a premium. Certificateholders may elect to amortize
this premium under a constant yield method in which case the amortizable premium
will be allocated among the interest payments on these certificates and will be
applied as an offset against these 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, in the same proportion that the assets in the related trust fund would
be so treated. In addition, interest on the offered certificates will be treated
as interest on obligations secured by mortgages on real property under Section
856(c)(3)(B) of the Code, generally to the extent that the offered certificates
are treated as real estate assets under Section 856(c)(4)(A) of the Code. The
offered certificates, other than the Residual Certificates, also will be treated
as qualified mortgages under Section 860G(a)(3) of the Code. See "Federal Income
Tax Consequences--REMICs--Characterization of Investments in REMIC Certificates"
in the prospectus.
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It is not anticipated that the REMIC will engage in any transactions that
would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any tax is imposed on
the REMIC, this tax will be borne:
o by the trustee, if the trustee has breached its obligations with
respect to REMIC compliance under the pooling and servicing agreement,
o by the master servicer, if the master servicer has breached its
obligations with respect to REMIC compliance under the pooling and servicing
agreement and
o 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 Description of the Certificates" and
"Federal Income Tax Consequences--REMICs--Prohibited Transactions Tax and Other
Taxes" in the prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the trustee. See "Federal Income Tax
Consequences--REMICs--Reporting and Other Administrative Matters" in the
prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued regulations under the provisions of the Code related to
REMICs, which are referred to in this prospectus supplement as the REMIC
Regulations, that significantly affect holders of the Residual Certificates. The
REMIC Regulations will impose restrictions on the transfer or acquisition of
residual interests, including the Residual Certificates. In addition, the REMIC
Regulations contain restrictions that apply to the transfer of noneconomic
residual interests to United States persons. The REMIC Regulations also provide
that transfers of a Residual Certificate to a non-United States person may be
disregarded for tax purposes. Transfers of the Residual Certificates to these
persons are, however, prohibited under the pooling and servicing agreement. See
"Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the prospectus and
"ERISA Considerations" and "Description of the Certificates--Restrictions on
Transfer of the Residual Certificates" in this prospectus supplement for
additional restrictions on transfer of the Residual Certificates.
The REMIC Regulations also provide that a transfer to a United States
person of noneconomic residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of noneconomic residual
interests will continue to remain liable for any taxes due with respect to the
income on these residual interests, unless no significant purpose of the
transfer was to impede the assessment or collection of tax. Based on the REMIC
Regulations, the Residual Certificates will constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the assessment or collection of tax, transfers of the Residual
Certificates may be disregarded and purported transferors may remain liable for
any taxes due with respect to the income on the Residual Certificates. All
transfers of the Residual Certificates will be subject to restrictions under the
terms of the pooling and servicing agreement that are intended to reduce the
possibility of any transfer being disregarded to the extent that the Residual
Certificates constitute noneconomic residual interests.
The holders of the Residual Certificates will be required to report taxable
income and pay tax with respect to the early accrual periods of the REMIC's term
that significantly exceeds the amount of cash distributions received by these
holders from the REMIC with respect to these periods. Furthermore, the tax on
this income will exceed the cash distributions with respect to these periods.
Consequently, holders of Residual Certificates should have other sources of
funds sufficient to pay
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any federal income taxes due in the earlier years of the REMIC as a result of
their ownership of Residual Certificates. In addition, the required inclusion of
this amount of taxable income during the REMIC's earlier accrual periods and the
deferral of corresponding tax losses or deductions until later accrual periods
or until the ultimate sale or disposition of a Residual Certificate, or possibly
later under the wash sale rules of Section 1091 of the Code, may cause the
after-tax rate of return of a holder of a Residual Certificate to be zero or
negative even where the holders' pre-tax rate of return is positive. That is, on
a present value basis, the resulting tax liabilities of a holder of a Residual
Certificate will substantially exceed the sum of any tax benefits and the amount
of any cash distributions on the Residual Certificates over their life.
An individual, trust or estate that holds, whether directly or indirectly
through pass-through entities, a Residual Certificate may have significant
additional gross income with respect to, but may be subject to limitations on
the deductibility of, servicing and trustee's fees and other administrative
expenses properly allocable to the REMIC in computing the holder's regular tax
liability and will not be able to deduct these fees or expenses to any extent in
computing the holder's alternative minimum tax liability. See "Federal Income
Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Pass Through of Miscellaneous Itemized Deductions" in the
prospectus.
Potential investors in Residual Certificates should also be aware that
under the terms of the pooling and servicing agreement, the holders of the
largest percentage interest in the Residual Certificates shall, by their
acceptance of these certificates, agree to irrevocably appoint the trustee as
their agent to perform all of the duties of the tax matters person for the
REMIC.
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
the Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see "Yield on the
Certificates--Additional Yield Considerations Applicable Solely to the Residual
Certificates" in this prospectus supplement and "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________ __, ____, the depositor has agreed to sell, and
______________, the underwriter, has agreed to purchase the offered
certificates. The underwriter is obligated to purchase all offered certificates
of the respective classes 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 _________% of the aggregate initial certificate principal balance
of the offered certificates, other than the Class XS Certificates, plus accrued
interest on the offered certificates. In connection with the purchase and sale
of the offered certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting discounts.
The offered certificates are offered subject to receipt and acceptance by
the underwriter, to prior sale and to the underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the book-entry certificates will be made
through the facilities of DTC, and that delivery of each other class of offered
certificates and the Residual Certificates will be made at the offices of the
underwriter, 390 Greenwich Street, 4th Floor, New York, New York 10013, in each
case, on or about the closing date.
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<PAGE>
The underwriting agreement provides that the depositor will indemnify the
underwriter against those civil liabilities set forth in the underwriting
agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There can be no assurance that a secondary market for the offered
certificates will develop or, if it does develop, that it will continue. 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
Certificates--Reports to Certificateholders", which will include information as
to the outstanding principal balance of the offered certificates and the status
of the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the offered certificates will be passed upon for
the depositor by Thacher Proffitt & Wood, New York, New York.
RATINGS
It is a condition to the issuance of the certificates that the Class A
Certificates and the Residual Certificates be rated "AAA" by _________________
and "AAA" by ____________, that the Class XS Certificates be rated "AAAr" by
________ and "AAA" by ______, that the Class B-1 Certificates be rated at least
"AA" by _________ and at least "AA" by _______, that the Class B-2 Certificates
be rated at least "A" by _________ and at least "A" by ________, and that the
Class B-3 Certificates be rated at least "BBB" by __________.
The ratings of _________ and ________ assigned to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which these 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 prepayments will differ from that originally anticipated. The
ratings do not address the possibility that certificateholders might suffer a
lower than anticipated yield due to non-credit events or that the holders of the
Class XS Certificates may fail to recover fully their initial investment. In
addition, the ratings on the Residual Certificates do not address the likelihood
of receipt by the holders of the Residual Certificates of any amounts in excess
of their initial Certificate Balance and interest on that Certificate Balance.
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.
S-53
<PAGE>
The depositor has not requested that any rating agency rate any class of
the offered certificates other than as stated in the immediately preceding
paragraph. However, there can be no assurance as to whether any other rating
agency will rate any class of the offered certificates, or, if it does, what
rating would be assigned by that rating agency. A rating on any class of the
offered certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the classes of the offered certificates as stated
in the first paragraph of this seciton.
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 some entities
to the extent provided in SMMEA. SMMEA, however, provides for state limitation
on the authority of these 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 employee benefit plan or any other plan or arrangement
subject to ERISA or Section 4975 of the Code, each referred to in this
prospectus supplement as a Plan, or any person investing Plan Assets of any Plan
should carefully review with its legal advisors whether the purchase, sale or
holding of certificates will give rise to a prohibited transaction under ERISA
or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, or the exemption, as described under
"Considerations for Benefit Plan Investors" in the prospectus, to the
underwriter. The exemption exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA and the excise taxes imposed on
these prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and holding of
pass-through certificates underwritten by the underwriter such as the senior
certificates, and the servicing and operation of asset pools such as the
mortgage pool. To obtain the benefit of the exemption, however, the conditions
set forth under "Considerations for Benefit Plan Investors" in the prospectus
must be satisfied. The purchase of the senior certificates by, on behalf of or
with the Plan Assets of any Plan may qualify for exemptive relief under the
exemption. However, the exemption contains a number of conditions which must be
met for the exemption to apply, as described in the prospectus, including the
requirement that any Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended. A fiduciary of a Plan contemplating
purchasing a Senior Certificate must make its own determination that the
conditions set forth in the exemption will be satisfied with respect to the
senior certificates.
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<PAGE>
Because the characteristics of the subordinate certificates and the
Residual Certificates will not meet the requirements of Prohibited Transaction
Class Exemption, or PTCE, 83-1, as described in the prospectus, or the
exemption, the purchase, sale or holding of the subordinate certificates or the
Residual Certificates by, on behalf of or with Plan Assets of any Plan may
result in prohibited transactions or the imposition of excise taxes or civil
penalties. Therefore, the pooling and servicing agreement provides that
transfers of Subordinate or Residual Certificates to a Plan, a trustee or other
person acting on behalf of any Plan or to any person using Plan Assets to effect
this acquisition will not be registered by the trustee unless the purchaser of
these certificates provides the depositor, the trustee and the master servicer
with either:
o an opinion of counsel satisfactory to the depositor, the trustee and
the master servicer, which opinion will not be at the expense of the depositor,
the master servicer, the trustee or the trust fund, to the effect that the
purchase of these certificates is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the depositor, the master
servicer, the trustee or the trust fund to any obligation in addition to those
undertaken in the pooling and servicing agreement OR
o a certification of facts, which in the case of the Class B-1
Certificates, the Class B-2 Certificates and the Class B-3 Certificates, the
purchaser will be deemed to have represented the certification of facts,
substantially to the effect that the purchase of offered certificates by or on
behalf of a Plan is permissible under applicable law, will not constitute or
result on a non-exempt prohibited transaction under ERISA or Section 4975 of the
Code, will not subject the depositor, the trustee or the master servicer to any
obligation in addition to those undertaken in the pooling and servicing
agreement and the following conditions are met:
o the transferee is an insurance company and:
o the source of funds used to purchase the offered certificates is
an insurance company general account, as that term is defined in PTCE 95-60,
o the conditions set forth in Sections I and III of PTCE 95-60
have been satisfied and
o there is no Plan with respect to which the amount of the general
account's reserves and liabilities for contracts held by or on behalf of the
Plan and all other Plans maintained by the same employer, or any affiliate
thereof, as defined in PTCE 95-60, or by the same employee organization, exceeds
10% of the total of all reserves and liabilities of the general account, as
determined under PTCE 95-60, as of the date of the acquisition of the
certificates;
o the transferee is an insurance company and:
o the source of funds used to purchase the certificates is an
insurance company general account,
o the requirements of Sections 401(c) of ERISA and the regulations
to be promulgated thereunder have been satisfied and will continue to be
satisfied and
o the insurance company represents that it understands that the
operation of the general account after December 31, 1998 may affect its ability
to continue to hold the certificates after the date which is 18 months after the
401(c) Regulations become final and that unless a class exemption or an
exception under Section 401(c) of ERISA is then available for the continued
holding of the certificates, it will dispose of the certificates prior to the
date which is 18 months after the 401(c) Regulations become final;
o the transferee is an insurance company and:
o the source of funds used to purchase the certificates is an
insurance company pooled separate account, as that term is defined in PTCE 90-1,
o the conditions set forth in PTCE 90-1 have been satisfied and
o there is no Plan, together with all other Plans maintained by
the same employer, or any affiliate thereof, as defined in PTCE 90-1, or by the
same employee organization, with assets which
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<PAGE>
exceed 10% of the total of all assets in such pooled separate account, as
determined under PTCE 90-1, as of the date of the acquisition of the
certificates;
o the transferee is a bank and:
o the source of funds used to purchase the certificates is a
collective investment fund, as defined in PTCE 91-38,
o the conditions set forth in PTCE 91-38 have been satisfied and
o there is no Plan, the interests of which, together with the
interests of any other Plans maintained by the same employer or employee
organization, in the collective investment fund exceed 10% of the total of all
assets in the collective investment fund, as determined under PTCE 91-38, as of
the date of acquisition of the certificates;
o the transferee is a qualified professional asset manager described in
PTCE 84-14 and the conditions set forth in PTCE 84-14 have been satisfied and
will continue to be satisfied; or
o the transferee is an in-house asset manager described in PTCE 96-23
and the conditions set forth in PTCE 96-23 have been satisfied and will continue
to be satisfied. The subordinate certificates and the Residual Certificates will
contain a legend describing these restrictions on transfer.
Before purchasing a Senior Certificate, a fiduciary of a Plan should itself
confirm that the senior certificates constitute certificates for purposes of the
exemption and that the specific conditions of the exemption and the other
requirements set forth in the exemption would be satisfied. In addition, before
purchasing a Subordinate Certificate or Residual Certificate, a fiduciary of a
Plan should itself confirm that the conditions to the purchase described in this
section would be satisfied. Any Plan fiduciary that proposes to cause a Plan to
purchase a certificate should consult with its counsel with respect to the
potential applicability to this investment of the fiduciary responsibility and
prohibited transaction provisions of ERISA and the Code to the proposed
investment. For further information regarding the ERISA considerations of
investing in the Certificates, see "ERISA Considerations" in the prospectus.
S-56
<PAGE>
$____________ (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES ____-__
PROSPECTUS SUPPLEMENT
DATED _________ ___, ____
MASTER SERVICER
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 BY THIS PROSPECTUS SUPPLEMENT 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 _______ ___, ____.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, Dated September __, 2000
[Version 2]
Prospectus Supplement (to Prospectus dated , ____)
$___________ (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-___
ISSUER
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
This prospectus supplement, together with the accompanying prospectus will
constitute the complete prospectus.
--------------------------------------------------------------------------------
OFFERED CERTIFICATES The trust created for the Series _____-__
certificates will hold a pool of one- to
four-family residential first and second mortgage
loans. The trust will issue ______ classes of
offered certificates. You can find a list of
these classes, together with their principal
balances, pass-through rates and other
characteristics, on Page S-__ of this prospectus
supplement. Credit enhancement for all of the
offered certificates will be provided by a
certificate insurance policy and
overcollateralization.
UNDERWRITING _______________________, as underwriter, will offer to the
public the Class A-1 Certificates through Class A-7
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 approximately
_____% of the principal balance of the underwritten
certificates plus accrued interest, before deducting
expenses. 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.
----------------------------------------
Underwriter
<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. maintains its principal office at
390 Greenwich Street, 4th Floor, New York, New York 10013. Its telephone number
is (212) 816-6000.
S-2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Prospectus Supplement.......................................................................................S-4
Risk Factors...........................................................................................................S-9
Use of Proceeds.......................................................................................................S-17
The Mortgage Pool.....................................................................................................S-17
Yield on the Certificates.............................................................................................S-24
Description of the Certificates.......................................................................................S-32
Pooling and Servicing Agreement.......................................................................................S-49
The Insurer...........................................................................................................S-57
Federal Income Tax Consequences.......................................................................................S-59
Method of Distribution................................................................................................S-61
Secondary Market......................................................................................................S-62
Legal Opinions........................................................................................................S-62
Experts...............................................................................................................S-62
Ratings...............................................................................................................S-62
ERISA Considerations..................................................................................................S-63
</TABLE>
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED BY THIS PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO
UNDERSTAND ALL OF THE TERMS OF THE OFFERED CERTIFICATES, READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE ACCOMPANYING PROSPECTUS.
Title of Series........................Salomon Brothers Mortgage Securities VII,
Inc. Mortgage Pass-Through Certificates,
Series ____-___.
Cut-off Date...........................________ __, ____.
Closing Date...........................On or about _______ __, ____.
Depositor..............................Salomon Brothers Mortgage Securities VII,
Inc. The depositor will deposit the
mortgage loans into the trust. The
depositor's principal offices are located
at 390 Greenwich Street, 4th Floor, New
York, New York 10013. Its telephone
number is (212) 816-6000. SEE "THE
DEPOSITOR" IN THE PROSPECTUS.
Mortgage Loan Seller..................._____________.
Master Servicer........................________________. SEE "THE MORTGAGE
POOL--UNDERWRITING STANDARDS OF ________
AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS" AND "POOLING AND
SERVICING AGREEMENT--____________" IN
THIS PROSPECTUS SUPPLEMENT.
Originators and Servicers..............______________ and ____________. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS OF
__________ AND REPRESENTATIONS CONCERNING
THE MORTGAGE LOANS" AND "POOLING AND
SERVICING AGREEMENT--______________" AND
"--______________" IN THIS PROSPECTUS
SUPPLEMENT.
Trustee................................_________________, a national banking
association, will be the trustee of the
trust. SEE "POOLING AND SERVICING
AGREEMENT--THE TRUSTEE" IN THIS
PROSPECTUS SUPPLEMENT.
Trust Administrator...................._________________, a national banking
association, will perform several
administrative functions on behalf of the
trustee and will act as the initial
paying agent, certificate registrar and
custodian. SEE "POOLING AND SERVICING
AGREEMENT--TRUST ADMINISTRATOR" IN THIS
PROSPECTUS SUPPLEMENT.
Insurer................................_________________. SEE "THE INSURER" IN
THIS PROSPECTUS SUPPLEMENT.
S-4
<PAGE>
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 _______ ----.
Offered Certificates...................Only the certificates listed in the
immediately following table are being
offered by this prospectus supplement.
Each class of offered certificates will
have the approximate initial certificate
principal balance and fixed pass-through
rate set forth in the immediately
following table.
<TABLE>
<CAPTION>
INITIAL PASS- INITIAL CERTIFICATE PASS-
CLASS CERTIFICATE THROUGH CLASS PRINCIPAL BALANCE THROUGH
PRINCIPAL RATE RATE
BALANCE
--------------- -------------------- ------------------ ---------------- ------------------------ -----------------
<S> <C> <C> <C> <C> <C>
A-1............ $___________ _____% A-5 . . . . . $__________ _____%
A-2............ $___________ _____% A-6 . . . . . $__________ _____%
A-3............ $___________ _____% A-7 . . . . . $__________ _____%
A-4............ $___________ _____%
=============== ==================== ================== ================ ======================== =================
</TABLE>
The initial certificate principal balance of each class of certificates
listed in the immediately preceding table is approximate. The pass-through rate
will equal the lesser of the rate stated in the immediately preceding table and
the weighted average net mortgage rate.
THE TRUST
The depositor will establish a trust with respect to the certificates, under the
pooling and servicing agreement dated as of _______ __, ____ among the
depositor, the servicers, the trust administrator and the trustee. There are
_____ classes of certificates representing the trust. SEE "DESCRIPTION OF THE
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
The certificates will evidence a partial undivided interest in the trust.
Distributions of interest and principal on the offered certificates will be made
only from payments received in connection with the mortgage loans described in
the next section and payments under the certificate insurance policy.
THE MORTGAGE LOANS
The trust will contain approximately _____ [conventional] [sub-prime]
[nonconforming], one- to four-family, fixed-rate mortgage loans secured by first
liens and second liens on residential real properties. The mortgage loans have
an aggregate principal balance of approximately $___________ as of _______
__, ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of _______ __, ____:
Approximate range of _____% to
mortgage rates: ______%.
Approximate weighted _____%.
average mortgage
rate :
S-5
<PAGE>
Approximate average __ years and __
remaining term to months.
stated maturity:
Approximate second ____%.
lien mortgage loans:
Approximate balloon _____%.
loans:
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED 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 DTC in minimum
denominations of $[10,000] and integral multiples of $[1.00] in excess of the
minimum denominations. SEE "DESCRIPTION OF THE CERTIFICATES --REGISTRATION OF
THE OFFERED CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
CLASS CE CERTIFICATES. The Class CE Certificates are one of the ______ classes
of certificates representing the trust, but are not offered by this prospectus
supplement. The Class CE Certificates will have an initial certificate principal
balance of approximately $__________, which is equal to the initial
overcollateralization required by the pooling and servicing agreement. The Class
CE Certificates initially evidence an interest of approximately ____% in the
trust. The Class CE Certificates will be sold by the depositor to
_______________ on the closing date.
CLASS P CERTIFICATES. The Class P Certificates are one of the ______ classes of
certificates representing the trust, but are not offered by this prospectus
supplement. The Class P Certificates will have an initial certificate principal
balance of $___ and will not be entitled to distributions in respect of
interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the mortgage loans. The Class P Certificates will be sold
by the depositor to ____________ on the closing date.
RESIDUAL CERTIFICATES. The Class R-I Certificates, the Class R-II Certificates
and the Class R-III Certificates are the classes of certificates representing
the residual interests in the trust, but are not offered by this prospectus
supplement. These certificates will be sold by the depositor to ______________
on the closing date.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
certificates consists of the certificate insurance policy and
overcollateralization, each as described in the next section and under
"Description of the Certificates--Credit Enhancement" and
"--Overcollateralization Provisions" in this prospectus supplement.
OVERCOLLATERALIZATION. The aggregate principal balance of the mortgage loans as
of _______ __, ____ will exceed the aggregate certificate principal balance of
the offered certificates and the Class P Certificates on the closing date by
approximately $__________, which is equal to the initial certificate principal
balance of the Class CE Certificates. This amount represents approximately ____%
of the aggregate principal balance of the mortgage loans as of ________ __, ____
and is the initial amount of overcollateralization required to be provided by
the mortgage pool under the pooling and servicing agreement.
The pooling and servicing agreement provides, however, that subject to trigger
tests set forth in the pooling and servicing agreement, the required level of
overcollateralization may increase or decrease over time. SEE "DESCRIPTION OF
THE CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS
SUPPLEMENT.
S-6
<PAGE>
CERTIFICATE INSURANCE POLICY. The offered certificates will be entitled to the
benefit of the certificate insurance policy to be issued by _____________. The
insurer will issue the certificate insurance policy as a means of providing
additional credit enhancement to the offered certificates. The certificate
insurance policy will irrevocably and unconditionally guarantee payment for the
benefit of the holders of the offered certificates of an amount that will cover:
o any interest shortfalls, except for the shortfalls described in this
prospectus supplement, allocated to the offered certificates,
o the amount by which the outstanding principal amount of the offered
certificates EXCEEDS the principal amount of the mortgage loans and
o without duplication of the amount specified in the immediately
preceding paragraph, the outstanding principal amount of the offered
certificates to the extent unpaid on the final distribution date or the
earlier termination of the trust under the terms of the pooling and
servicing agreement. SEE "DESCRIPTION OF THE CERTIFICATES--FINANCIAL
GUARANTY INSURANCE POLICY" IN THIS PROSPECTUS SUPPLEMENT.
ALLOCATION OF LOSSES; SUBORDINATION. If, on any distribution date, there is not
sufficient excess interest or overcollateralization to absorb realized losses on
the mortgage loans as described under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement,
then realized losses on the mortgage loans will be allocated to the offered
certificates. The pooling and servicing agreement does not permit the allocation
of realized losses on the mortgage loans to the Class P Certificates. Subject to
the terms of the certificate insurance policy, all realized losses allocated to
the offered certificates will be covered by the certificate insurance policy.
SEE "DESCRIPTION OF THE CERTIFICATES --ALLOCATION OF LOSSES; SUBORDINATION" AND
"--FINANCIAL GUARANTY INSURANCE POLICY" IN THIS PROSPECTUS SUPPLEMENT.
P&I ADVANCES
Each servicer is required to advance delinquent payments of principal and
interest on the mortgage loans that each services, subject to the limitations
described under "Description of the Certificates--P&I Advances" in this
prospectus supplement. These advances shall be referred to in this prospectus
supplement as P&I Advances. Each servicer is entitled to be reimbursed for these
advances, and therefore these advances are not a form of credit enhancement. SEE
"DESCRIPTION OF THE CERTIFICATES--P&I ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE SECURITIES--ADVANCES IN RESPECT OF DELINQUENCIES" IN THE
PROSPECTUS.
OPTIONAL TERMINATION
At its option, the majority holder of the Class CE Certificates, or if that
holder does not exercise the option, the master servicer or the insurer, 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 __% or
__%, as further provided in this prospectus supplement, of the aggregate
principal balance of the mortgage loans as of _______ __, ____. SEE "POOLING AND
SERVICING AGREEMENT-- TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND
"DESCRIPTION OF THE SECURITIES-- TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the trust
as real estate
S-7
<PAGE>
mortgage investment conduits for federal income tax purposes. See "Federal
Income Tax Consequences--Characterization of Investments in REMIC Certificates"
in the prospectus.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN
THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the certificates that the offered
certificates receive a rating of "Aaa" from _____________ and a rating of "AAA"
from _____________.
The ratings on the offered certificates are based in part on the ratings of the
claims- paying ability of the insurer by _______ and __________.
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to investors. SEE "YIELD ON THE
CERTIFICATES" AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD
CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The offered certificates will not constitute mortgage related securities for
purposes of SMMEA because the mortgage pool includes mortgage loans that are
secured by subordinate liens on the related mortgaged properties. SEE "LEGAL
INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption to the
underwriter. This exemption applies to certificates such as the offered
certificates provided that the specific conditions set forth under
"Considerations for Benefit Plan Investors" in the prospectus are satisfied. SEE
"ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND "CONSIDERATIONS FOR
BENEFIT PLAN INVESTORS" IN THE PROSPECTUS.
S-8
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase the offered certificates unless you
understand and are able to bear the prepayment, credit, liquidity and market
risks associated with these securities.
You should carefully consider the following factors in connection with the
purchase of the offered certificates:
[Appropriate Risk Factors as necessary]
[THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC WHICH MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
The originators' underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. The originators provide loans primarily to
borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac
guidelines but who have equity in their property. While the originators' primary
consideration in underwriting a mortgage loan is the value of the mortgaged
property, each originator also considers, among other things, a mortgagor's
credit history, repayment ability and debt service-to-income ratio, as well as
the type and use of the mortgaged property. Neither originator's underwriting
standards prohibit a mortgagor from obtaining secondary financing at the time of
origination of the originator's first lien, which secondary financing would
reduce the equity the mortgagor would otherwise have in the related mortgaged
property as indicated in the related originator's loan-to-value ratio
determination.
As a result of these underwriting standards, the mortgage loans in the
mortgage pool are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS OF ___________ AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT].
[THE PAYMENT PERFORMANCE OF YOUR CERTIFICATES WILL BE RELATED TO THE PAYMENT
PERFORMANCE OF THE MORTGAGE LOANS IN THE TRUST FUND; THE MORTGAGE LOANS IN THE
TRUST FUND WHICH ARE DISCUSSED IN THIS SECTION MAY EXPOSE YOUR CERTIFICATES TO
GREATER LOSSES.
The certificates represent an interest in mortgage loans. In the event that
the mortgaged properties fail to provide adequate security for the mortgage
loans included in the trust fund, any resulting losses, to the extent not
covered by the credit enhancement, will be allocated to the certificates as
described in this prospectus supplement, and consequently may adversely affect
the yield to maturity on your certificate. 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 mortgage loans. Furthermore,
particular mortgage loans, including negative amortization mortgage loans,
buydown mortgage loans and mortgage loans requiring the mortgagor to make a
balloon payment, may have a greater likelihood of delinquency and
S-9
<PAGE>
foreclosure, and a greater likelihood of loss in the event of delinquency or
foreclosure. You should consider the following risks associated with the
mortgage loans included in the trust fund: [AS APPLICABLE]
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL MAY RESULT IN
OUTSTANDING PRINCIPAL BALANCES IN EXCESS OF THE VALUE OF THE UNDERLYING
MORTGAGED PROPERTY WHICH COULD RESULT IN LOSSES ON YOUR CERTIFICATES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _______________, are subject to negative amortization. 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 the
credit enhancement in the trust fund, holders of the certificates 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.
[THE INABILITY OF A MORTGAGOR TO MAKE LARGER MONTHLY PAYMENTS FOLLOWING THE
BUYDOWN PERIOD OF A BUYDOWN MORTGAGE LOAN MAY RESULT IN LOSSES ON THOSE MORTGAGE
LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _________________ are buydown mortgage loans, subject to temporary buydown
plans under 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.
In most cases, 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 some
buydown mortgage loans, during the initial buydown period. The inability of a
mortgagor to make these larger monthly payments could lead to losses on the
mortgage loans, and to the extent not covered by the credit enhancement, may
adversely affect the yield to maturity on your certificates.
[THE INABILITY OF A MORTGAGOR TO MAKE A BALLOON PAYMENT AT MATURITY, MAY EXPOSE
YOUR CERTIFICATES TO LOSSES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ may not be fully amortizing, or may not amortize at all,
over their terms to maturity and, thus, will require substantial payments of
principal and interest, that is, balloon payments, at their stated maturity.
Mortgage loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the
S-10
<PAGE>
related mortgaged property, the level of available mortgage rates at the time of
sale or refinancing, the mortgagor's equity in the related mortgaged property,
prevailing economic conditions and the availability of credit for loans secured
by comparable real properties.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE LIMITED
RECOURSE TO THE RELATED BORROWER, WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are 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. If the value of
the mortgaged property and other security has declined, the trust fund could
suffer losses on these mortgage loans that, to the extent not covered by [the
credit enhancement] may be allocated to your certificates. However, even with
respect to those mortgage loans that provide for recourse against the mortgagor
and its assets, there can be no assurance that enforcement of the 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.
[THE INABILITY OF A MORTGAGOR TO MAKE VARYING MONTHLY PAYMENTS UNDER A HOME
EQUITY LINE OF CREDIT LOAN MAY RESULT IN LOSSES ON YOUR CERTIFICATES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans that provide the borrower with a line of
credit under which amounts may be advanced to the borrower by the lender from
time to time. Collection on these types of mortgage loans may vary because,
among other things:
o borrowers may make payments during any month as low as the minimum
monthly payment for the month, or just the interest and fees for the month
during any interest-only period, or
o borrowers may make payments as high as the entire outstanding charges
on the mortgage loans.
It is possible that borrowers may fail to make the required periodic
payment and, to the extent not covered by credit support, these losses may
adversely affect the yield to maturity on the related securities.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE SECURED BY
JUNIOR LIENS, WHICH MAY EXPOSE THE OFFERED CERTIFICATES TO LOSSES IF THE TRUST
FUND DOES NOT RECEIVE ADEQUATE FUNDS IN CONNECTION WITH A FORECLOSURE OF THE
RELATED SENIOR LIEN TO SATISFY BOTH THE SENIOR AND JUNIOR LIEN.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans secured by junior liens and with respect
to approximately ___% of these junior liens, the related senior liens are not
included in the trust fund. 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 junior lien mortgage loan. 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 junior lien
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
S-11
<PAGE>
full at this type of sale, a bidder at the foreclosure sale of a junior lien
mortgage loan would have to bid an amount sufficient to pay off all sums due
under the junior lien mortgage loan and the senior liens or purchase the
mortgaged property subject to the senior liens. 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. A decline in
the value of the mortgaged properties securing the mortgage loans with junior
liens may increase the likelihood that, in the event of a default by the related
mortgagor, liquidation or other proceeds will be insufficient to satisfy the
junior lien mortgage loan after satisfaction of any senior liens and the payment
of any liquidation expenses. In the event that the 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 the certificates bear:
o the risk of delay in distributions while a deficiency judgment
against the borrower is obtained,
o the risk of loss if the deficiency judgment is not realized upon and
o the risk that deficiency judgments may not be available in all
jurisdictions.
Other factors may affect the prepayment rate of junior lien mortgage loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien mortgage loans
may experience a higher rate of prepayments than 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.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL WERE ORIGINATED
OUTSIDE THE UNITED STATES, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________, are mortgage loans secured by properties located in Puerto
Rico and Guam. 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 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.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE HIGH
LOAN-TO-VALUE RATIOS, SO THAT THE RELATED BORROWER HAS LITTLE OR NO EQUITY IN
THE RELATED MORTGAGED PROPERTY, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, had a loan-to-value ratio, or a combined loan-to-value
ratio, in the case of any second lien mortgage loan, at origination in excess of
80%. No mortgage loan in the mortgage pool with a
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<PAGE>
loan-to-value ratio, or a combined loan-to-value ratio, in the case of any
second lien mortgage loan, at origination in excess of 80% will be covered by a
primary mortgage insurance policy. No first lien mortgage loan will have a
loan-to-value ratio exceeding __% at origination and no second lien mortgage
loan will have a combined loan-to-value ratio exceeding _____% at origination.
Mortgage loans with higher loan-to-value ratios may present a greater risk of
loss in that an overall decline in the residential real estate market, a rise in
interest rates over a period of time and the condition of a mortgaged property,
as well as other factors, may have the effect of reducing the value of the
mortgaged property from the appraised value at the time the mortgage loan was
originated. If there is a reduction in value of the mortgaged property, the
loan-to-value ratio may increase over what it was at the time the mortgage loan
was originated. An increase of this kind may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the mortgage loan and
any losses, to the extent not covered by the credit enhancement, may affect the
yield to maturity or your certificates. Furthermore, investors should note that
the value of the mortgaged property may be insufficient to cover the outstanding
balance of the certificates. There can be no assurance that the loan-to-value
ratio of any mortgage loan determined at any time after origination is less than
or equal to its original loan-to-value ratio.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE DELINQUENT
AS OF THE CUT-OFF DATE, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, were thirty days or more but less than sixty days
delinquent in their monthly payments as of ______ __, ____. Approximately ____%
of the mortgage loans, by aggregate principal balance as of _______ __, ____,
were sixty days or more but less than ninety days delinquent in their monthly
payments as of the _______ __, ____. However, investors in the mortgage loans
should realize that approximately _____% of the mortgage loans, by aggregate
principal balance as of _______ __, ____, have a first payment date occurring on
or after _______ __, ____ and, therefore, these mortgage loans could not have
been delinquent as of _______ __, ____].
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE CONCENTRATED
IN THE STATE OF [NAME OF STATE], WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
Approximately ___% of the mortgage loans are in the state of [Name of
State.] Investors should note that some geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets causing a decline in property values in those areas, and
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans located in other geographic regions. A region's
economic condition and housing market may be directly, or indirectly, adversely
affected by a number of factors including 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. A concentration
of mortgage loans in the trust fund in a region experiencing a deterioration in
economic conditions or a decline in real estate values may expose your
certificates to losses in addition to those present for similar mortgage-backed
securities without this concentration. 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 mortgage loans. Any deterioriation of
economic conditions in [name of state] which adversely affects the ability of
borrowers to make payments on the mortgage loans may increase the likelihood of
delinquency and foreclosure of the mortgage loans that may result in losses
that, to the extent not covered by the [credit enhancement] will be allocated to
your certificates.
S-13
<PAGE>
[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 servicers, the mortgage loan seller, the trustee, the trust
administrator or any of their respective affiliates. Neither the certificates
nor the underlying mortgage loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the depositor, the servicers, the
trustee, the trust administrator or any of their respective affiliates. The
offered certificates are covered by the certificate insurance policy, as and to
the extent described under the caption "Description of the
Certificates--Financial Guaranty Insurance policy" in this prospectus
supplement. Proceeds of the assets included in the trust and proceeds from the
certificate insurance policy will be the sole source of payments on the offered
certificates, and there will be no recourse to the depositor, the servicers, the
mortgage loan seller, the trustee, the trust administrator or any other entity
in the event that 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 YOUR CERTIFICATES WILL BE
AFFECTED BY THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The rate and timing of distributions allocable to principal on the offered
certificates will depend on the rate and timing of principal payments, including
prepayments and collections upon defaults, liquidations and repurchases, on the
mortgage loans and the allocation of these payments to pay principal on the
offered certificates as provided in this prospectus supplement. As is the case
with mortgage pass-through certificates, the offered certificates are subject to
substantial inherent cash- flow uncertainties because the mortgage loans may be
prepaid at any time. However, with respect to approximately _____% of the
mortgage loans, by aggregate principal balance as of _______ __, ____, a
prepayment may subject the related mortgagor to a prepayment charge, which may
act as a deterrent to prepayment of the mortgage loan.
Prior to the distribution date in ___________ ____, no principal payments
or a disproportionately small portion of the amount of principal then payable to
the offered certificates will be distributed on the Class ___ Certificates.
After that date, a disproportionately large portion of the amount of principal
then payable to the offered certificates will be distributed on the Class ___
Certificates as more fully described in this prospectus supplement.
[THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS WHICH COULD IMPACT THE RATE AND TIMING OF PRINCIPAL
DISTRIBUTIONS ON YOUR CERTIFICATES.
In most cases, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease; a decrease in the prepayment rates on
the mortgage loans will result in a reduced rate of return of principal to
investors in the offered certificates at a time when reinvestment at the higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
are declining, prepayment rates on mortgage loans tend to increase; an increase
in the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the offered certificates at a time when
reinvestment at comparable yields may not be possible.
Except as otherwise described in this prospectus supplement, distributions
of principal will be made to the classes of offered certificates according to
the priorities described in this prospectus supplement, rather than on a PRO
RATA basis among these classes. The timing of commencement of principal
distributions and the weighted average life of each class of certificates will
be affected by the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on that class.
S-14
<PAGE>
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 FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION"].
[THE YIELD ON YOUR CERTIFICATES WILL VARY DEPENDING ON THE RATE OF PREPAYMENTS.
The yield to maturity on the offered certificates will depend on:
o the applicable purchase price; and
o the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the
mortgage loans, payments by the insurer, and the allocation of those
payments to reduce the certificate principal balance of the
certificates, as well as other factors.
The yield to investors on the offered certificates will be adversely
affected by any allocation to the offered certificates of interest shortfalls on
the mortgage loans not covered by the insurer.
If the offered certificates are purchased at a premium and principal
distributions on the 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
are purchased at a discount and principal distributions on the 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 ___% of the constant prepayment rate, as more fully described in
this prospectus supplement, and weighted average lives corresponding to that
prepayment assumption. No representation is made that the mortgage loans will
prepay at this rate or at any other rate. The yield assumptions for the offered
certificates will vary as determined at the time of sale].
[THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC TERMS THAT
APPLY TO THAT CLASS, DISCUSSED IN THIS RISK FACTOR.
The multiple class structure of the offered certificates causes the yield
of some classes to be particularly sensitive to changes in the rates of
prepayments of the mortgage loans. Because distributions of principal will be
made to the classes of offered certificates according to the priorities
described in this prospectus supplement, the yield to maturity on these classes
of certificates will be sensitive to the rates of prepayment on the mortgage
loans experienced both before and after the commencement of principal
distributions on that class.
In particular, the Class ___ Certificates do not receive, unless the
certificate principal balances of the other classes of offered certificates have
been reduced to zero, any portion of principal payments prior to the
distribution date in _______ ____. In addition, the Class ___ Certificates will
receive, unless the certificate principal balances of the other classes of
offered certificates have been reduced to zero, a disproportionately small or
large portion of the amount of principal then payable to the offered
certificates thereafter. Therefore, the weighted average life of the Class ___
Certificates will be longer or shorter than would otherwise be the case. The
effect on the market value of the Class ___ Certificates of changes in market
interest rates or market yields for similar securities may be greater or lesser
than for the other classes of offered certificates entitled to principal
distributions].
S-15
<PAGE>
[VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND YOUR CERTIFICATES.
Applicable state laws regulate interest rates and other charges, require
disclosure, and require licensing of the originators. In addition, other state
laws, public policy and principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding
the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, will be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994, or the Riegle Act, which incorporates the
Home Ownership and Equity Protection Act of 1994. The Riegle Act adds additional
provisions to Regulation Z, which is the implementing regulation of the Federal
Truth-in-Lending Act. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans with
high interest rates or high up-front fees and charges. In most cases, mortgage
loans covered by the Riegle Act have annual percentage rates over 10% greater
than the yield on treasury securities of comparable maturity and fees and points
which exceed the greater of 8% of the total loan amount or $441, which amount is
adjusted annually based on changes in the consumer price index for the year. The
provisions of the Riegle Act apply on a mandatory basis to all applicable
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would, in most cases, be subject to all
claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the related
originator to damages and administrative enforcement.
Each originator will represent that as of the closing date, each mortgage
loan originated by it is in compliance with applicable federal and state laws
and regulations. In the event of a breach of this representation, the related
originator will be obligated to cure the breach or repurchase or replace the
affected mortgage loan in the manner described in the prospectus].
[IF THE INSURER FAILS TO MEET ITS OBLIGATIONS UNDER THE POLICY, YOU MAY
EXPERIENCE A LOSS ON YOUR INVESTMENT
S-16
<PAGE>
If the protection created by the overcollateralization is insufficient and
the insurer is unable to meet its obligations under the certificate insurance
policy, then you could experience a loss on your investment. In addition, any
reduction in a rating of the claims-paying ability of the insurer may result in
a reduction in the rating of the offered certificates].
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE SERVICERS TO PERFORM
THEIR DUTIES
As is the case with most companies using computers in their operations,
each servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the servicers' computer programs that have
time- sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any occurrence of this kind could result in major computer
system failure or miscalculations. Each servicer is presently engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant. However, in the event that the related servicer or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the servicer under the
pooling and servicing agreement could be materially adversely affected].
All capitalized terms used in this prospectus supplement will have the
meanings assigned to them under "Description of the Certificates--Glossary of
Terms" or in the prospectus under "Glossary."
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 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 loans were previously purchased by the mortgage
loan seller either directly or indirectly from the originator.
THE MORTGAGE POOL
GENERAL DESCRIPTION OF THE MORTGAGE LOANS
The mortgage pool will consist of approximately _____ conventional, one- to
four-family, fixed- rate mortgage loans secured by first liens or second liens
on residential real properties and having an aggregate principal balance as of
_______ __, ____, which date will also be referred to in this prospectus
supplement the cut-off date of approximately $___________, after application of
scheduled payments due on or before the cut-off date whether or not received and
subject to a permitted variance of plus or minus 5%. The mortgage loans have
original terms to maturity of not greater than [30] years.
References to percentages of the mortgage loans, unless otherwise noted,
are calculated based on the aggregate principal balance of the mortgage loans as
of the cut-off date.
The mortgage loans are secured by first or second mortgages or deeds of
trust or other similar security instruments creating first liens or second liens
on residential properties. The mortgaged properties in the mortgage pool consist
of attached, detached or semi-detached, one- to four-family dwelling units,
townhouses, individual condominium units, individual units in planned unit
S-17
<PAGE>
developments and manufactured housing. The mortgage loans to be included in the
mortgage pool will be acquired by the depositor from the mortgage loan seller,
who acquired the mortgage loans either directly or indirectly from the
originators. _______________ will act as the master servicer under the pooling
and servicing agreement for the mortgage loans and each of the master servicer
and ________________ will act as the servicer under the pooling and servicing
agreement for the mortgage loans originated by it. See "--Underwriting Standards
of _________ and Representations Concerning the Mortgage Loans" in this
prospectus supplement
____ mortgage loans, representing approximately ____% of the mortgage
loans, have first payment dates occurring in _________ ____. With respect to
these mortgage loans, no principal amortization payments will be distributed in
_______ ____ unless principal payments on these mortgage loans are received in
the Prepayment Period applicable to the distribution date occurring in _______
____. On the closing date, however, cash will be deposited with the trust
administrator in an amount equal to interest accrued on these mortgage loans,
net of the related servicing fee, for the related Interest Accrual Period for
distribution to the holders of the offered certificates on the first
distribution date.
The mortgage loans have scheduled monthly payments due on the first day of
the month and that day will be referred to in this prospectus supplement as the
due date. Each mortgage loan will contain a customary due-on-sale clause.
Approximately _____% of the mortgage loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on prepayments as
provided in the related mortgage note. These mortgage loans provide for payment
of a prepayment charge on some partial prepayments and all prepayments in full
made within a specified period not in excess of ____ years from the date of
origination of the mortgage loan, as provided in the related mortgage note. The
amount of the prepayment charge is as provided in the related mortgage note,
but, in most cases, is equal to _____ month's interest on any amounts prepaid in
excess of __% of the then outstanding principal balance of the related mortgage
loan in any __ month period, as permitted by law. The holders of the Class P
Certificates will be entitled to all prepayment charges received on the mortgage
loans, and these amounts will not be available for distribution on the other
classes of certificates. Under those instances described in the pooling and
servicing agreement, the applicable servicer may waive the payment of any
otherwise applicable prepayment charge. Investors should conduct their own
analysis of the effect, if any, that the prepayment charges, and decisions by
the servicers with respect to the waiver of the prepayment charges, may have on
the prepayment performance of the mortgage loans. The depositor makes no
representation as to the effect that the prepayment charges, and decisions by
the servicers with respect to the waiver of the prepayment charges, may have on
the prepayment performance of the mortgage loans.
Approximately ___% of the mortgage loans are buydown mortgage loans.
Approximately _____% of the mortgage loans are balloon loans. Each balloon
loan amortizes over ___ months, but the final payment on each balloon loan is
due and payable on the ___th month. The amount of the final payment on each
balloon loan is substantially in excess of the amount of the scheduled monthly
payment on the balloon loan for the period prior to the due date of the final
payment.
The average principal balance of the mortgage loans at origination was
approximately $______. No mortgage loan had a principal balance at origination
greater than approximately $_______ or less than approximately $_____. The
average principal balance of the mortgage loans as of the cut-off date was
approximately $______. No mortgage loan had a principal balance as of the
cut-off date greater than approximately $_______ or less than approximately
$_____.
S-18
<PAGE>
The mortgage loans had mortgage rates as of the cut-off date ranging from
approximately _____% per annum to approximately ______% per annum, and the
weighted average mortgage rate was approximately _____% per annum.
The weighted average loan-to-value ratio, or combined loan-to-value ratio,
in the case of second lien mortgage loans, of the mortgage loans at origination
was approximately _____%. At origination, no mortgage loan will have a
loan-to-value ratio, or combined loan-to-value ratio, in the case of any second
lien mortgage loan, greater than approximately _____% or less than approximately
____%.
Approximately ____% of the mortgage loans are secured by second liens on
the related mortgaged property.
The weighted average remaining term to stated maturity of the mortgage
loans will be approximately __ years and __ months as of the cut-off date. None
of the mortgage loans will have a first due date prior to ______ ____ or after
_________ ____, or will have a remaining term to stated maturity of less than __
years and __ months or greater than [30] years as of the cut-off date. The
latest maturity date of any mortgage loan is _______ ____.
The mortgage loans are expected to have the following characteristics as of
the cut-off date but investors should note that the sum in any column may not
equal the total indicated due to rounding:
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
% OF
NUMBER AGGREGATE ORIGINAL AGGREGATE ORIGINAL
RANGE ($) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- -------- ------------------- ------------------
<S> <C> <C> <C>
- ..........................
- ..........................
- ..........................
- ..........................
Total.............................................
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- -------- ------------------ -----------------
<S> <C> <C> <C>
- .......................
- .......................
- .......................
- .......................
Total..........................................
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
- .............................................
- .............................................
- .............................................
- .............................................
Total......................................
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
- .....................................................
- .....................................................
- .....................................................
- .....................................................
Total..............................................
</TABLE>
* References to loan-to-value ratios are references to combined loan-to-value
ratios with respect to second lien Mortgage Loans.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-20
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
<TABLE>
<CAPTION>
PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------ -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------ -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE _____________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
* Underwritten under the Mortgage Credit Only program. ** Underwritten under the
Home Saver program.
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE __________ MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-22
<PAGE>
UNDERWRITING STANDARDS OF _________ AND REPRESENTATIONS CONCERNING THE MORTGAGE
LOANS
The mortgage loans will be acquired by the depositor from the mortgage loan
seller. The mortgage loan seller will have acquired, either directly or
indirectly, approximately _____% of the mortgage loans by aggregate principal
balance as of the cut-off date, from ______________. The mortgage loan seller
will have acquired approximately _____% of the mortgage loans, by aggregate
principal balance as of the cut-off date, from ______________ ("________"). All
of the mortgage loans were originated or acquired by the originators generally
in accordance with the underwriting criteria described below.
The information set forth below with regard to the originators'
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by the originators. None of the depositor,
the trustee, the trust administrator, the mortgage loan seller, the underwriter
or any of their respective affiliates has made any independent investigation of
such information or has made or will make any representation as to the accuracy
or completeness of such information.
The originators' underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. All of the mortgage loans were
also underwritten with a view toward the resale thereof in the secondary
mortgage market. While the originators' primary consideration in underwriting a
mortgage loan is the value of the mortgaged property, the originators also
consider, among other things, a mortgagor's credit history, repayment ability
and debt service-to-income ratio, as well as the type and use of the mortgaged
property. The mortgage loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with Fannie Mae and Freddie Mac
standards, which is likely to result in rates of delinquencies and foreclosures
that are higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in a more traditional manner.
As a result of the originators' underwriting criteria, changes in the
values of mortgaged properties may have a greater effect on the delinquency,
foreclosure and loss experience on the mortgage loans than such changes would be
expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given that the values of the related mortgaged
properties have remained or will remain at the levels in effect on the dates of
origination of the related mortgage loans.
[Originator's Underwriting Programs]
[Discussion of Underwriting Programs used by Originator 1 to originate
mortgage loans such as those in the securitization]
[Originator's Underwriting Programs]
[Discussion of Underwriting Programs used by Originator 2 to originate
mortgage loans such as those in the securitization]
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
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
S-23
<PAGE>
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 THE OFFERED CERTIFICATES
The effective yield to holders of the offered certificates of each class
will be less than the yields otherwise produced by their respective pass-through
rates and purchase prices because:
o on the first distribution date one month's interest is payable on
the offered certificates even though __ days will have elapsed from
the date on which interest begins to accrue o on the offered
certificates,
o on each succeeding distribution date the interest payable on the
offered certificates is the interest accrued during the month
preceding the month of the distribution date, which ends 24 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
that may be less than the Certificate Principal Balance of the class
actually outstanding for the first 24 days of the Interest Accrual
Period.
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 applicable servicer to collect full amounts of interest on
mortgage loans affected by application of the relief act. Each servicer is
obligated to pay from its own funds only those interest shortfalls attributable
to full and partial prepayments by the mortgagors on the related mortgage loans,
but only to the extent of its servicing fee for the related Due Period.
Accordingly, the effect of:
o any principal prepayments on the mortgage loans, to the extent that
Prepayment Interest Shortfalls exceed 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 certificateholders.
Any of these shortfalls will be allocated among the certificates as
provided under "Description of the Certificates--Interest Distributions on the
Offered Certificates" and "--Overcollateralization Provisions" in this
prospectus supplement. The certificate insurance policy will not cover any
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<PAGE>
shortfalls resulting from application of the Relief Act. See "Legal Aspects of
the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the
prospectus.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yield to maturity of
the offered certificates will be related to the rate and timing of payments of
principal on the mortgage loans. Furthermore, since mortgage loans secured by
second liens are not usually viewed by borrowers as permanent financing and, in
most cases, carry a high rate of interest, the mortgage loans in the mortgage
pool may experience a higher rate of prepayments than traditional mortgage
loans. The rate of principal payments on the mortgage loans will in turn be
affected by the amortization schedules of the mortgage loans 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 originators, the mortgage loan seller, the
insurer or the master servicer. The mortgage loans may be prepaid by the
mortgagors at any time; however, as described under "The Mortgage Pool" in this
prospectus supplement, with respect to approximately _____% of the mortgage
loans, by aggregate principal balance as of the cut-off date, a prepayment may
subject the related mortgagor to a prepayment charge.
Prepayments, liquidations and repurchases of the mortgage loans will result
in distributions in respect of principal to the holders of the offered
certificates that otherwise would be distributed over the remaining terms of the
mortgage loans. 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 the offered certificates may vary from the anticipated
yield will depend upon the degree to which the offered certificates are
purchased at a discount or premium and the degree to which the timing of
payments on the offered certificates is sensitive to prepayments on the mortgage
loans. Further, an investor should consider, in the case of any offered
certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the mortgage loans could result in an actual yield
to the investor that is lower than the anticipated yield. 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. 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. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in this prospectus
supplement and in the prospectus.
It is highly unlikely that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the actual yield to maturity on the offered certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
The rate of payments, including prepayments, on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the mortgage rates on the
mortgage loans, the rate of prepayment and refinancing would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
mortgage rates on the mortgage loans in the mortgage pool, the rate of
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<PAGE>
prepayment on the mortgage loans would be expected to decrease. Other factors
affecting prepayment of mortgage loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. There can be no certainty as to the rate of
prepayments on the mortgage loans 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. In particular, with respect to
the Lockout Certificates, there will be periods when no principal payments or a
disproportionately small portion of the amount of principal then payable to the
offered certificates will be distributed on the Lockout Certificates, and during
other periods, a disproportionately large portion of the amount of principal
then payable to the offered certificates will be distributed on the Lockout
Certificates. Unless the Certificate Principal Balances of the offered
certificates, other than the Lockout Certificates, have been reduced to zero,
the Lockout Certificates will not be entitled to receive any distributions of
principal payments prior to the distribution date in _______ ____.
Defaults on mortgage loans are expected to occur with greater frequency in
their early years and the rate of defaults and the severity of losses on
mortgage loans secured by second liens may be substantially higher than mortgage
loans secured by first liens. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a mortgage loan in the mortgage pool, other than as
provided by the certificate insurance policy as described in this prospectus
supplement, there can be no assurance that recourse will be available beyond the
specific mortgaged property pledged as security for repayment. See "The Mortgage
Pool--Underwriting Standards of ___________ and Representations Concerning the
Mortgage Loans" in this prospectus supplement.
MARKET INTEREST RATE CONSIDERATIONS
Because the mortgage rates on the mortgage loans in the mortgage pool and
the pass-through rates on the offered certificates are fixed, these rates will
not change in response to changes in market interest rates. Accordingly, if
mortgage market interest rates or market yield for securities similar to the
offered certificates were to rise, the market value of the offered certificates
may decline.
BALLOON PAYMENTS
The mortgage loans with balloon payments will not be fully-amortizing
over their terms to maturity, and will require substantial principal payments at
their stated maturity. Mortgage loans of this type involve a greater degree of
risk than self-amortizing loans because the ability of a borrower to make a
balloon payment typically will depend upon the borrower's ability either to
fully refinance the loan or to sell the related mortgaged property at a price
sufficient to permit the borrower to make the balloon payment. The ability of a
borrower to accomplish either of these goals will be affected by a number of
factors, including the value of the related mortgaged property, the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related mortgaged property, tax laws, prevailing economic
conditions and the availability of credit for loans secured by residential
property. Because the ability of a borrower to make a balloon payment typically
will depend upon the borrower's ability to either refinance the loan or to sell
the related mortgaged property, there is a risk that the balloon loans may
default at maturity. Any
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<PAGE>
defaulted balloon payment that extends the maturity of a mortgage loan in the
mortgage pool may delay distributions of principal on the offered certificates
and extend the weighted average life of the certificates and, if these
certificates were purchased at a discount, reduce the yield on those
certificates.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of 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.
Except as otherwise described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement, distributions of principal will be made to the classes of
the offered certificates according to the priorities described in this
prospectus supplement, rather than on a PRO RATA basis among the classes of
Class A Certificates, unless an insurer default exists. The timing of
commencement of principal distributions to each class of the offered
certificates and the weighted average life of each class will be affected by the
rates of prepayment on the mortgage loans experienced both before and after the
commencement of principal distributions on each class. Furthermore, the Lockout
Certificates do not receive, unless the Certificate Principal Balances of the
offered certificates other than the Lockout Certificates, have been reduced to
zero, any portion of principal payments prior to the distribution date occurring
in _______ ____. After that date, the Lockout Certificates will receive, unless
the Certificate Principal Balances of the offered certificates, other than the
Lockout Certificates, have been reduced to zero, a disproportionately small or
large portion of principal payments. As a result, the weighted average life of
the Lockout Certificates will be longer or shorter than would otherwise be the
case, and the effect on the market value of the Lockout Certificates of changes
in market interest rates or market yields for similar securities may be greater
or lesser than for the other classes of offered certificates entitled to
principal distributions.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
assumes a prepayment rate for the mortgage loans of ___% CPR.
The tables following the next paragraph indicate the percentage of the
initial Certificate Principal Balance of the offered certificates that would be
outstanding after each of the dates shown at various percentages of the
prepayment assumption and the corresponding weighted average lives of these
certificates. The tables are based on the following assumptions:
o the mortgage pool consists of ______ mortgage loans with the
characteristics set forth in the immediately following table entitled "Assumed
Mortgage Loan Characteristics",
o distributions on these certificates are received, in cash, on the
25th day of each month, commencing in _______ ____,
o the mortgage loans prepay at the percentages of the prepayment
assumption 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,
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<PAGE>
o none of the depositor, the originators, the mortgage loan seller, the
majority holder of the Class CE Certificates, the insurer, the servicers, the
master servicer or any other person purchases from the trust fund any mortgage
loan under any obligation or option under the pooling and servicing agreement,
except as indicated in the second sentence following the tables entitled
"Percent of initial Certificate Principal Balance outstanding at the specified
percentages of the prepayment assumption",
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in _______ ____, and are computed prior to
giving effect to any prepayments received in the prior month,
o prepayments representing payment in full of individual mortgage loans
are received on the last day of each month commencing in _______ ____, and
include 30 days' interest on the mortgage loan,
o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate, original term to stated maturity
and remaining term to stated maturity so 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 _______ __, ____,
o the servicing fee rate is equal to ____% per annum, the master
servicing fee rate is equal to ____% per annum on the mortgage loans directly
serviced by ________ and is equal to ____% per annum on the mortgage loans
serviced by __________, the administration fee rate is equal to ______% per
annum and the amount of the premium payable to the insurer is as described under
the heading "Pooling and Servicing Agreement--Matters Regarding the Insurer",***
o the first _____ mortgage loans in the table entitled "Assumed
Mortgage Loan Characteristics" are mortgage loans that do not by their terms
have prepayment charges and the last _____ mortgage loans in the table entitled
"Assumed Mortgage Loan Charactersistics" are mortgage loans that by their terms
do have prepayment charges,
o the _____ mortgage loan in the table entitled "Assumed Mortgage Loan
Characteristics" is a balloon loan with a balloon payment of $_______ and the
_____ mortgage loan in the table entitled "Assumed Mortgage Loan
Characteristics" is a balloon loan with a balloon payment of $_______ and
o the _____, _____, _____, ______, _____ and _____ mortgage loans in
the table entitled "Assumed Mortgage Loan Characteristics" are mortgage loans
that have been originated by __________ and the _____, _____, _____, _____,
_____ and ______ mortgage loans in the table entitled "Assumed Mortgage Loan
Characteristics" are mortgage loans that have been originated by ---------.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL BALANCE ORIGINAL TERM REMAINING TERM
AS OF THE MORTGAGE TO MATURITY TO MATURITY
CUT-OFF DATE RATE (MONTHS) (MONTHS)
------------ ---- -------- --------
<S> <C> <C> <C>
</TABLE>
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<PAGE>
There will be discrepancies between the characteristics of the actual
mortgage loans in the mortgage pool and the characteristics assumed in preparing
the tables. Any discrepancy may have an effect upon the percentages of the
initial Certificate Principal Balance outstanding, and the weighted average
lives, of the offered certificates set forth in the tables. In addition, since
the actual mortgage loans included in the mortgage pool will have
characteristics that differ from those assumed in preparing the tables set forth
immediately following this paragraph, the offered certificates may mature
earlier or later than indicated by the tables. Based on the foregoing
assumptions, the tables indicate the weighted average lives of the offered
certificates and sets forth the percentages of the initial Certificate Principal
Balance of the offered certificates that would be outstanding after each of the
distribution dates shown, at various percentages of the prepayment assumption.
Neither the prepayment model used in this prospectus supplement nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the mortgage loans included in the
mortgage pool. Variations in the prepayment experience and the balance of the
mortgage loans that prepay may increase or decrease the percentages of initial
Certificate Principal Balances, and weighted average lives, shown in the
following table. These variations may occur even if the average prepayment
experience of all the mortgage loans included in the mortgage pool equals any of
the specified percentages of the prepayment assumption.
S-29
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES CLASS A-3 CERTIFICATES
---------------------- ---------------------- ----------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- -------------------- ------------- ---------- ------ ------------ ------------ --------------------
<S> <C> <C> <C>
Closing Date.............
.........................
.........................
.........................
.........................
Weighted Average Life
in Years...............
Weighted Average Life
in Years...............
</TABLE>
-----------------
* Represents less than one-half of one percent.
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. The last row of weighted average lives is calculated
using the calculation set forth in the previous sentence but assumes the
majority holder of the Class CE Certificates exercises its option to purchase
the mortgage loans on the earliest possible distribution date on which it is
permitted to exercise this option. See "Pooling and Servicing Agreement
--Termination" in this prospectus supplement.
(TABLE CONTINUED ON NEXT PAGE.)
S-30
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-5 CERTIFICATES CLASS A-6 CERTIFICATES CLASS A-7 CERTIFICATES
---------------------- ---------------------- ----------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%% 0% 50% 100% 150% 200%
----------------- ----------- ---------------------- --------- ------------------- ------ ----- --------------------
<S> <C> <C> <C>
Closing Date.............
.........................
.........................
.........................
.........................
Weighted Average Life
in Years...............
Weighted Average Life
in Years...............
</TABLE>
-----------------
* Represents less than one-half of one percent.
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. The last row of weighted average lives is calculated
using the calculation set forth in the previous sentence but assumes the
majority holder of the Class CE Certificates exercises its option to purchase
the mortgage loans on the earliest possible distribution date on which it is
permitted to exercise this option. See "Pooling and Servicing Agreement
--Termination" in this prospectus supplement.
(TABLE CONTINUED FROM PRIOR PAGE.)
S-31
<PAGE>
There is no assurance that prepayments of the mortgage loans included in
the mortgage pool will conform to any of the levels of the prepayment assumption
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.
DESCRIPTION OF THE CERTIFICATES
GENERAL DESCRIPTION OF THE CERTIFICATES
The Salomon Brothers Mortgage Securities VII, Inc., Mortgage Pass-Through
Certificates, Series ____-___ will consist of ______ classes of certificates,
designated as:
o the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class A-5 Certificates and the
Class A-6 Certificates, which will also be referred to in this prospectus
supplement as the Senior Sequential Certificates;
o the Class A-7 Certificates, which will also be referred to in this
prospectus supplement as the Lockout Certificates;
o the Class CE Certificates;
o the Class P Certificates and
o the Class R-I Certificates, the Class R-II Certificates and the Class
R-III Certificates, which will also be referred to in this prospectus supplement
as the Residual Certificates.
Only the Senior Sequential Certificates and the Lockout Certificates are
being offered by this prospectus supplement. The Class CE Certificates, the
Class P Certificates and the Residual Certificates, which are not being offered
by this prospectus suupplement, will be sold by the depositor to ______________
on the closing date.
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 _______ ____.
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, fixed-rate, first lien and second lien
mortgage loans having original terms to maturity of not greater than [30] years.
The certificates have an aggregate principal balance as of the cut-off date of
approximately $___________, subject to a permitted variance as described under
"The Mortgage Pool" in this prospectus supplement.
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<PAGE>
Each class of offered certificates will have the approximate initial
Certificate Principal Balance and pass-through rate as set forth in the table
appearing in the summary of this prospectus supplement. The pass-through rate on
the Class A-6 Certificates for any distribution date will be a rate per annum
equal to the lesser of:
o _____% and
o the Net WAC Pass-Through Rate for that distribution date.
The offered certificates in the aggregate evidence an initial undivided
interest of approximately _____% in the trust fund and the Class CE Certificates
evidence an initial undivided interest of approximately ____% in the trust fund.
The offered certificates will be issued, maintained and transferred on the
book-entry records of the Depository Trust Company, or DTC, and its
participants, and in that capacity, will be referred to in this prospectus
supplement as the book-entry certificates. The book-entry certificates will be
issued in minimum denominations of $[10,000] and integral multiples of $[1.00]
in excess of the minimum denominations.
The depositor has been informed by DTC that DTC's nominee will be CEDE &
Co. No person acquiring an interest in any offered certificate will be entitled
to receive a certificate representing that person's interest, except as set
forth in the section entitled "--Definitive Certificates". Unless and until a
certificate is issued in fully registered certificated form, a definitive
certificate, under the limited circumstances described in this prospectus
supplement, all references to actions by certificateholders with respect to the
offered certificates shall refer to actions taken by DTC upon instructions from
its participants, and all references in this prospectus supplement to
distributions, notices, reports and statements to certificateholders with
respect to the offered certificates shall refer to distributions, notices,
reports and statements to DTC or CEDE & Co., as the registered holder of the
Offered Certificates, for distribution to Certificate Owners in accordance with
DTC procedures. See "--Registration of the Offered Certificates" and
"--Definitive Certificates" in this prospectus supplement.
Any definitive certificates will be transferable and exchangeable at the
offices of the trust administrator. No service charge will be imposed for any
registration of transfer or exchange, but the trust administrator may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection with any registration of this kind.
All distributions to holders of the certificates, other than the final
distribution on any class of certificates, will be made by the trust
administrator on behalf of the trustee to the persons in whose names these
certificates are registered at the close of business on each record date. The
record date for each distribution date is:
o with respect to any book-entry certificate, the close of business on
the business day immediately preceding the distribution date or
o with respect to any other class of certificates, including any
definitive certificates, 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 trust administrator at least five
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<PAGE>
business days prior to the relevant record date by any holder of certificates
having an aggregate initial Certificate Principal Balance that is in excess of
the lesser of:
o $5,000,000 or
o two-thirds of the initial aggregate Certificate Principal Balance of
that 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 certificates at the corporate trust office of the trust
administrator or other location specified in the notice to certificateholders of
the final distribution.
REGISTRATION OF THE OFFERED CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a clearing
corporation within the meaning of the New York Uniform Commercial Code, and a
clearing agency registered under the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations and to facilitate the clearance and settlement of
securities transactions between its participants through electronic book
entries, thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, including the underwriter
of the certificates offered by this prospectus supplement, banks, trust
companies and clearing corporations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers, and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Certificate owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the book-entry certificates may do so only through participants and indirect
participants. In addition, certificate owners will receive all distributions of
principal of and interest on the book-entry certificates from the trust
administrator through DTC and DTC participants. The trust administrator will
forward payments to DTC in same day funds and DTC will forward these payments to
participants in next day funds settled through the New York Clearing House. Each
participant will be responsible for disbursing these payments to indirect
participants or to certificate owners. Unless and until definitive certificates
are issued, it is anticipated that the only certificateholder of the book-entry
certificates will be CEDE & Co., as nominee of DTC. Certificate owners will not
be recognized by the trust administrator as certificateholders, as the term is
used in the pooling and servicing agreement and certificate owners will be
permitted to exercise the rights of certificateholders only indirectly through
DTC and its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the book-entry
certificates among participants and to receive and transmit distributions of
principal of, and interest on, the book-entry certificates. Participants and
indirect participants with which certificate owners have accounts with respect
to the book-entry certificates similarly are required to make book-entry
transfers and receive and transmit payments on behalf of their respective
certificate owners. Accordingly, although certificate owners will not possess
definitive certificates, the rules, regulations and procedures creating and
affecting DTC and its operations provide a mechanism by which certificate owners
through their participants and indirect participants will receive payments and
will be able to transfer their interest.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of banks, the ability of a
certificate owner to pledge book-entry certificates
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<PAGE>
to persons or entities that do not participate in the DTC system, or to
otherwise act with respect to these certificates, may be limited due to the
absence of physical certificates for the book-entry certificates. In addition,
under a book-entry format, certificate owners may experience delays in their
receipt of payments since distributions will be made by the trust administrator
to CEDE & Co., as nominee for DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations , DTC will take action permitted to be taken by a
certificateholder under the pooling and servicing agreement only at the
direction of one or more participants to whose DTC account the book-entry
certificates are credited. Additionally, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC will take actions
with respect to specified voting rights only at the direction of and on behalf
of participants whose holdings of book-entry certificates evidence these
specified voting rights. DTC may take conflicting actions with respect to voting
rights, to the extent that participants whose holdings of book-entry
certificates evidencing these voting rights, authorize divergent action.
DTC management is aware that computer applications, systems and similar
items for processing data that are dependent upon calendar dates, including
dates before, on and after January 1, 2000, may encounter Year 2000 problems.
DTC has informed its participants and other members of the financial community
that it has developed and is implementing a program so that its computer
applications, systems and similar items for processing data, as the same relate
to the timely payment of distributions, including principal and income payments,
to securityholders, book- entry deliveries and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting and will continue to contact third
party vendors from whom DTC acquires services to impress upon them the
importance of their services being Year 2000 compliant and determine the extent
of their efforts for Year 2000 remediation and, as appropriate, testing of their
services. In addition, DTC is in the process of developing contingency plans as
it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
The depositor, the servicers, the trustee, the trust administrator, the
originators, the insurer and the mortgage loan seller will have no liability for
any actions taken by DTC or its nominee, including, without limitation, actions
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the offered certificates held by CEDE & Co.,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to the beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive certificates will be issued to certificate owners or their
nominees, rather than to DTC or its nominee, only if
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o the depositor advises the trust administrator in writing that DTC is
no longer willing or able to discharge properly its responsibilities as clearing
agency with respect to the offered certificates and the depositor is unable to
locate a qualified successor,
o the depositor, at its option, advises the trust administrator in
writing that it elects to terminate the book-entry system through DTC, or
o after the occurrence of an event of default, certificate owners
representing in the aggregate not less than 51% of the voting rights of the
offered certificates advise the trust administrator and DTC through
participants, in writing, that the continuation of a book-entry system through
DTC, or a successor to DTC, is no longer in the certificate owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the trust administrator is required to notify all certificate owners
through participants of the availability of definitive certificates. Upon
surrender by DTC of the definitive certificates representing the offered
certificates and receipt of instructions for re-registration, the trust
administrator will reissue the offered certificates as definitive certificates
issued in the respective principal amounts owned by individual certificate
owners, and thereafter the trust administrator will recognize the holders of
these definitive certificates as certificateholders under the pooling and
servicing agreement. Definitive certificates will be issued in minimum
denominations of $10,000, except that any beneficial ownership represented by an
offered certificate in an amount less than $10,000 immediately prior to the
issuance of a definitive certificate shall be issued in a minimum denomination
equal to the amount represented by the offered certificate.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the certificates:
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, the servicers, the trust administrator or the trustee, of:
o the aggregate amount of scheduled monthly payments on the mortgage
loans due on the related due date and received on or prior to the related
determination date, after deduction of the servicing fees, the master servicing
fee, the administration fee and the premium payable with respect to the
certificate insurance policy,
o 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
o all P&I Advances with respect to the mortgage loans received for the
distribution date.
BANKRUPTCY LOSS: A Bankruptcy Loss is a Deficient Valuation or a Debt
Service Reduction.
CERTIFICATE PRINCIPAL BALANCE: The Certificate Principal Balance of an
offered certificate outstanding at any time represents the then maximum amount
that the holder of the offered certificate is entitled to receive as
distributions allocable to principal from the cash flow on the mortgage loans
and the other assets in the trust fund. The Certificate Principal Balance of any
class of offered certificates as of any date of determination is equal to the
initial Certificate Principal Balance of the offered certificate reduced by the
aggregate of:
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o all amounts allocable to principal previously distributed with
respect to that certificate and
o any reductions in the Certificate Principal Balance of the offered
certificate deemed to have occurred in connection with allocations of Realized
Losses in the manner described in this prospectus supplement.
The Certificate Principal Balance of the Class CE Certificates as of any
date of determination is equal to the excess, if any, of:
o the then aggregate principal balance of the mortgage loans over
o the then aggregate Certificate Principal Balance of the offered
certificates and the Class P Certificates.
COMPENSATING INTEREST: With respect to any principal prepayments, any
payments made by the master servicer from its own funds to cover Prepayment
Interest Shortfalls.
CUMULATIVE INSURANCE PAYMENTS: As of any distribution date, Cumulative
Insurance Payments refers to the aggregate of any payments made by the insurer
under the certificate insurance policy to the extent not previously reimbursed,
plus interest on these payments.
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.
EXPENSE ADJUSTED MORTGAGE RATE: The Expense Adjusted Mortgage Rate on any
mortgage loan is equal to the then applicable mortgage rate on the mortgage loan
MINUS the sum of
o the administration fee rate,
o the servicing fee rate and
o the master servicing fee rate.
For any distribution date, the administration fee rate is equal to _____% per
annum, the servicing fee rate is equal to ____% per annum and the master
servicing fee rate is equal to ____% per annum with respect to each mortgage
loan serviced by _________. See "Pooling and Servicing Agreement--The Trustee",
"--The Trust Administrator" and "--Servicing and Other Compensation and Payment
of Expenses" in this prospectus supplement. The amount of the premium payable to
the insurer with respect to the certificate insurance policy for any
distribution date is described under "Pooling and Servicing Agreement--Matters
Regarding the Insurer" in this prospectus supplement.
INSURED PAYMENTS: Insured Payments shall mean with respect to the offered
certificates as of any distribution date, the sum of:
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(i) any shortfall in amounts available in the distribution account, as
defined in the pooling and servicing agreement, to pay the Interest Distribution
Amount on the offered certificates for the related Interest Accrual Period,
(ii) the excess, if any, of:
o the aggregate Certificate Principal Balance of the offered
certificates then outstanding over
o the aggregate principal balances of the mortgage loans then
outstanding and
(iii) without duplication of the amount specified in clause (ii), the
aggregate Certificate Principal Balance of the offered certificates to the
extent unpaid on the final distribution date or the earlier termination of the
trust fund under the terms of the pooling and servicing agreement.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for any distribution
date and the offered certificates of any class is the one-month period preceding
the month in which the distribution date occurs, and all distributions of
interest on the offered certificates will be based on a 360-day year consisting
of twelve 30-day months.
INTEREST DISTRIBUTION AMOUNT: The Interest Distribution Amount for the
offered certificates of any class on any distribution date is equal to interest
accrued during the related Interest Accrual Period on the Certificate Principal
Balance of the certificates immediately prior to the distribution date at the
pass-through rate for that class, reduced, to not less than zero, in the case of
each class, by the allocable share for that class of shortfalls resulting from
the application of the Relief Act, plus any undistributed Interest Distribution
Amount for that class from any previous distribution dates.
LOCKOUT CERTIFICATE PERCENTAGE: The Lockout Certificate Percentage for the
Lockout Certificates will be calculated for each distribution date to be the
percentage equal to the aggregate Certificate Principal Balance of the Lockout
Certificates immediately prior to the distribution date divided by the sum of
the aggregate Certificate Principal Balances of the offered certificates
immediately prior to the distribution date.
LOCKOUT DISTRIBUTION PERCENTAGE: The Lockout Distribution Percentage for
the Lockout Certificates and for any distribution date occurring prior to the
distribution date in ________ ____ will be equal to 0%. The Lockout Distribution
Percentage for any distribution date occurring after the first three years
following the closing date will be as follows: for any distribution date during
the _____ or _____ year after the closing date, __% of the Lockout Certificate
Percentage for that distribution date; for any Distribution Date during the
_____ year after the Closing Date, __% of the Lockout Certificate Percentage for
that Distribution Date; for any Distribution Date during the _______ year after
the Closing Date, ___% of the Lockout Certificate Percentage for that
Distribution Date, and for any Distribution Date thereafter, the lesser of:
o ___% of the Lockout Certificate Percentage and
o ---%.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Offered Certificates, other than the Lockout Certificates, have been reduced to
zero, the Lockout Distribution Percentage will be equal to ___%.
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NET MONTHLY EXCESS CASHFLOW: The Net Monthly Excess Cashflow for any
distribution date is equal to the sum of:
o any Overcollateralization Reduction Amount and
o the excess of:
o the Available Distribution Amount for the distribution date OVER
o the sum for the distribution date of the aggregate of the
Interest Distribution Amounts payable to the holders of the offered
certificates and the sum of the amounts described in clauses (b)(i)
through (iii) of the definition of Principal Distribution Amount.
NET WAC PASS-THROUGH RATE: The Net WAC Pass-Through Rate for any
distribution date is a rate per annum equal to the fraction, expressed as a
percentage, the numerator of which is an amount equal to:
o 1/12 of the aggregate Scheduled Principal Balance of the then outstanding
mortgage loans multiplied by the weighted average of the Expense Adjusted
Mortgage Rates on the then outstanding mortgage loans MINUS
o the amount of the premium payable to the insurer with respect to the
certificate insurance policy for that distribution date,
and the denominator of which is
o 1/12 of the aggregate Scheduled Principal Balance of the then outstanding
mortgage loans.
OVERCOLLATERALIZATION INCREASE AMOUNT: An Overcollateralization Increase
Amount is any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal to the extent the Required Overcollateralized
Amount exceeds the Overcollateralized Amount as of the distribution date.
OVERCOLLATERALIZATION REDUCTION AMOUNT: An Overcollateralization Reduction
Amount for any distribution date is the amount by which the Overcollateralized
Amount exceeds the Required Overcollateralized Amount after taking into account
all other distributions to be made on the distribution date.
OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount with respect to
any distribution date, is the excess, if any, of:
o the aggregate principal balance of the mortgage loans immediately
following the distribution date, OVER
o the sum of the aggregate Certificate Principal Balances of the
offered certificates and the Class P Certificates as of that date, after taking
into account the payment of the amounts described in clauses (b)(i) through (iv)
of the definition of Principal Distribution Amount on the distribution date.
PREPAYMENT INTEREST SHORTFALL: With respect to any principal prepayments on
the mortgage loans, any resulting shortfall.
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PRINCIPAL DISTRIBUTION AMOUNT: The Principal Distribution Amount for any
distribution date will be the lesser of:
(a) the excess of the Available Distribution Amount over the aggregate
of the Interest Distribution Amounts for the offered certificates; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the mortgage loans due during the related due period, whether or
not received on or prior to the related determination date;
(ii) the principal portion of all proceeds received in respect
of the repurchase of a mortgage loan, or, in the case of a
substitution, amounts representing a principal adjustment, as
required by the pooling and servicing agreement during the related
prepayment period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received during
the related prepayment period, to the extent applied as recoveries
of principal on the mortgage loans;
(iv) the principal portion of any Realized Losses incurred or
deemed to have been incurred on any mortgage loans in the calendar
month preceding the distribution date to the extent covered by Net
Monthly Excess Cashflow for the distribution date; and
(v) the amount of any Overcollateralization Increase Amount
for the distribution date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
for the distribution date.
REALIZED LOSS: A Realized Loss is any Bankruptcy Loss and any amount of
loss realized 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 on the
remaining unpaid principal balance through the last day of the month in which
the mortgage loan was finally liquidated, after application of all amounts
recovered, net of amounts reimbursable to the servicers for P&I Advances,
servicing advances and other related expenses, including attorney's fees,
towards interest and principal owing on the mortgage loan.
REQUIRED OVERCOLLATERALIZED AMOUNT: The Required Overcollateralized Amount
with respect to the offered certificates and any distribution date is the
Overcollateralized Amount that is required under the pooling and servicing
agreement for the 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:
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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.
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 preceding
business day.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Distributions in respect of interest will be made on each distribution date
to the holders of each class of offered certificates in an amount, allocable
among the certificates PRO RATA in accordance with the respective amounts
payable as to each in respect of interest, equal to the Interest Distribution
Amount for that class for that distribution date.
On any distribution date, any shortfalls resulting from the application of
the Relief Act will be allocated, first, to the interest distribution amount
with respect to the Class CE Certificates, and thereafter, to the Interest
Distribution Amounts with respect to the offered certificates on a PRO RATA
basis based on the respective amounts of interest accrued on these certificates
for the distribution date. On any distribution date, any Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the
servicers will be allocated to the interest distribution amount with respect to
the Class CE Certificates. The holders of the offered certificates will be
entitled to reimbursement for any shortfalls resulting from application of the
Relief Act, subject to available funds, in the priority described under
"--Overcollateralization Provisions" in this prospectus supplement.
The pass-through rate applicable to the calculation on the Interest
Distribution Amount for each class of offered certificates is fixed and set
forth in the summary section of this prospectus supplement under "Summary of
Prospectus Supplement--Offered Certificates"; subject to the Net WAC
Pass-Through Rate in the case of the Class A-6 Certificates.
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 prospectus supplement, on a PARI PASSU basis, based on
the Certificate Principal Balance of the certificates of each class.
Subject to the terms of the certificate insurance policy, any interest
losses incurred by the offered certificates, other than shortfalls resulting
from the application of the Relief Act, will be covered under the certificate
insurance policy. Notwithstanding the foregoing, however, if payments are not
made as required under the certificate insurance policy, any of these interest
losses may be borne by the offered certificates to the extent the amount of
these losses is not paid from Net
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Monthly Excess Cashflow, in the priority described under
"--Overcollateralization Provisions" in this prospectus supplement.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date, the Principal Distribution Amount will be
distributed to the holders of the offered certificates then entitled to these
distributions.
Notwithstanding the foregoing, as described under "--Overcollateralization
Provisions" in this prospectus supplement, no amounts will be distributed to the
holders of the offered certificates under clause (v) of the definition of
Principal Distribution Amount except to the extent of any Net Monthly Excess
Cashflow remaining after payment to the holders of the offered certificates of
all amounts in respect of Realized Losses under clause (iv) of the definition of
Principal Distribution Amount and payment to the insurer of any Cumulative
Insurance Payments.
In no event will the Principal Distribution Amount with respect to any
distribution date be:
o less than zero or
o greater than the then outstanding aggregate Certificate Principal
Balance of the offered certificates.
The holders of the Class P Certificates will be entitled to all prepayment
charges received on the mortgage loans and these amounts will not be available
for distribution on the offered certificates.
In addition, on each distribution date, funds received as a result of a
claim under the certificate insurance policy in respect of the principal portion
of Realized Losses allocated to the offered certificates will be distributed by
the trust administrator on behalf of the trustee to the holders of these
certificates. See "--Financial Guaranty Insurance Policy" in this prospectus
supplement.
Distributions of the Principal Distribution Amount, and any amounts
distributable in accordance with clauses first and third under
"--Overcollateralization Provisions" in this prospectus supplement, on the
offered certificates on each distribution date will be made as follows:
o First, to the holders of the Lockout Certificates, the Lockout
Distribution Percentage of the Principal Distribution Amount, until the
Certificate Principal Balance of the Lockout Certificates has been reduced
to zero;
o Second, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance of the Class A-1 Certificates has been
reduced to zero;
o Third, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance of the Class A-2 Certificates has been
reduced to zero;
o Fourth, to the holders of the Class A-3 Certificates, until the
Certificate Principal Balance of the Class A-3 Certificates has been
reduced to zero;
o Fifth, to the holders of the Class A-4 Certificates, until the
Certificate Principal Balance of the Class A-4 Certificates has been
reduced to zero;
o Sixth, to the holders of the Class A-5 Certificates, until the
Certificate Principal Balance of the Class A-5 Certificates has been
reduced to zero;
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o Seventh, to the holders of the Class A-6 Certificates, until the
Certificate Principal Balance of the Class A-6 Certificates has been
reduced to zero; and
o Eighth, to the holders of the Lockout Certificates, until the
Certificate Principal Balance of the Lockout Certificates has been reduced
to zero.
Notwithstanding the foregoing priorities, if an Insurer Default exists, the
priority of distributions of principal among the offered certificates will be
disregarded and distributions allocable to principal will be paid on each
succeeding distribution date to holders of the offered certificates, on a PRO
RATA basis, based on the Certificate Principal Balances of the offered
certificates.
OVERCOLLATERALIZATION PROVISIONS
The weighted average mortgage rate, net of the administration fee rate, the
servicing fee Rate, the master servicing fee rate and the amount of the premium
payable to the insurer, for the mortgage loans is expected to be higher than the
weighted average of the pass-through rate on the offered certificates, thus
generating excess interest collections which, in the absence of Realized Losses,
will not be necessary to fund interest distributions on the offered
certificates. The pooling and servicing agreement requires that, on each
distribution date, the Net Monthly Excess Cashflow, if any, be applied on that
distribution date as an accelerated payment of principal on the offered
certificates, but only to the limited extent described in this section.
With respect to any distribution date, any Net Monthly Excess Cashflow, or,
in the case of clause first below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction Amount, shall be paid as follows:
FIRST, to the holders of the class or classes of offered certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the principal portion of any Realized Losses incurred or deemed to
have been incurred on the mortgage loans;
SECOND, to the insurer, in an amount equal to any Cumulative Insurance
Payments;
THIRD, to the holders of the class or classes of offered certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the Overcollateralization Increase Amount;
FOURTH, to the holders of the offered certificates, in an amount equal to
the certificates' allocated share of any shortfalls resulting from the
application of the Relief Act with respect to the mortgage loans;
FIFTH, to the insurer, for any amounts remaining due to the insurer under
the terms of the insurance agreement;
SIXTH, to the holders of the Class CE Certificates as provided in the
pooling and servicing agreement; and
SEVENTH, to the holders of the Residual Certificates, any remaining
amounts; provided that if the distribution date is the distribution date
immediately following the expiration of the latest prepayment charge term
or any distribution date thereafter, then any remaining amounts will be
distributed FIRST, to the holders of the Class P Certificates, until the
Certificate Principal Balance of the Class P Certificates has been reduced
to zero; and SECOND, to the holders of the Residual Certificates.
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As of the closing date, the aggregate principal balance of the mortgage
loans as of the cut-off date will exceed the sum of the aggregate Certificate
Principal Balances of the offered certificates and the Class P Certificates by
an amount equal to approximately $__________, which is equal to the initial
Certificate Principal Balance of the Class CE Certificates. This amount
represents approximately ____% of the aggregate principal balance of the
mortgage loans as of the cut-off date and is the initial amount of
overcollateralization required to be provided by the mortgage pool under the
pooling and servicing agreement. Under the pooling and servicing agreement, the
Overcollateralized Amount is required to be maintained at the Required
Overcollateralized Amount. In the event that Realized Losses are incurred on the
mortgage loans, these Realized Losses may result in an overcollateralization
deficiency since these Realized Losses will reduce the principal balance of the
mortgage loans without a corresponding reduction to the aggregate Certificate
Principal Balances of the offered certificates. In event the event of an
occurrence of this kind, the pooling and servicing agreement requires the
payment from Net Monthly Excess Cashflow, subject to available funds, of an
amount equal to the overcollateralization deficiency, which shall constitute a
principal distribution on the offered certificates in reduction of the
Certificate Principal Balances of the offered certificates. This has the effect
of accelerating the amortization of the offered certificates relative to the
amortization of the mortgage loans, and of increasing the Overcollateralized
Amount.
With respect to any distribution date, the Required Overcollateralized
Amount for the offered certificates will be an amount equal to approximately
____% of the aggregate principal balance of the mortgage loans as of the cut-off
date, subject to increase, or step up, or, after __ months, decrease, or step
down, upon the occurrence of loss and delinquency triggers with respect to the
mortgage pool set forth in the pooling and servicing agreement.
In the event that the Required Overcollateralized Amount is required to
step up on any distribution date, the pooling and servicing agreement provides
that all Net Monthly Excess Cashflow remaining after the distributions described
in clauses first and second will be distributed in respect of the
Overcollateralization Increase Amount for the offered certificates until the
Overcollateralized Amount is equal to the stepped up Required Overcollateralized
Amount. This has the effect of accelerating the amortization of the offered
certificates relative to the amortization of the mortgage loans, and of
increasing the Overcollateralized Amount.
In the event that the Required Overcollateralized Amount is permitted to
step down on any distribution date, the pooling and servicing agreement provides
that a portion of the principal which would otherwise be distributed to the
holders of the offered certificates on this distribution date shall be
distributed to the holders of the Class CE Certificates on this distribution
date. With respect to each distribution date of this kind, the Principal
Distribution Amount will be reduced by the Overcollateralization Reduction
Amount after taking into account all other distributions to be made on this
distribution date. Any Overcollateralization Reduction Amount shall be
distributed as part of Net Monthly Excess Cashflow according to the priorities
set forth in this section. This has the effect of decelerating the amortization
of the offered certificates relative to the amortization of the mortgage loans
and of reducing the Overcollateralized Amount.
FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the certificate insurance policy does
not purport to be complete and is qualified in its entirety by reference to the
certificate insurance policy. A form of the certificate insurance policy may be
obtained, upon request, from the depositor.
Simultaneously with the issuance of the offered certificates, the insurer
will deliver the certificate insurance policy to the trust administrator for the
benefit of the holders of the offered certificates. Under the certificate
insurance policy, the insurer will irrevocably and unconditionally guarantee
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payment to the trust administrator on behalf of the trustee on each distribution
date for the benefit of the holders of the offered certificates, the full and
complete payment of Insured Payments with respect to the offered certificates
calculated in accordance with the original terms of the offered certificates
when issued and without regard to any amendment or modification of the offered
certificates or the pooling and servicing agreement except amendments or
modifications to which the insurer has given its prior written consent. The
certificate insurance policy does not cover Relief Act shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Insurer will pay that
amount out of funds of the insurer on the later of:
o the date when due to be paid under the order referred to below OR
o the first to occur of
o the fourth business day following receipt by the insurer from
the trust administrator of:
(A) a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the effect that
a holder of offered certificates is required to return principal
or interest distributed with respect to an offered certificate
during the term of the certificate insurance policy because those
distributions were avoidable preferences under applicable
bankruptcy law, which order shall be referred to in this
prospectus supplement as the order,
(B) a certificate of the holder of offered certificates that
the Order has been entered and is not subject to any stay, and
(C) an assignment duly executed and delivered by the holder of
offered certificates, in the form as is reasonably required by the
insurer and provided to the holder of offered certificates by the
insurer, irrevocably assigning to the insurer all rights and
claims of the holder of offered certificates relating to or
arising under the offered certificates against the debtor which
made the preference payment or otherwise with respect to the
preference payment, or
o the date of receipt by the insurer from the trust administrator
of the items referred to in clauses (A), (B) and (C) if, at least four
business days prior to the date of receipt, the insurer shall have
received written notice from the trust administrator that these items
were to be delivered on that date and that date was specified in the
notice. These payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and
not to the trust administrator or holder of offered certificates
directly, unless a holder of offered certificates has previously paid
these amount to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the Order, in which case the payment
shall be disbursed to the trust administrator for distribution to the
holder of the offered certificates upon proof of the payment reasonably
satisfactory to the insurer. In connection with the foregoing, the
insurer shall have the rights provided under the pooling and servicing
agreement.
Payment of claims under the certificate insurance policy made in respect of
Insured Payments will be made by the insurer following receipt by the insurer of
the appropriate notice for payment on the later to occur of 12:00 noon, New York
City time, on the second business day following receipt of notice for payment,
and 12:00 noon, New York City time, on the relevant distribution date.
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The terms receipt and received, with respect to the certificate insurance
policy, means actual delivery to the insurer and to its fiscal agent appointed
by the insurer at its option, if any, prior to 12:00 p.m., New York City time,
on a business day; delivery either on a day that is not a business day or after
12:00 p.m., New York City time, shall be deemed to be receipt on the next
succeeding business day. If any notice or certificate given under the
certificate insurance policy by the trust administrator is not in proper form or
is not properly completed, executed or delivered, it shall be deemed not to have
been received, and the insurer or the fiscal agent shall promptly so advise the
trust administrator and the trust administrator may submit an amended notice.
Under the certificate insurance policy, business day means any day other
than:
o a Saturday or Sunday or
o a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate trust office
of the trust administrator is located, are authorized or obligated by law or
executive order to be closed.
The insurer's obligations under the certificate insurance policy to make
Insured Payments shall be discharged to the extent funds are transferred to the
trust administrator as provided in the certificate insurance policy, whether or
not these funds are properly applied by the trust administrator.
The term of the certificate insurance policy means the period from and
including the date of issuance of the certificate insurance policy to and
including the date on which the Certificate Principal Balances of the offered
certificates are reduced to zero, plus the additional period, to the extent
specified in the certificate insurance policy, during which any payment on the
offered certificates could be avoided in whole or in part as a preference
payment.
The insurer shall be subrogated to the rights of the holders of the offered
certificates to receive payments of principal and interest, as applicable, with
respect to distributions on these certificates to the extent of any payment by
the insurer under the certificate insurance policy. To the extent the insurer
makes Insured Payments, either directly or indirectly, as by paying through the
trust administrator, to the holders of the offered certificates, the insurer
will be subrogated to the rights of the holders of the offered certificates, as
applicable, with respect to the Insured Payment and shall be deemed to the
extent of the payments so made to be a registered holder of the offered
certificates for purposes of payment.
Claims under the certificate insurance policy constitute direct unsecured
and unsubordinated obligations of the insurer, and will rank not less than PARI
PASSU with any other unsecured and unsubordinated indebtedness of the insurer
except for obligations in respect to tax and other payments to which preference
is or may become afforded by statute. The terms of the certificate insurance
policy cannot be modified, altered or affected by any other agreement or
instrument, or by the merger, consolidation or dissolution of the depositor. The
certificate insurance policy by its terms may not be canceled or revoked prior
to distribution in full of all guaranteed distributions, as defined in the
certificate insurance policy. The certificate insurance policy is governed by
the laws of the State of New York. The certificate insurance policy is not
covered by the property/casualty insurance security fund specified in Article 76
of the New York Insurance Law.
To the fullest extent permitted by applicable law, the insurer agrees under
the certificate insurance policy not to assert, and waives, for the benefit of
each holder of the offered certificates, all its rights, whether by
counterclaim, setoff or otherwise, and defenses, including, without limitation,
the defense of fraud, whether acquired by subrogation, assignment or otherwise,
to the
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<PAGE>
extent that these rights and defenses may be available to the insurer to avoid
payment of its obligations under the certificate insurance policy in accordance
with the express provisions of the certificate insurance policy.
Under the terms of the pooling and servicing agreement, unless an insurer
default exists, the insurer will be entitled to exercise rights of the holders
of the offered certificates, without the consent of the certificateholders, and
the holders of the offered certificates may exercise these rights only with the
prior written consent of the insurer. See "Pooling and Servicing
Agreement--Voting Rights" and "--Matters Regarding the Insurer" in this
prospectus supplement.
The depositor, the mortgage loan seller, the servicers and the insurer will
enter into an insurance and indemnity agreement under which the depositor, the
mortgage loan seller and the servicers will agree to reimburse, with interest,
the insurer for amounts paid due to claims under the certificate insurance
policy. The depositor, the mortgage loan seller and the servicers will further
agree to pay the insurer all reasonable charges and expenses which the insurer
may pay or incur relative to any amounts paid under the certificate insurance
policy or otherwise in connection with the transaction and to indemnify the
insurer against liabilities as set forth in the insurance and indemnity
agreement. Except to the extent provided tin this prospectus supplement, amounts
owing under the insurance and indemnity agreement will be payable solely from
the trust fund. An event of default by either servicer under the insurance and
indemnity agreement will constitute an event of default by that servicer under
the pooling and servicing agreement and allow the insurer, among other things,
to direct the trustee to terminate that servicer. An event of default by each
servicer under the insurance and indemnity agreement includes:
o the servicer's failure to pay when due any amount owed under the
insurance and indemnity agreement or other documents,
o the servicer's untruth or incorrectness in any material respect of
any representation or warranty of the servicer in the insurance and indemnity
agreement, the pooling and servicing agreement, in its capacity as servicer, or
other documents,
o the servicer's failure to perform or to observe any covenant or
agreement in the insurance and indemnity agreement, the pooling and servicing
agreement, in its capacity as servicer, and other documents,
o the servicer's failure to pay its debts or the occurrence of events
of insolvency or bankruptcy with respect to the servicer and
o the occurrence of an event of default relating to the servicer under
the pooling and servicing agreement or other documents.
ALLOCATION OF LOSSES; SUBORDINATION
In the event that amounts recovered in connection with the final
liquidation of a defaulted mortgage loan are insufficient to reimburse the
servicers for P&I Advances and servicing advances, these amounts may be
reimbursed to the servicers out of any funds in the certificate account prior to
the distribution on the certificates.
Any Realized Losses on the mortgage loans will be allocated on any
distribution date,
FIRST, to Net Monthly Excess Cashflow,
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SECOND, to the Class CE Certificates until the Certificate Principal
Balance of the Class CE Certificates has been reduced to zero, and
THIRD, to the offered certificates on a PRO RATA basis.
The pooling and servicing agreement does not permit the allocation of any
Realized Losses to the Class P Certificates. The certificate insurance policy
will cover any Realized Losses allocable to the offered certificates under
clause third. Notwithstanding the foregoing, however, if payments are not made
as required under the certificate insurance policy, Realized Losses will be
allocated to the offered certificates.
If Realized Losses have been allocated to the offered certificates and the
insurer has defaulted in its obligation to cover these Realized Losses, these
amounts with respect to the certificates will no longer accrue interest nor will
these amounts be reinstated thereafter, even if Net Monthly Excess Cashflow and
the Overcollateralized Amount are greater than zero on any subsequent
distribution dates.
Any allocation of a Realized Loss to a certificate will be made by reducing
the Certificate Principal Balance of that certificate by the amount so allocated
as of the distribution date in the month following the calendar month in which
the Realized Loss was incurred. An allocation of a Realized Loss on a PRO RATA
basis between two or more classes of certificates means an allocation to each
class of certificates on the basis of its then outstanding Certificate Principal
Balance prior to giving effect to distributions to be made on the distribution
date. Notwithstanding anything to the contrary described in this prospectus
supplement, in no event will the Certificate Principal Balance of an offered
certificate be reduced more than once in respect of any particular amount both:
o allocable to the offered certificate in respect of Realized Losses
and
o payable as principal to the holder of the offered certificate from
Net Monthly Excess Cashflow or from amounts paid under the certificate insurance
policy.
P&I ADVANCES
Subject to the limitations set forth in the following paragraph, each
servicer will be obligated to advance or cause to be advanced on or before each
distribution date its own funds, or funds in the certificate account that are
not included in the Available Distribution Amount for the distribution date. The
amount of the servicers' 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 period on the mortgage loans serviced by it 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. With respect to a delinquent balloon
payment, the related servicer is not required to make a P&I Advance of the
delinquent balloon payment. The related servicer will, however, make monthly P&I
Advances with respect to a balloon loan with delinquent balloon payments, in
each case in an amount equal to the assumed monthly principal and interest
payment, net of the related servicing fee, that would have been due during the
related due period based on the original principal amortization schedule for the
balloon loan.
P&I Advances are required to be made only to the extent they are deemed by
the applicable servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making the P&I
Advances is to maintain a regular cash flow to the certificateholders, rather
than to guarantee or insure against losses. Neither servicer will be required to
make any P&I
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<PAGE>
Advances with respect to reductions in the amount of the monthly payments on the
mortgage loans due to bankruptcy proceedings or the application of the Relief
Act.
All P&I Advances will be reimbursable to the applicable servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
serviced by it as to which 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 applicable servicer to be nonrecoverable from related late collections,
insurance proceeds or liquidation proceeds may be reimbursed to that servicer
out of any funds in the certificate account prior to the distributions on the
certificates. In the event that either servicer fails in its obligation to make
any required advance, the trust administrator will be obligated to make the
advance and in the event that 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.
Notwithstanding the foregoing, in the event _______ fails in its obligation to
make any required advance as servicer, the master servicer will be obligated to
make the advance prior to the obligation of the trust administrator or the
trustee to make the advances as provided in this section.
POOLING AND SERVICING AGREEMENT
GENERAL DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The certificates will be issued under the pooling and servicing agreement,
dated as of _______ __, ____, among the depositor, the servicers, the trust
administrator and the trustee, a form of which is filed as an exhibit to the
registration statement. A Current Report on Form 8-K relating to the
certificates containing a copy of the 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 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 of the mortgage loans,
o any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received on
these mortgaged properties,
o the rights of the trustee under all insurance policies required to be
maintained under the pooling and servicing agreement and
o the rights of the depositor under the mortgage loan purchase
agreement among the depositor, the mortgage loan seller and ___________ and
under the mortgage loan purchase agreement among the depositor, the mortgage
loan seller and ___________.
Reference is made to the prospectus for important information in addition
to that set forth in this prospectus supplement regarding the trust fund, the
terms and conditions of the pooling and servicing agreement and the offered
certificates. The offered certificates will be transferable and exchangeable at
the corporate trust offices of the trust administrator, located in ______,
__________. The depositor will provide to a prospective or actual
certificateholder without charge,
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on written request, a copy, without exhibits, of the pooling and servicing
agreement. Requests should be addressed to the 390 Greenwich Street, 4th Floor,
New York, NY 10013.
ASSIGNMENT OF THE MORTGAGE LOANS
The depositor will deliver to the trust administrator, as custodian for the
trustee, with respect to each mortgage loan:
o the mortgage note endorsed without recourse to the trustee to reflect
the transfer of the mortgage loan,
o the original mortgage with evidence of recording indicated on the
mortgage loan and
o an assignment of the mortgage in recordable form to the trustee,
reflecting the transfer of the mortgage loan. These assignments of mortgage
loans are required to be recorded by or on behalf of the depositor in the
appropriate offices for real property records.
[ORIGINATOR 1]
The information set forth in the following paragraphs has been provided by
_________. None of the depositor, the trustee, the trust administrator, the
other servicer or the insurer or any of their respective affiliates has made or
will make any representation as to the accuracy or completeness of such
information.
<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE EXPERIENCE
OF _________'S SERVICING PORTFOLIO AS OF JUNE 30, 2000
Percentage
Dollar of Total
Amount Servicing Portfolio
------ -------------------
<S> <C> <C>
Delinquency(1)
30-59 Days $ %
60-89 Days $ %
90 Days or more $ %
Loans in Foreclosure(2) $ %
REO Properties(2) $ %
Total Servicing Portfolio $
</TABLE>
-------------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) The percentage of loans in foreclosure and REO properties is based on the
dollar amount of loans in foreclosure and REO properties as a percentage of
the total dollar amount of the mortgage loans in the servicing portfolio as
of the date indicated.
[ORIGINATOR 2]
The information set forth in the following paragraphs has been provided by
the _________. None of the depositor, the trustee, the mortgage loan seller, the
master servicer or any of their
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<PAGE>
respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
----------------------------
<TABLE>
<CAPTION>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
At December 31, At December 31,
1997 1998
---------------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of Loans Amount Loans Amount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio......................
Period of Delinquency
31-59 Days......................
60-89 Days......................
90 days or more.................
Total Delinquent Loans...............
Loans in Foreclosure(1)..............
</TABLE>
<TABLE>
<CAPTION>
At December 31, At June 30, 2000
1999
--------------------------------------------------------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of Loans Amount Loans Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio......................
Period of Delinquency
31-59 Days......................
60-89 Days......................
90 days or more.................
Total Delinquent Loans...............
Loans in Foreclosure(1)..............
</TABLE>
--------------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans".
------------------------
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
At December 31, At December 31, At December 31, At June 30, 2000
1997 1998 1999
------------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio
Foreclosed Loans(1)
Foreclosure Ratio(2)
</TABLE>
-----------------
(1) For the purposes of these tables, foreclosedlLoans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by _______, by investors or by an insurer following
foreclosure or delivery of a deed in lieu of foreclosure.
(2) The foreclosure ratio is equal to the aggregate principal balance or number
of foreclosed loans divided by the aggregate principal balance, or number,
as applicable, of mortgage loans in the total portfolio at the end of the
indicated period.
----------------------------
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<PAGE>
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE ON _________'S
SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
Nine Months Ended
Year Ended December 31, June 30,
-----------------------------------------------------------------------------
1996 1997 1998 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio(1)
Net Losses(2)(3)
Net Losses as a Percentage of
Total Portfolio(4)
</TABLE>
-------------
(1) Total portfolio on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) Net losses means gross losses minus recoveries. Gross losses are actual
losses incurred on liquidated properties for each respective period. Losses
are calculated after repayment of all principal, foreclosure costs and
accrued interest to the date of liquidation. Recoveries are recoveries from
liquidation proceeds and deficiency judgments.
(3) Net losses are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the net losses reported in the table may
change in future periods. The information in this table reflects costs and
recoveries through June 30, 2000.
(4) For the nine months ended June 30, 2000, net losses as a percentage of
total portfolio was annualized by multiplying net losses by 1.33 before
calculating the percentage of net losses as a percentage of total
portfolio.
----------------------------
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<PAGE>
THE TRUSTEE
_______________, a national banking association, will act as trustee for
the certificates under the pooling and servicing agreement. The trustee's
offices for notices under the pooling and servicing agreement are located at
_________________, and its telephone number is ----------. In the event the
trust administrator advises the trustee that it is unable to continue to perform
its obligations under the terms of the pooling and servicing agreement prior to
the appointment of a successor, the trustee shall be obligated to perform those
obligations until a new trust administrator is appointed.
The principal compensation to be paid to the trustee in respect of its
obligations under the pooling and servicing agreement will be equal to the
related portion of accrued interest at the administration fee rate of ______%
per annum on the Scheduled Principal Balance of the mortgage loans. The 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 a breach of either servicer's or the trust
administrator's obligations and duties under the pooling and
servicing agreement,
o that constitutes a specific liability of the trustee under the
pooling and servicing agreement or
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.
This indemnification will not include expenses, disbursements and advances
incurred or made by the trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the trustee's
performance in accordance with the provisions of the pooling and servicing
agreement.
THE TRUST ADMINISTRATOR
_______________, a national banking association, will act as trust
administrator for the certificates under the pooling and servicing agreement.
The trust administrator's offices for notices under the pooling and servicing
agreement are located at __________________, and its telephone number is
______________. The trust administrator will perform several administrative
functions on behalf of the trustee and will act as initial paying agent,
certificate registrar and custodian.
The principal compensation to be paid to the trust administrator in respect
of its obligations under the pooling and servicing agreement will be equal to
the related portion of the administration fee paid to the trustee. The pooling
and servicing agreement will provide that the trust administrator and any
director, officer, employee or agent of the trust administrator will be
indemnified by the trust fund and will be held harmless against any loss,
liability or expense, incurred by the trust administrator in connection with any
pending or threatened claim or legal action arising out of or in
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<PAGE>
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 a breach of either servicer's or the trustee's
obligations and duties under the pooling and servicing agreement,
o that constitutes a specific liability of the trust administrator
under the pooling and servicing agreement or
o incurred by reason of willful misfeasance, bad faith or negligence
in the performance of the trust administrator's duties under the
pooling and servicing agreement or as a result of a breach, or by
reason of reckless disregard, of the trust administrator's
obligations and duties under the pooling and servicing agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to ___________, in its capacity as
master servicer, will be equal to accrued interest at the master servicing fee
rate of ____% per annum with respect to each mortgage loan serviced by _________
on the Scheduled Principal Balance of each mortgage loan. The principal
compensation to be paid to each of __________ and ___________, in its capacity
as a servicer, in respect of its servicing activities for the certificates will
be equal to accrued interest at the servicing fee rate of ____% per annum with
respect to each mortgage loan serviced by it on the Scheduled Principal Balance
of each mortgage loan. As additional servicing compensation, each servicer is
entitled to retain all assumption fees, late payment charges and other
miscellaneous servicing fees in respect of the mortgage loans serviced by it,
with the exception of prepayment charges, which will be distributed to the
holders of the Class P Certificates, to the extent collected from mortgagors,
together with any interest or other income earned on funds held in the
certificate account and any escrow accounts in respect of the mortgage loans
serviced by it.
Each servicer is obligated to offset any Prepayment Interest Shortfall in
respect of the mortgage loans serviced by it on any distribution date, with
Compensating Interest to the extent of its servicing fee for each distribution
date. Each servicer is obligated to pay insurance premiums and other ongoing
expenses associated with the mortgage pool in respect of the mortgage loans
serviced by it and incurred by that servicer in connection with its
responsibilities under the pooling and servicing agreement and is entitled to
reimbursement for these expenses as provided in the pooling and servicing
agreement. See "Description of the Securities--Retained Interest; Servicing
Compensation and Payment of Expenses" in the prospectus for information
regarding expenses payable by the servicers and "Federal Income Tax
Consequences" in this prospectus supplement regarding taxes payable by the
servicers.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The master servicer has the option to purchase from the trust fund any
mortgage loan that is 90 days or more delinquent, which the master servicer
determines in good faith will otherwise become subject to foreclosure
proceedings; provided, however, that:
(i) the master servicer shall purchase any mortgage loans on the
basis of delinquency, purchasing the most delinquent mortgage loans first and
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<PAGE>
(ii) after it has purchased __% of the mortgage loans, by aggregate
principal balance as of the cut-off date, under clause (i), the master servicer
must also obtain the consent of the insurer prior to any further purchases of
delinquent mortgage loans.
Notwithstanding the foregoing, prior to purchasing any mortgage loan
serviced by ___________, the master servicer must give ___________ the right of
first refusal to purchase that mortgage loan.
EVENTS OF DEFAULT
In addition to those events of default described under "Description of the
Securities--Events of Default" in the prospectus, upon the occurrence of loss
and delinquency triggers with respect to the mortgage loans serviced by the
related servicer or upon the occurrence of other defaults set forth in the
pooling and servicing agreement, each servicer may be removed as servicer of
those mortgage loans in accordance with the terms of the pooling and servicing
agreement and the insurance and indemnity agreement. In addition, if
______________ is terminated in its capacity as servicer under the pooling and
servicing agreement, it shall also be terminated as master servicer.
Under the pooling and servicing agreement, each servicer covenants and
agrees to act as a servicer for an initial term from the closing date to
__________ __, ____, which term shall be extendable by the insurer for
successive terms of three (3) calendar months thereafter, until the termination
of the trust fund. Each notice of extension, or servicer extension notice, shall
be delivered by the insurer to the trustee, the trust administrator and the
related servicer. Each servicer will, upon its receipt of any servicer extension
notice, become bound for the duration of the term covered by the servicer
extension notice to continue as a servicer subject to and in accordance with the
other provisions of the pooling and servicing agreement. If as of the fifteenth
(15th) day prior to the last day of any term of the servicer, the trust
administrator shall not have received any servicer extension notice from the
insurer, the trust administrator will, within five (5) days thereafter, give
written notice of non-receipt to the insurer, the related servicer and the
trustee. The failure of the insurer to deliver a servicer extension notice by
the end of a calendar term shall result in the termination of the related
servicer.
Any successor to either servicer appointed under the pooling and servicing
agreement must be a housing loan servicing institution, acceptable to each
rating agency as defined in the prospectus, with a net worth at the time of the
appointment of at least $15,000,000. See "Description of the Securities--Rights
Upon Event of Default" in the prospectus.
VOTING RIGHTS
At all times, __% of all voting rights will be allocated among the holders
of the offered certificates and the Class CE Certificates in proportion to the
then outstanding Certificate Principal Balances of their respective
certificates, __% of all voting rights will be allocated to the holders of the
Class P Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective certificates and __/__ of __% of all voting rights
will be allocated among the holders of each class of Residual Certificates in
proportion to the percentage interests in those classes evidenced by their
respective certificates. Unless an insurer default exists, the insurer will be
entitled to exercise voting and other rights of the holders of the Offered
Certificates. See "--Matters Regarding the Insurer" in this prospectus
supplement.
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<PAGE>
MATTERS REGARDING THE INSURER
Under the pooling and servicing agreement, on each distribution date, the
trust administrator is required to pay to the insurer a premium with respect to
the certificate insurance policy equal to __/__ times ____% per annum times the
Certificate Principal Balance of the offered certificates.
Under the terms of the pooling and servicing agreement, unless there exists
a continuance of any failure by the insurer to make a required payment under the
certificate insurance policy or there exists a proceeding in bankruptcy by or
against the insurer, either of these conditions constituting, an insurer
default, the insurer will be entitled to exercise, among others, the following
rights of the holders of the offered certificates, without the consent of those
holders, and the holders of the offered certificates may exercise these rights
only with the prior written consent of the insurer:
o the right to direct the trustee to terminate the rights and
obligations of the either servicer under the pooling and servicing agreement in
the event of a default by that servicer;
o the right to consent to or direct any waivers of defaults by
either servicer;
o the right to remove the trustee or the trust administrator under
the pooling and servicing agreement; and
o the right to institute proceedings against either servicer in the
event of default by that servicer and refusal of the trustee to institute these
proceedings.
In addition, unless an insurer default exists, the insurer will have the
right to direct all matters relating to any proceeding seeking the avoidance as
a preferential transfer under applicable bankruptcy, insolvency, receivership or
similar law of any distribution made with respect to the offered certificates,
and, unless an insurer default exists, the insurer's consent will be required
prior to, among other things:
o the removal of the trustee or the trust administrator,
o the appointment of any successor trustee, trust administrator or
servicer, as the case may be, or
o any amendment to the pooling and servicing agreement.
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 Securities--Termination" in the prospectus. The master
servicer or the insurer will have the right to purchase all remaining mortgage
loans and any properties acquired in respect of the mortgage loans and thereby
effect early retirement of the certificates on any distribution date following
the due period during which the aggregate principal balance of the mortgage
loans and properties acquired in respect of the mortgage loans remaining in the
trust fund at the time of purchase is reduced to less than __%of the aggregate
principal balance of the mortgage loans as of the cut-off date. In the event the
master servicer or the insurer exercises the option, the purchase price payable
in connection with the option will be equal to the greater of par or the fair
market value of the mortgage loans and properties, in each case plus accrued
interest for each mortgage loan at the related mortgage rate to but not
including the first day of the month in which the repurchase price is
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<PAGE>
distributed, together with any amounts due to the servicers for unpaid servicing
fees and any unreimbursed advances and any amounts due to ___________, in its
capacity as master servicer for any unpaid master servicing fees. In the event
the master servicer or the insurer exercises this option, the portion of the
purchase price allocable to the offered certificates will be, to the extent of
available funds, including funds paid under the certificate insurance policy:
o 100% of the then outstanding Certificate Principal Balance of the
offered certificates, PLUS
o one month's interest on the then outstanding Certificate Principal
Balance of the offered certificates at the then applicable pass-through rate for
the class, PLUS
o any previously accrued but unpaid interest thereon to which the
holders of the offered certificates are entitled.
The holders of the Residual Certificates shall pledge any amount received
in a termination in excess of par to the holders of the Class CE Certificates.
In no event will the trust created by the 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
Securities--Termination" in the prospectus.
THE INSURER
The following information has been supplied by __________________, or the
insurer, for inclusion in this prospectus supplement. No representation is made
by the depositor or the underwriter as to the accuracy and completeness of this
information.
GENERAL
The principal executive offices of the insurer are located at
_______________, and its telephone number at that location is __________.
REINSURANCE
According to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the insurer or any of its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among these companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the insurer reinsures a
portion of its liabilities under its financial guaranty insurance policies with
other reinsurers under various treaties and on a transaction-by-transaction
basis. This reinsurance is utilized by the insurer as a risk management device
and to comply with statutory and rating agency requirements; it does not alter
or limit the insurer's obligations under any financial guaranty insurance
policy.
S-57
<PAGE>
RATINGS
The insurer's insurance financial strength is rated "Aaa" by _________. The
insurer's insurer financial strength is rated "AAA" by each of ____________ and
____________. The insurer's claims-paying ability is rated "AAA" by ___________
and ___________ and _______________. These ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by the rating
agencies. See "Ratings".
CAPITALIZATION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
ACTUAL AS ADJUSTED
(UNAUDITED)
(IN THOUSANDS)
--------------
<S> <C> <C>
Deferred Premium Revenue
(net of prepaid reinsurance premiums)................................ $____________ $____________
Surplus Notes.............................................................
Minority Interest.........................................................
Shareholder's Equity
Common Stock.........................................................
Additional Paid-In Capital...........................................
Accumulated Other Comprehensive Income (net of
deferred income taxes)...............................................
Accumulated Earnings.................................................
Total Shareholder's Equity................................................
Total Deferred Premium Revenue, Surplus Notes, Minority
Interest and Shareholder's Equity.........................................
</TABLE>
------------------
As adjusted in the immediately preceding table is necessary to give effect
to the:
o purchase by _________ of $__ million of surplus notes from the
insurer in connection with the formation of a new indirect _________
subsidiary of the insurer, initially capitalized with $___ million,
including a $__ million minority interest owned by ____________, and
o contribution by _______ to the capital of the insurer of
approximately $__ million, representing a portion of the proceeds from
the sale by Holdings of $___ million of _______% Senior Quarterly
Income Debt Securities due ____.
For further information concerning the insurer, see the Consolidated
Financial Statements of the insurer and subsidiaries, and the notes to those
statements, incorporated by reference in this prospectus supplement. The
insurer's financial statements are included as exhibits in the Annual Reports on
Form 10-K and the Quarterly Reports on Form 10-Q filed with the Securities and
Exchange Commission and may be reviewed at the EDGAR web site maintained by the
Securities and Exchange Commission and at Holding's website,
http://www._______.com. Copies of the statutory quarterly and annual financial
statements filed with the State of New York Insurance Department by the insurer
are available upon request to the State of New York Insurance Department.
S-58
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the prospectus, the consolidated financial
statements of the insurer and subsidiaries included in or as exhibits to the
following documents which have been filed with the Securities and Exchange
Commission by _________, are hereby incorporated by reference in this prospectus
supplement, which together with the prospectus, forms a part of the depositor's
registration statement:
o the Annual Report on Form 10-K for the year ended December 31, 1998
and
o the Quarterly Report on Form 10-Q for the period ended
_________________.
All financial statements of the insurer and subsidiaries included in
documents filed by Holdings under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the
offered certificates shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part of this prospectus supplement from the
respective dates of filing these documents.
The depositor will provide without charge to any person to whom this
prospectus supplement is delivered, upon oral or written request of that person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for these copies should be directed to the 390 Greenwich
Street, 4th Floor, New York, NY 10013.
INSURANCE REGULATION
The insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each insurer to financial guaranty insurance and related lines,
requires that each insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
insurer, and limits the size of individual transactions or single risks and the
volume of transactions or aggregate risks that may be underwritten by each
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the insurer, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the
trust fund as real estate mortgage investment conduits, or REMICs, designated as
REMIC I, REMIC II and REMIC III, for federal income tax purposes. Prior to the
sale of the certificates, Thacher Proffitt & Wood, counsel to the depositor,
will deliver its opinion to the effect that, assuming compliance with all
provisions of the pooling and servicing agreement, for federal income tax
purposes, each of REMIC I, REMIC II and REMIC III will qualify as a REMIC under
Sections 860A through 860G of the Internal Revenue Code of 1986, or the Code.
For federal income tax purposes:
o the Class R-I Certificates will be the sole class of residual
interests in REMIC I,
S-59
<PAGE>
o separate non-certificated regular interests in REMIC I will be issued
and will be the regular interests in REMIC I,
o the Class R-II Certificates will be the sole class of residual
interests in REMIC II,
o separate non-certificated regular interests in REMIC II will be
issued and will be the regular interests in REMIC II,
o the Class R-III Certificates will be the sole class of residual
interests in REMIC III, and
o the offered certificates, the Class CE Certificates and the Class P
Certificates will be the regular interests in, and will be treated as debt
instruments of, REMIC III. See "Federal Income Tax
Consequences--REMIC--Classification of REMICs" in the prospectus.
For federal income tax reporting purposes, the offered certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the mortgage loans will prepay at a constant rate equal to ___%
CPR. No representation is made that the mortgage loans will prepay at this 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 IRS has issued regulations, referred to in this prospectus supplement
as OID Regulations, under Sections 1271 to 1275 of the Code addressing the
treatment of debt instruments issued with original issue discount. The OID
Regulations may 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 these certificates in this regard.
The offered certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of an offered certificate
will be treated as holding a certificate with amortizable bond premium will
depend on that certificateholder's purchase price and the distributions
remaining to be made on the certificate at the time of its acquisition by the
certificateholder. Holders of offered certificates should consult their own tax
advisors regarding the possibility of making an election to amortize this
premium. See "Federal Income Tax Consequences-- REMICs--Taxation of Owners of
REMIC Regular Certificates--Premium" in the prospectus.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and real estate assets under Section 856(c)(4)(A) of
the Code, in the same proportion that the assets in the trust fund would be so
treated. In addition, interest on the offered certificates will be treated as
interest on obligations secured by mortgages on real property under Section
856(c)(3)(B) of the Code, to the extent that the offered certificates are
treated as real estate assets under Section 856(c)(4)(A) of the Code. The
offered certificates will also be treated as qualified mortgages under Section
860G(a)(3) of the Code. See "Federal Income Tax Consequences--
REMICs--Characterization of Investments in REMIC Certificates" in the
prospectus.
It is not anticipated that any of REMIC I, REMIC II or REMIC III will
engage in any transactions that would subject it to the prohibited transactions
tax as defined in Section 860F(a)(2) of the Code, the contributions tax as
defined in Section 860G(d) of the Code or the tax on net income from foreclosure
property as defined in Section 860G(c) of the Code. However, in the event that
any tax is imposed on REMIC I, REMIC II or REMIC III, this tax will be borne:
S-60
<PAGE>
o by the trust administrator, if the trust administrator has breached
its obligations with respect to REMIC compliance under the pooling and servicing
agreement,
o by __________, if ____________, in its capacity as master servicer or
as a servicer, has breached its obligations with respect to REMIC compliance
under the pooling and servicing agreement,
o by ___________, if ___________, in its capacity as a servicer has
breached its obligations with respect to REMIC compliance under the pooling and
servicing agreement,
o by the trustee, if the trustee has breached its obligations with
respect to REMIC compliance under the pooling and servicing agreement and
o otherwise by the trust fund, with a resulting reduction in amounts
otherwise distributable to holders of the related offered certificates. See
"Description of the Securities-- General" and "Federal Income Tax
Consequences--REMICs--Prohibited Transactions and Other Possible REMIC Taxes" in
the prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the trustee, the trust administrator or the master
servicer. See "Federal Income Tax Consequences--REMICs-- Reporting and Other
Administrative Matters" in the prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________ __, ____, the depositor has agreed to sell, and
_____________, the underwriter, has agreed to purchase the offered certificates.
The underwriter is obligated to purchase all offered certificates if it
purchases any. The underwriter is an affiliate of the depositor.
Distribution of the offered certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the depositor from the sale of the offered
certificates, before deducting expenses payable by the depositor, will be _____%
of the aggregate initial Certificate Principal Balance of the offered
certificates, plus accrued interest on the offered certificates. In connection
with the purchase and sale of the offered certificates, the underwriter may be
deemed to have received compensation from the depositor in the form of
underwriting discounts.
The offered certificates are offered subject to receipt and acceptance by
the underwriter, to prior sale and to the underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the offered certificates will be made
through the facilities of DTC on or about the closing date.
The underwriting agreement provides that the depositor will indemnify the
underwriter against those civil liabilities set forth in the underwriting
agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the underwriter may be required to make in
respect of these liabilities.
S-61
<PAGE>
SECONDARY MARKET
There is currently no secondary market for the offered certificates and
there can be no assurance that a secondary market for the offered certificates
will develop or, if it does develop, that it will continue. The underwriter
intends to establish a market in the offered certificates but it is not
obligated to do so. 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--Reports to Certificateholders", which will include information
as to the outstanding principal balance of the offered certificates and the
status of the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the offered certificates will be passed upon for
the depositor by Thacher Proffitt & Wood, New York, New York.
EXPERTS
The consolidated balance sheets of the insurer and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997, incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance on
the report of _______________, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the certificates that the offered
certificates be rated "Aaa" by ____________ and "AAA" by _____________ .
The ratings of ________ and ___________ assigned to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which 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 principal prepayments will differ from that originally
anticipated. The ratings assigned by __________ and _________ on the offered
certificates are based in part upon the insurer's claims paying ability. Any
change in the ratings of the insurer by _________ or ___________ may result in a
change in the ratings on the offered certificates. The ratings do not address
the possibility that certificateholders might suffer a lower than anticipated
yield due to non-credit events.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially
S-62
<PAGE>
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 in the first paragraph of this section.
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 the first paragraph of this section.
LEGAL INVESTMENT
The offered certificates will not constitute mortgage related securities
for purposes of SMMEA because the mortgage pool includes mortgage loans that are
secured by subordinate liens on the related mortgaged properties.
The depositor makes no representations as to the proper characterization of
any class of offered certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of offered
certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of offered certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of offered certificates constitutes a legal
investment or is subject to investment, capital or other restrictions. On
December 1, 1998, the OTS 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. TB 13a should be
reviewed by any thrift institution prior to investing in the offered
certificates.
See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to ERISA, or Section 4975 of the Code, each referred to in this
prospectus supplement as a Plan, or any person investing Plan Assets of any Plan
should carefully review with its legal advisors whether the purchase, sale or
holding of certificates will give rise to a prohibited transaction under ERISA
or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, or the exemption, as described under "ERISA
Considerations" in the prospectus, to the underwriter. The exemption exempts
from the application of the prohibited transaction provisions of Section 406 of
ERISA, and the excise taxes imposed on these prohibited transactions by Section
4975(a) and (b) of the Code and Section 502(i) of ERISA, transactions relating
to the purchase, sale and holding of pass-through certificates underwritten by
the underwriter, such as the offered certificates, and the servicing and
operation of asset pools such as the mortgage pool. To obtain the benefit of the
exemption, however, the conditions set forth under "Considerations for Benefit
Plan Investors" in the prospectus must be satisfied. The purchase of the offered
certificates by, on behalf of or with the Plan Assets of any Plan may qualify
for exemptive relief under the exemption. However, the exemption contains a
number of conditions which must be met for the exemption to apply, as described
in the prospectus, including the requirement that any Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended. A fiduciary of
a Plan contemplating
S-63
<PAGE>
purchasing an offered certificate must make its own determination that the
conditions set forth in the exemption will be satisfied with respect to the
offered certificates.
Before purchasing an offered certificate, a fiduciary of a Plan should
itself confirm:
o that the offered certificates constitute certificates for purposes of
the exemption and
o that the conditions of the exemption and the other requirements set
forth in the exemption would be satisfied.
Any Plan fiduciary that proposes to cause a Plan to purchase a certificate
should consult with its counsel with respect to the potential applicability to
such investment of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to the proposed investment. For further
information regarding the ERISA considerations of investing in the certificates,
see "ERISA Considerations" in the prospectus.
S-64
<PAGE>
$___________ (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-___
PROSPECTUS SUPPLEMENT
DATED _______ __, ____
MASTER SERVICER
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 BY THIS PROSPECTUS SUPPLEMENT 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 ______ __, ____.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________)
[Version 3]
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
THE DEPOSITOR
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-C2
CLASS A-1, CLASS A-2, CLASS B, CLASS C, CLASS D, CLASS E, CLASS F AND CLASS X
APPROXIMATE TOTAL PRINCIPAL BALANCE AT INITIAL ISSUANCE: $________
We, Salomon Brothers Mortgage Securities VII, Inc., have prepared this
prospectus supplement in order to offer the classes of commercial mortgage
pass-through certificates identified above. These certificates are the only
securities offered by this prospectus supplement. This prospectus supplement
specifically relates to, and is accompanied by, our prospectus dated
____________. We will not list the offered certificates on any national
securities exchange or any automated quotation system of any registered
securities associations, such as NASDAQ.
The offered certificates will represent interests only in the Salomon
Brothers Commercial Mortgage Trust __ ________. They will not represent
interests in or obligations of any other party. The assets of the trust will
include a pool of multifamily and commercial mortgage loans. The initial
mortgage pool balance that we expect to transfer to the trust will be
approximately $____________. No governmental agency or instrumentality or
private insurer has insured or guaranteed the offered certificates or any of the
mortgage loans that back them.
Each class of offered certificates will receive monthly distributions
of interest, principal or both, commencing in __________. The table on page S-_
of this prospectus supplement contains a list of the classes of offered
certificates and states the principal balance, interest rate, and other select
characteristics of each class. Credit enhancement is being provided through the
subordination of ___ non-offered classes of series ___ certificates. That same
table on page S-_ of this prospectus supplement also contains a list of the
non-offered classes of the series ___ certificates.
-------------------------
YOU SHOULD FULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE S-____ IN
THIS PROSPECTUS SUPPLEMENT AND ON PAGE _____ IN THE ACCOMPANYING PROSPECTUS
PRIOR TO INVESTING IN THE OFFERED CERTIFICATES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
Salomon Smith Barney Inc. is the underwriter for this offering. It will
purchase the offered certificates from us. Our proceeds from the sale of the
offered certificates will equal approximately ____% of the total initial
principal balance of the offered certificates, plus accrued interest, before
deducting expenses payable by us. The underwriter's commission will be the
difference between the price it pays to us for the offered certificates and the
amount it receives from the sale of the offered certificates to the public. The
underwriter currently intends to sell the offered certificates from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. See "Method of Distribution" in this prospectus supplement.
SALOMON SMITH BARNEY
The date of this prospectus supplement is September __, 2000.
<PAGE>
---------------------
IMPORTANT NOTICE ABOUT THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT,
THE ACCOMPANYING PROSPECTUS AND THE RELATED REGISTRATION STATEMENT
Information about the offered certificates is contained in two separate
documents:--
o this prospectus supplement, which describes the specific terms
of the offered certificates; and
o the accompanying prospectus, which provides general
information, some of which may not apply to the offered
certificates.
You should read both this prospectus supplement and the accompanying
prospectus in full to obtain material information concerning the offered
certificates.
In addition, we have filed with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933, as amended, with
respect to the offered certificates. This prospectus supplement and the
accompanying prospectus form a part of that registration statement. However,
this prospectus supplement and the accompanying prospectus do not contain all of
the information contained in our registration statement. For further information
regarding the documents referred to in this prospectus supplement and the
accompanying prospectus, you should refer to our registration statement and the
exhibits to it. Our registration statement and the exhibits to it can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the SEC at its public reference section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located at: Chicago regional
office, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661; and
New York regional office, Seven World Trade Center, New York, New York 10048.
Copies of these materials can also be obtained electronically through the SEC's
internet web site (http:\\www.sec.gov).
You should only rely on the information contained in this prospectus
supplement, the accompanying prospectus and our registration statement. We have
not authorized any person to give any other information or to make any
representation that is different from the information contained in this
prospectus supplement, the accompanying prospectus or our registration
statement.
S-2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
<S> <C>
Important Notice About the Information Contained in this Prospectus Supplement, the Accompanying Prospectus and the
Related Registration Statement............................................................................................S-2
Summary of Prospectus Supplement...............................................................................................S-4
Risk Factors..................................................................................................................S-25
Capitalized Terms Used in this Prospectus Supplement..........................................................................S-35
Forward-Looking Statements....................................................................................................S-35
Description of the Mortgage Pool..............................................................................................S-35
Servicing of the Underlying Mortgage Loans....................................................................................S-54
Description of the Offered Certificates.......................................................................................S-82
Yield and Maturity Considerations............................................................................................S-104
Use of Proceeds..............................................................................................................S-111
Federal Income Tax Consequences..............................................................................................S-111
ERISA Considerations.........................................................................................................S-115
Legal Investment.............................................................................................................S-120
Method of Distribution.......................................................................................................S-121
Legal Matters................................................................................................................S-122
Ratings......................................................................................................................S-122
Glossary.....................................................................................................................S-125
ANNEX A-- Certain Characteristics of the Underlying Mortgage Loans and the Mortgaged Real Properties..................A-1
ANNEX B-- Term Sheet..................................................................................................B-1
ANNEX C-1-- Price/Yield Tables........................................................................................C-1-1
ANNEX C-2-- Decrement Tables..........................................................................................C-2-1
ANNEX D-- Form of Trustee Report......................................................................................D-1
PROSPECTUS
Important Notice About the Information Presented in this Prospectus..............................................................3
Available Information; Incorporation by Reference................................................................................3
Summary of Prospectus............................................................................................................4
Risk Factors....................................................................................................................13
Description of the Trust Assets.................................................................................................33
Yield and Maturity Considerations...............................................................................................56
Salomon Brothers Mortgage Securities VII, Inc...................................................................................62
Description of the Certificates.................................................................................................63
Description of the Governing Documents..........................................................................................73
Description of Credit Support...................................................................................................82
Legal Aspects of Mortgage Loans.................................................................................................85
Federal Income Tax Consequences.................................................................................................99
State and Other Tax Consequences...............................................................................................141
ERISA Considerations...........................................................................................................141
Legal Investment...............................................................................................................146
Use of Proceeds................................................................................................................148
Method of Distribution.........................................................................................................148
Legal Matters..................................................................................................................150
Financial Information..........................................................................................................150
Rating.........................................................................................................................150
</TABLE>
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary contains selected information regarding the offering being
made by this prospectus supplement. It does not contain all of the information
you need to consider in making your investment decision. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE OFFERED CERTIFICATES, YOU SHOULD READ CAREFULLY
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN FULL.
INTRODUCTION TO THE TRANSACTION
The offered certificates will be part of a series of commercial
mortgage pass-through certificates designated as the Series _____ Commercial
Mortgage Pass-Through Certificates and consisting of multiple classes. The table
below identifies the respective classes of that series, specifies various
characteristics of each of those classes and indicates which of those classes
are offered by this prospectus supplement and which are not.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
SERIES _____ COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
----------------------------------------------------------------------------------------------------------------------------
APPROX. % APPROX.
OF TOTAL
APPROX. TOTAL INITIAL CREDIT WEIGHTED
PRINCIPAL MORTGAGE SUPPORT AT PASS-THROUGH INITIAL AVERAGE
BALANCE AT POOL INITIAL RATE PASS-THROUGH LIFE PRINCIPAL ____/____
CLASS INITIAL ISSUANCE BALANCE ISSUANCE DESCRIPTION RATE (YEARS) WINDOW RATINGS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Offered Certificates
----------------------------------------------------------------------------------------------------------------------------
A-1 $ % % %
----------------------------------------------------------------------------------------------------------------------------
A-2 $ % % %
----------------------------------------------------------------------------------------------------------------------------
B $ % % %
----------------------------------------------------------------------------------------------------------------------------
C $ % % %
----------------------------------------------------------------------------------------------------------------------------
D $ % % %
----------------------------------------------------------------------------------------------------------------------------
E $ % % %
----------------------------------------------------------------------------------------------------------------------------
F $ % % %
----------------------------------------------------------------------------------------------------------------------------
X N/A N/A N/A %
----------------------------------------------------------------------------------------------------------------------------
Non-Offered Certificates
----------------------------------------------------------------------------------------------------------------------------
G $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
H $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
J $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
K $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
L $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
M $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
N $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
R-I N/A N/A N/A N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
R-II N/A N/A N/A N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
R-III N/A N/A N/A N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-4
<PAGE>
The offered certificates will evidence beneficial ownership interests
in a common law trust designated as the Salomon Brothers Commercial Mortgage
Trust ___________. We will form the trust at or prior to the time of initial
issuance of the offered certificates. The assets of the trust will include a
pool of multifamily and commercial mortgage loans having the characteristics
described in this prospectus supplement.
The governing document for purposes of issuing the offered certificates
and forming the trust will be a pooling and servicing agreement to be dated as
of ______________. The pooling and servicing agreement will also govern the
servicing and administration of the mortgage loans and the other assets that
back the offered certificates. The parties to the pooling and servicing
agreement will include us, a trustee, a master servicer and a special servicer.
A copy of the pooling and servicing agreement will be filed with the SEC as an
exhibit to a current report on Form 8-K, within 15 days after the initial
issuance of the offered certificates. The SEC will make that current report on
Form 8-K and its exhibits available to the public for inspection.
----------------------
KEY CERTIFICATE FEATURES SHOWN IN THE TABLE ABOVE
A. TOTAL PRINCIPAL BALANCE
OR NOTIONAL AMOUNT AT
INITIAL ISSUANCE..................... The table above identifies for
each class of the series _____
certificates the approximate
total principal balance, if any,
of that class at initial
issuance. The actual total
principal balance of any class of
series _____ certificates at
initial issuance may be larger or
smaller than the amount shown
above, depending on the actual
size of the initial mortgage pool
balance. The actual size of the
initial mortgage pool balance may
be as much as 5% larger or
smaller than the amount presented
in this prospectus supplement.
As shown in the table above, the
class A-1, A-2, B, C, D, E, F, G,
H, J, K, L, M and N certificates
are the only series _____
certificates with principal
balances. The principal balance
of any of those certificates at
any time represents the maximum
amount that the holder may
receive as principal out of
cashflow received on or with
respect to the underlying
mortgage loans.
The class X certificates do not
have principal balances. They are
interest-only certificates. For
purposes of calculating the
amount of accrued interest with
respect to the class X
certificates, however, they will
have a total notional amount
equal to the total principal
balance of the class A-1, A-2, B,
C, D, E, F, G, H, J, K, L, M and
N certificates outstanding from
time to time. The total initial
notional amount of the class X
certificates will be
approximately $________________,
although it may be as much as 5%
larger or smaller.
S-5
<PAGE>
The class R-I, R-II and R-III
certificates do not have
principal balances or notional
amounts. They are residual
interest certificates. The
holders of the class R-I, R-II
and R-III certificates are not
expected to receive any material
payments.
B. TOTAL CREDIT SUPPORT AT
INITIAL ISSUANCE.................... The respective classes of the
series _____ certificates entitle
their holders to varying degrees
of seniority for purposes of--
o receiving payments of
interest and, if and
when applicable,
payments of principal,
and
o bearing the effects of
losses on the underlying
mortgage loans, as well
as default-related and
other unanticipated
expenses of the trust.
The class A-1, A-2 and X
certificates are the most senior.
The class R-I, R-II and R-III
certificates are the most
subordinate, but they do not
provide any credit support to the
other series _____ certificates.
The remaining classes of series
_____ certificates are listed
from top to bottom in descending
order of seniority.
The table above shows the
approximate total credit support
provided to each class of the
offered certificates, other than
the class X certificates, through
the subordination of other
classes of the series _____
certificates. In the case of each
of those classes of offered
certificates, the credit support
shown in the table above
represents the total initial
principal balance, expressed as a
percentage of the initial
mortgage pool balance, of all
classes of the series _____
certificates that are subordinate
to the indicated class.
C. PASS-THROUGH RATE....................... Each class of the series _____
certificates, other than the
class R-I, R-II and R-III
certificates, will bear interest.
The table above provides the
indicated information regarding
the pass-through rate at which
each of those classes of the
series _____ certificates will
accrue interest. [ADD SUMMARY
DESCRIPTIONS OF THE PASS-THROUGH
RATES FOR THE VARIOUS
INTEREST-BEARING CLASSES OF THE
SERIES _____ CERTIFICATES.]
S-6
<PAGE>
D. WEIGHTED AVERAGE LIFE
AND PRINCIPAL WINDOW................. The weighted average life of any
class of offered certificates,
other than the class X
certificates, refers to the
average amount of time, expressed
in years, that will elapse from
the date of their issuance to the
respective dates of repayment of
each dollar to be applied in
reduction of the total principal
balance of those certificates is
paid to the investor. The
principal window for any class of
offered certificates, other than
the class X certificates, is the
period during which the holders
of that class of offered
certificates will receive
payments of principal. The
weighted average life and
principal window shown in the
table above for each class of
offered certificates, other than
the class X certificates, were
calculated based on the following
assumptions with respect to each
underlying mortgage loan--
o the related borrower
timely makes all
payments on the mortgage
loan,
o if the mortgage loan has
an anticipated repayment
date, as described under
"--The Underlying
Mortgage Loans and the
Mortgaged Real
Properties" below, the
mortgage loan will be
paid in full on that
date, and
o that mortgage loan will
not otherwise be prepaid
prior to stated
maturity.
The weighted average life and
principal window shown in the
table above for each class of
offered certificates, other than
the class X certificates, were
further calculated based on the
other maturity assumptions
described under "Yield and
Maturity Considerations" in this
prospectus supplement.
E. RATINGS................................. The ratings shown in the table
above for the offered
certificates are those of
______________ and _____________,
respectively. It is a condition
to their issuance that the
respective classes of the offered
certificates receive credit
ratings no lower than those shown
in the table above.
The ratings of the offered
certificates address the timely
payment of interest and, except
in the case of the class X
certificates, the ultimate
payment of principal on or before
______________, which is the
rated final payment date. A
security rating is not a
recommendation to buy, sell or
hold securities and the assigning
rating agency may revise or
withdraw its rating at any time.
For a description of the
limitations of the ratings of the
offered certificates, see
"Ratings" in this prospectus
supplement.
S-7
<PAGE>
RELEVANT PARTIES
WHO WE ARE.................................. Our name is Salomon Brothers
Mortgage Securities VII, Inc.. We
are a Delaware corporation. Our
address is 388 Greenwich Street,
New York, New York 10013 and our
telephone number is (212)
816-6000. We are an indirect,
wholly-owned subsidiary of
Salomon Smith Barney Holdings
Inc. and an affiliate of Salomon
Smith Barney Inc. See "Salomon
Brothers Mortgage Securities VII,
Inc." in the accompanying
prospectus.
INITIAL TRUSTEE.............................. ________________________, a
_____________________, will act
as the initial trustee on behalf
of all the series _____
certificateholders. See
"Description of the Offered
Certificates--The Trustee" in
this prospectus supplement. The
trustee will also have, or be
responsible for appointing an
agent to perform, additional
duties with respect to tax
administration.
INITIAL MASTER SERVICER..................... ________________________, a
__________________, will act as
the initial master servicer with
respect to the pooled mortgage
loans. See "Servicing of the
Underlying Mortgage Loans--The
Initial Master Servicer and the
Initial Special Servicer" in this
prospectus supplement.
INITIAL SPECIAL SERVICER.................... ________________________, a
___________________, will act as
the initial special servicer with
respect to the pooled mortgage
loans. See "Servicing of the
Underlying Mortgage Loans--The
Initial Master Servicer and the
Initial Special Servicer" in this
prospectus supplement.
CONTROLLING CLASS
OF CERTIFICATEHOLDERS.................... The holders of certificates
representing a majority interest
in a designated controlling class
of the series _____ certificates
will have the right, subject to
the conditions described under
"Servicing of the Underlying
Mortgage Loans--The Controlling
Class Representative" and
"--Replacement of the Special
Servicer" in this prospectus
supplement, to--
o replace the special
servicer, and
o select a representative
that may direct and
advise the special
servicer on various
servicing matters.
Unless there are significant
losses on the underlying mortgage
loans, the controlling class of
series _____ certificateholders
will be the holders of a
non-offered class of series _____
certificates.
S-8
<PAGE>
MORTGAGE LOAN SELLERS....................... We will acquire the mortgage
loans that are to back the
offered certificates, from--
o ______________________,
a _________________,
and
o _______________________,
a ___________________.
See "Description of the Mortgage
Pool--The Mortgage Loan Sellers"
in this prospectus supplement.
UNDERWRITER................................. Salomon Smith Barney Inc. is the
underwriter of this offering. See
"Method of Distribution" in this
prospectus supplement.
RELEVANT DATES AND PERIODS
CUT-OFF DATE................................ The pooled mortgage loans will be
considered part of the trust as
of a cut-off date of ___________.
All payments and collections
received on the underlying
mortgage loans after that date,
excluding any payments or
collections that represent
amounts due on or before that
date, will belong to the trust.
Accordingly, __________ is the
date as of which we present much
of the information relating to
the underlying mortgage loans and
the mortgaged real properties for
those loans in this prospectus
supplement.
ISSUE DATE.................................. The date of initial issuance for
the offered certificates will be
on or about ____________.
PAYMENT DATE................................ Payments on the offered
certificates are scheduled to
occur monthly, commencing in
____________. During any given
month, the payment date will be
the _____ calendar day of that
month, or, if the _____ calendar
day of that month is not a
business day, then the next
succeeding business day.
RECORD DATE................................. The record date for each monthly
payment on an offered certificate
will be the last business day of
the prior calendar month. The
registered holders of the offered
certificates at the close of
business on each record date,
will be entitled to receive any
payments on those certificates on
the following payment date.
S-9
<PAGE>
COLLECTION PERIOD........................... Amounts available for payment on
the offered certificates on any
payment date will depend on the
payments and other collections
received, and any advances of
payments due, on the underlying
mortgage loans during the related
collection period. Each
collection period--
o will relate to a
particular payment
date,
o will be approximately
one month long,
o will begin when the
prior collection period
ends or, in the case of
the first collection
period, will begin on
______________, and
o will end during the
month of, but prior to,
the related payment
date.
INTEREST ACCRUAL PERIOD..................... The amount of interest payable
with respect to the offered
certificates on any payment date
will be a function of the
interest accrued during the
related interest accrual period.
The interest accrual period for
any payment date will be [the
calendar month immediately
preceding the month in which that
payment date occurs].
DESCRIPTION OF THE OFFERED CERTIFICATES
REGISTRATION AND
DENOMINATIONS.......................... We intend to deliver the offered
certificates in book-entry form
in original denominations of:
o in the case of the
class X certificates,
$_______ initial
notional amount and in
any whole dollar
denomination in excess
of $_______; and
o in the case of the
other offered
certificates, $_______
initial principal
balance and in any
whole dollar
denomination in excess
of $_______.
You will initially hold your
offered certificates through The
Depository Trust Company. As a
result, you will not receive a
fully registered physical
certificate representing your
interest in any offered
certificate, except under the
limited circumstances described
under "Description of the Offered
Certificates--Registration and
Denominations" in this prospectus
supplement and under "Description
of the Certificates--Book-Entry
Registration" in the accompanying
prospectus. We may elect to
terminate the book-entry system
through DTC with respect to all
or any portion of any class of
offered certificates.
S-10
<PAGE>
PAYMENTS
A. GENERAL................................. The trustee will make payments of
interest and principal to the
respective classes of series
_____ certificateholders entitled
to those payments, sequentially
as follows:
PAYMENT ORDER CLASS
------------- -----
1st A-1, A-2 and X
2nd B
3rd C
4th D
5th E
6th F
7th G
8th H
9th J
10th K
11th L
12th M
13th N
Allocation of interest payments
among the class A-1, A-2 and X
certificates is PRO RATA based on
entitlement. Allocation of
principal payments between the
class A-1 and A-2 certificates is
described under
"--Payments--Payments of
Principal" below. The class X
certificates do not have
principal balances and do not
entitle their holders to payments
of principal.
See "Description of the Offered
Certificates--Payments--Priority
of Payments" in this prospectus
supplement.
B. PAYMENTS OF INTEREST.................... Each class of offered
certificates will bear interest.
In each case, that interest will
accrue during each interest
accrual period based upon--
o the pass-through rate
applicable for the
particular class for
that interest accrual
period,
o the total principal
balance or notional
amount, as the case may
be, of the particular
class outstanding
immediately prior to
the related payment
date, and
o the assumption that
each year consists of
12 30-day months.
S-11
<PAGE>
A whole or partial prepayment on
an underlying mortgage loan may
not be accompanied by the amount
of one full month's interest on
the prepayment. As and to the
extent described under
"Description of the Offered
Certificates--Payments--Payments
of Interest" in this prospectus
supplement, these shortfalls may
be allocated to reduce the amount
of accrued interest otherwise
payable to the holders of all of
the interest-bearing classes of
the series _____ certificates,
including the offered
certificates, on a PRO RATA basis
in accordance with the respective
amounts of interest otherwise
payable on those classes for the
corresponding interest accrual
period.
On each payment date, subject to
available funds and the payment
priorities described under
"--Payments--General" above, you
will be entitled to receive your
proportionate share of all unpaid
distributable interest accrued
with respect to your class of
offered certificates through the
end of the related interest
accrual period.
See "Description of the Offered
Certificates--Payments--Payments
of Interest" and
"--Payments--Priority of
Payments" in this prospectus
supplement.
C. PAYMENTS OF PRINCIPAL................... The class X certificates do not
have principal balances and do
not entitle their holders to
payments of principal. Subject to
available funds and the payment
priorities described under
"--Payments--General" above,
however, the holders of each
other class of offered
certificates will be entitled to
receive a total amount of
principal over time equal to the
total principal balance of their
particular class. The trustee
must make payments of principal
in a specified sequential order
to ensure that--
o no payments of
principal will be made
to the holders of any
non-offered class of
series _____
certificates until the
total principal balance
of the offered
certificates is reduced
to zero,
o no payments of
principal will be made
to the holders of the
class B, C, D, E or F
certificates until, in
the case of each of
those classes, the
total principal balance
of all more senior
classes of offered
certificates is reduced
to zero, and
o except as described in
the following
paragraph, no payments
of principal will be
made to the holders of
the
S-12
<PAGE>
class A-2 certificates
until the total
principal balance of
the class A-1
certificates is reduced
to zero.
Because of losses on the
underlying mortgage loans and/or
default-related or other
unanticipated expenses of the
trust, the total principal
balance of the class B, C, D, E,
F, G, H, J, K, L, M and N
certificates could be reduced to
zero at a time when the class A-1
and A-2 certificates remain
outstanding. Under those
circumstances, any payments of
principal on the class A-1 and
A-2 certificates will be made on
a PRO RATA basis in accordance
with their respective principal
balances.
The total payments of principal
to be made on the series _____
certificates on any payment date
will be a function of--
o the amount of scheduled
payments of principal
due or, in some cases,
deemed due on the
underlying mortgage
loans during the
related collection
period, which payments
are either received as
of the end of that
collection period or
advanced by the master
servicer, and
o the amount of any
prepayments and other
unscheduled collections
of previously
unadvanced principal
with respect to the
underlying mortgage
loans that are received
during the related
collection period.
See "Description of the Offered
Certificates--Payments--Payments
of Principal" and
"--Payments--Priority of
Payments" in this prospectus
supplement.
D. PAYMENTS OF PREPAYMENT
PREMIUMS AND YIELD
MAINTENANCE CHARGES.................. If any prepayment premium or
yield maintenance charge is
collected on any of the pooled
mortgage loans, then the trustee
will pay that amount in the
proportions described under
"Description of the Offered
Certificates--Payments "Payments
of Prepayment Premiums and Yield
Maintenance Charges" in this
prospectus supplement, to--
o the holders of the
class X certificates,
and/or
o the holders of any
other class or classes
of certificates senior
to the class
_____certificates, that
are then entitled to
receive payments of
principal.
S-13
<PAGE>
REDUCTIONS OF CERTIFICATE PRINCIPAL
BALANCES IN CONNECTION WITH LOSSES
ON THE UNDERLYING MORTGAGE LOANS
AND DEFAULT-RELATED AND OTHER
UNANTICIPATED EXPENSES................... Because of losses on the
underlying mortgage loans and/or
default-related and other
unanticipated expenses of the
trust, the total principal
balance of the mortgage pool, net
of advances of principal, may
fall below the total principal
balance of the series _____
certificates. If and to the
extent that those losses and
expenses cause a deficit to exist
following the payments made on
the series _____ certificates on
any payment date, the total
principal balances of the
following classes of series _____
certificates will be successively
reduced in the following order,
until that deficit is eliminated:
REDUCTION ORDER CLASS
--------------- -----
1st N
2nd M
3rd L
4th K
5th J
6th H
7th G
8th F
9th E
10th D
11th C
12th B
13th A-1 and A-2
Any reduction to the total
principal balances of the class
A-1 and class A-2 certificates
will be made on a PRO RATA basis
in accordance with the relative
sizes of those principal
balances.
See "Description of the Offered
Certificates--Reductions of
Certificate Principal Balances in
Connection With Realized Losses
and Additional Trust Fund
Expenses" in this prospectus
supplement.
ADVANCES OF DELINQUENT MONTHLY
DEBT SERVICE PAYMENTS................... Except as described in the next
two paragraphs, the master
servicer will be required to make
advances with respect to any
delinquent monthly payments,
other than balloon payments, of
principal and/or interest due on
the pooled mortgage loans. In
addition, the trustee must make
any of those advances that the
master servicer fails to make. As
described under "Description
S-14
<PAGE>
of the Offered
Certificates--Advances of
Delinquent Monthly Debt Service
Payments" in this prospectus
supplement, any party that makes
an advance will be entitled to be
reimbursed for the advance,
together with interest at the
prime rate described in that
section of this prospectus
supplement.
Notwithstanding the foregoing,
neither of the master servicer
nor the trustee will be required
to make any advance that it
determines, in its good faith and
reasonable judgment, will not be
recoverable from proceeds of the
related mortgage loan.
In addition, if any of the
adverse events or circumstances
that we describe under "Servicing
of the Underlying Mortgage
Loans--Required Appraisals" in
this prospectus supplement, occur
or exist with respect to any
pooled mortgage loan or the
mortgaged real property for that
loan, the special servicer will
be obligated to obtain a new
appraisal or, in cases involving
relatively small principal
balances, conduct a valuation of
that property. If, based on that
appraisal or other valuation, it
is determined that--
o the principal balance
of, and other delinquent
amounts due under, the
mortgage loan, exceed
o 90% of the new estimated
value of that real
property,
then the amount otherwise
required to be advanced with
respect to interest on that
mortgage loan will be reduced.
The reduction will be in the same
proportion that the excess bears
to the principal balance of the
mortgage loan, net of related
advances of principal. Due to the
payment priorities, any reduction
in advances will reduce the funds
available to pay interest on the
most subordinate interest-bearing
class of series _____
certificates then outstanding.
See "Description of the Offered
Certificates--Advances of
Delinquent Monthly Debt Service
Payments" and "Servicing of the
Underlying Mortgage
Loans--Required Appraisals" in
this prospectus supplement. See
also "Description of the
Certificates--Advances" in the
accompanying prospectus.
S-15
<PAGE>
REPORTS TO CERTIFICATEHOLDERS............... On each payment date, various
statements and reports prepared
by the trustee, the master
servicer and/or the special
servicer regarding the offered
certificates and the pooled
mortgage loans will be available
to you and will contain the
information described under
"Description of the Offered
Certificates--Reports to
Certificateholders; Available
Information" in this prospectus
supplement.
Upon reasonable prior notice, you
may also review at the trustee's
offices during normal business
hours a variety of information
and documents that pertain to the
pooled mortgage loans and the
mortgaged real properties for
those loans. We expect that the
available information and
documents will include loan
documents, borrower operating
statements, rent rolls and
property inspection reports, to
the extent received by the
trustee.
See "Description of the Offered
Certificates--Reports to
Certificateholders; Available
Information" in this prospectus
supplement.
OPTIONAL AND OTHER TERMINATION.............. Specified parties to the
transaction may terminate the
trust when the total principal
balance of the related mortgage
pool, net of advances of
principal, is less than
approximately ____% of the
initial mortgage pool balance.
See "Description of the Offered
Certificates--Termination" in
this prospectus supplement.
THE UNDERLYING MORTGAGE LOANS AND THE MORTGAGED REAL PROPERTIES
GENERAL..................................... In this section, "--The
Underlying Mortgage Loans and the
Mortgaged Real Properties", we
provide summary information with
respect to the mortgage loans
that we intend to include in the
trust. For more detailed
information regarding those
mortgage loans, you should review
the following sections in this
prospectus supplement:
o "Description of the
Mortgage Pool";
o "Risk Factors--Risks
Related to the
Underlying Mortgage
Loans"; and
o Annex A--Certain
Characteristics of the
Underlying Mortgage
Loans and the Mortgaged
Real Properties.
When reviewing the information
that we have included in this
prospectus supplement with
respect to the mortgage loans
that are to back the offered
certificates, please note that--
S-16
<PAGE>
o All numerical
information provided
with respect to the
mortgage loans is
provided on an
approximate basis.
o All weighted average
information provided
with respect to the
mortgage loans reflects
a weighting based on
their respective cut-off
date principal balances.
We will transfer the
cut-off date principal
balance for each of the
mortgage loans to the
trust. We show the
cut-off date principal
balance for each of the
mortgage loans on Annex
A to this prospectus
supplement.
o When information with
respect to mortgaged
real properties is
expressed as a
percentage of the
initial mortgage pool
balance, the percentages
are based upon the
cut-off date principal
balances of the related
mortgage loans.
o If any of the mortgage
loans is secured by
multiple real properties
located in more than one
state, a portion of that
mortgage loan has been
allocated to each of
those properties.
o Statistical information
regarding the mortgage
loans may change prior
to the date of initial
issuance of the offered
certificates due to
changes in the
composition of the
mortgage pool prior to
that date.
SOURCE OF THE
UNDERLYING MORTGAGE LOANS................ We are not the originator of the
mortgage loans that we intend to
include in the trust. We will
acquire those mortgage loans from
_____ separate parties. [Each of
those mortgage loans was
originated by--
o the related mortgage
loan seller from whom we
acquired the mortgage
loan,
o an affiliate of the
related mortgage loan
seller, or
o a correspondent in the
related mortgage loan
seller's conduit lending
program.]
PAYMENT AND OTHER TERMS..................... Each of the mortgage loans that
we intend to include in the trust
is the obligation of a borrower
to repay a specified sum with
interest.
Repayment of each of the mortgage
loans is secured by a mortgage
lien on the ownership and/or
leasehold interest of the related
borrower or another party in one
or more commercial or
S-17
<PAGE>
multifamily real properties.
Except for limited permitted
encumbrances, which we describe
in the "Glossary" to this
prospectus supplement, that
mortgage lien will be a first
priority lien.
All of the mortgage loans are or
should be considered nonrecourse.
None of the mortgage loans are
insured or guaranteed by any
governmental agency or
instrumentality or by any private
mortgage insurer.
Each of the mortgage loans
currently accrues interest at the
annual rate specified with
respect to that loan on Annex A
to this prospectus supplement.
Except as otherwise described
below with respect to mortgage
loans that have anticipated
repayment dates, the mortgage
interest rate for each mortgage
loan is, in the absence of
default, fixed for the entire
term of the loan. [IF ANY OF THE
MORTGAGE LOANS HAVE FLOATING OR
ADJUSTABLE MORTGAGE INTEREST
RATES, PROVIDE SUMMARY
DESCRIPTION OF HOW TO CALCULATE
THOSE RATES.]
Each of the mortgage loans
provides for scheduled payments
of principal and/or interest to
be due on the ________ day of
each month. [PROVIDE SUMMARY
DESCRIPTION REGARDING ANY
ADJUSTMENTS TO THE MONTHLY DEBT
SERVICE PAYMENTS AND ANY
POTENTIAL NEGATIVE AMORTIZATION
OF INTEREST.]
________ of the mortgage loans,
representing ____% of the initial
mortgage pool balance, provide
for:
o an amortization schedule
that is significantly
longer than its
remaining term to stated
maturity; and
o a substantial payment of
principal on its
maturity date.
________ of the mortgage loans,
representing ____% of the initial
mortgage pool balance, provide
material incentives to the
related borrower to pay the
mortgage loan in full by a
specified date prior to maturity.
We consider that date to be the
anticipated repayment date for
the mortgage loan. There can be
no assurance, however, that these
incentives will result in any of
these mortgage loans being paid
in full on or before its
anticipated repayment date. The
incentives, which in each case
will become effective as of the
related anticipated repayment
date, include:
o The calculation of
interest in excess of
the initial mortgage
interest rate. The
additional interest will
be
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<PAGE>
deferred and will be
payable only after the
outstanding principal
balance of the mortgage
loan is paid in full.
o The application of
excess cash flow from
the mortgaged real
property to pay the
principal amount of the
mortgage loan. The
payment of principal
will be in addition to
the principal portion of
the normal monthly debt
service payment.
The remaining _______ mortgage
loans, representing ____% of the
initial mortgage pool balance,
have payment schedules that
provide for the payment of these
mortgage loans in full or
substantially in full by their
respective maturity dates. These
___ mortgage loans do not provide
for any of the repayment
incentives associated with the
mortgage loans that have
anticipated repayment dates.
DELINQUENCY STATUS.......................... None of the mortgage loans that
we intend to include in the trust
was _____ days or more delinquent
with respect to any monthly debt
service payment as of the cut-off
date or at any time during the
_____-month period preceding that
date.
PREPAYMENT LOCK-OUT PERIODS................. A prepayment lock-out period is
currently in effect for ________
of the mortgage loans to be
included in the trust. Set forth
below is information regarding
the remaining terms of those
lock-out periods:
Maximum remaining lock-out period: _____ months
Minimum remaining lock-out period: _____ months
Weighted average remaining lock-out period: _____ months
DEFEASANCE.................................. ________ of the mortgage loans to
be included in the trust,
representing ____% of the initial
mortgage pool balance, permit the
related borrower to obtain a full
or partial release of the
mortgaged real property from the
related mortgage lien by
delivering U.S. Treasury
obligations as substitute
collateral. None of these
mortgage loans permits defeasance
prior to the ________ anniversary
of the date of initial issuance
of the certificates.
ADDITIONAL STATISTICAL INFORMATION
A. GENERAL CHARACTERISTICS................. The mortgage pool will have the
following general characteristics
as of the cut-off date:
Initial mortgage pool balance............................. $
Number of mortgage loans..................................
Number of mortgaged real properties.......................
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<PAGE>
Maximum cut-off date principal balance.................... $
Minimum cut-off date principal balance.................... $
Average cut-off date principal balance.................... $
Maximum mortgage interest rate............................ %
Minimum mortgage interest rate............................ %
Weighted average mortgage interest rate................... %
Maximum original term to maturity
or anticipated repayment date......................... months
Minimum original term to maturity
or anticipated repayment date......................... months
Weighted average original term to maturity
or anticipated repayment date......................... months
Maximum remaining term to maturity
or anticipated repayment date......................... months
Minimum remaining term to maturity
or anticipated repayment date......................... months
Weighted average remaining term to
maturity or anticipated repayment date................ months
Maximum underwritten debt
service coverage ratio................................ x
Minimum underwritten debt
service coverage ratio................................ x
Weighted average underwritten debt
service coverage ratio................................ x
Maximum cut-off date loan-to-appraised
value ratio.......................................... %
Minimum cut-off date loan-to-appraised
value ratio.......................................... %
Weighted average cut-off date loan-to-
appraised value ratio................................. %
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<PAGE>
B. STATE CONCENTRATION..................... The table below shows the number
of, and percentage of the initial
mortgage pool balance secured by,
mortgaged real properties located
in the indicated states:
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES POOL BALANCE
----- ---------- ------------
%
%
%
The remaining mortgaged real
properties with respect to the
mortgage pool, are located
throughout ________ other states
and ________________. No more
than ____% of the initial
mortgage pool balance is secured
by mortgaged real properties
located in any of these other
jurisdictions.
C. PROPERTY TYPES.......................... The table below shows the number
of, and percentage of the initial
mortgage pool balance secured by,
mortgaged real properties
operated for each indicated
purpose:
% OF
NUMBER OF INITIAL MORTGAGE
PROPERTY TYPE PROPERTIES POOL BALANCE
------------- ---------- ------------
%
%
%
%
%
%
%
%
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<PAGE>
D. ENCUMBERED INTERESTS.................... The table below shows the number
of, and percentage of the initial
mortgage pool balance secured by,
mortgaged real properties for
which the encumbered interest is
as indicated:
% OF
ENCUMBERED INTEREST IN THE NUMBER OF INITIAL MORTGAGE
MORTGAGED REAL PROPERTY PROPERTIES POOL BALANCE
Ownership %
Ownership in part,
Leasehold in part %
Leasehold %
Other %
LEGAL AND INVESTMENT CONSIDERATIONS
FEDERAL INCOME
TAX CONSEQUENCES......................... The trustee or its agent will
make elections to treat
designated portions of the assets
of the trust as three separate
real estate mortgage investment
conduits under Sections 860A
through 860G of the Internal
Revenue Code of 1986. The
designations for each of those
three REMICs are as follows:
o REMIC I, the lowest tier
REMIC, which will
consist of, among other
things--
1. the pooled mortgage
loans, and
2. any mortgaged real
properties that may
be acquired by the
trust following a
borrower default,
but will exclude
collections of
additional interest
accrued and deferred as
to payment with respect
to each mortgage loan
with an anticipated
repayment date that
remains outstanding past
that date;
o REMIC II, which will
hold the regular
interests in REMIC I;
and
o REMIC III, which will
hold the regular
interests in REMIC II.
[Any assets not included in a
REMIC will constitute a grantor
trust for federal income tax
purposes.]
The offered certificates will be
treated as regular interests in
REMIC III. This means that they
will be treated as newly issued
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<PAGE>
debt instruments for federal
income tax purposes. You will
have to report income on your
offered certificates in
accordance with the accrual
method of accounting even if you
are otherwise a cash method
taxpayer. The offered
certificates will not represent
any interest in the grantor trust
referred to above.
The class _____ and _____
certificates will be issued with
more than a DE MINIMIS amount of
original issue discount. The
class _____ certificates will be
issued with a DE MINIMIS amount
of original issue discount. The
other offered certificates will
not be issued with any original
issue discount. If you own an
offered certificate issued with
original issue discount, you may
have to report original issue
discount income and be subject to
a tax on this income before you
receive a corresponding cash
payment.
For a more detailed discussion of
the federal income tax aspects of
investing in the offered
certificates, see "Federal Income
Tax Consequences" in this
prospectus supplement and
"Federal Income Tax Consequences"
in the accompanying prospectus.
ERISA....................................... We anticipate that, subject to
satisfaction of the conditions
referred to under "ERISA
Considerations" in this
prospectus supplement, retirement
plans and other employee benefit
plans and arrangements subject
to--
o Title I of the Employee
Retirement Income
Security Act of 1974,
as amended, or
o Section 4975 of the
Internal Revenue Code
of 1986,
will be able to invest in the
class A-1, A-2 and X certificates
without giving rise to a
prohibited transaction. This is
based upon an individual
prohibited transaction exemption
granted to the underwriter by the
U.S. Department of Labor.
However, investments in the other
offered certificates by, on
behalf of or with assets of these
entities, will be restricted as
described under "ERISA
Considerations" in this
prospectus supplement.
If you are a fiduciary of any
retirement plan or other employee
benefit plan or arrangement
subject to Title I of ERISA or
section 4975 of the Internal
Revenue Code of 1986, you should
review carefully with your legal
advisors whether the purchase or
holding of the offered
certificates could give rise to a
transaction that is prohibited
under ERISA or Section 4975 of
the Internal Revenue Code of
1986. See "ERISA Considerations"
in this prospectus supplement and
in the accompanying prospectus.
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<PAGE>
LEGAL INVESTMENT............................ [Upon initial issuance, the
following classes of offered
certificates will constitute
mortgage related securities for
purposes of the Secondary
Mortgage Market Enhancement Act
of 1984:
o class A-1,
o class A-2,
o class B, and
o class X.
The other offered certificates
will NOT be mortgage related
securities within the meaning of
SMMEA.]
You should consult your own legal
advisors to determine whether and
to what extent the offered
certificates will be legal
investments for you. See "Legal
Investment" in this prospectus
supplement and in the
accompanying prospectus.
INVESTMENT CONSIDERATIONS................... The rate and timing of payments
and other collections of
principal on or with respect to
the underlying mortgage loans
will affect the yield to maturity
on each offered certificate. In
the case of offered certificates
purchased at a discount, a slower
than anticipated rate of payments
and other collections of
principal on the underlying
mortgage loans could result in a
lower than anticipated yield. In
the case of class X certificates
or any other offered certificates
purchased at a premium, a faster
than anticipated rate of payments
and other collections of
principal on the underlying
mortgage loans could result in a
lower than anticipated yield. If
you are contemplating the
purchase of class X certificates,
you should be aware that--
o the yield to maturity on
those certificates will
be highly sensitive to
the rate and timing of
principal prepayments
and other liquidations
on or with respect to
the underlying mortgage
loans, and
o that an extremely rapid
rate of prepayments
and/or other
liquidations on or with
respect to the
underlying mortgage
loans could result in a
substantial loss of your
initial investment.
See "Yield and Maturity
Considerations" in this
prospectus supplement and in the
accompanying prospectus.
S-24
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all
investors. In particular, you should not purchase any class of offered
certificates unless you understand and are able to bear the risks associated
with that class.
The offered certificates are complex securities and it is important
that you possess, either alone or together with an investment advisor, the
expertise necessary to evaluate the information contained in this prospectus
supplement and the accompanying prospectus in the context of your financial
situation.
You should consider the following factors, as well as those set forth
under "Risk Factors" in the accompanying prospectus, in deciding whether to
purchase any offered certificates. The "Risk Factors" section in the
accompanying prospectus includes a number of general risks associated with
making an investment in the offered certificates.
RISKS RELATED TO THE OFFERED CERTIFICATES
THE CLASS B, C, D, E AND F CERTIFICATES ARE SUBORDINATE TO, AND ARE
THEREFORE RISKIER THAN, THE CLASS A-1, A-2 AND X CERTIFICATES. If you purchase
class B, C, D, E or F certificates, then your offered certificates will provide
credit support to other classes of offered certificates. As a result, you will
receive payments after, and must bear the effects of losses on the underlying
mortgage loans before, the holders of those other classes of offered
certificates.
When making an investment decision, you should consider, among other
things--
o the payment priorities of the respective classes of the
certificates,
o the order in which the principal balances of the respective
classes of the certificates with balances will be reduced in
connection with losses and default-related shortfalls, and
o the characteristics and quality of the mortgage loans in the
trust.
See "Description of the Mortgage Pool" and "Description of the Offered
Certificates--Payments" and "--Reductions of Certificate Principal Balances in
Connection With Realized Losses and Additional Trust Fund Expenses" in this
prospectus supplement. See also "Risk Factors--The Investment Performance of
Your Offered Certificates Will Depend Upon Payments, Defaults and Losses on the
Underlying Mortgage Loans; and Those Payments, Defaults and Losses may be Highly
Unpredictable", "--Any Credit Support for Your Offered Certificates may be
Insufficient to Protect you Against all Potential Losses" and "--Payments on the
Offered Certificates Will be Made Solely from the Limited Assets of the Related
Trust, and Those Assets may be Insufficient to Make all Required Payments on
Those Certificates" in the accompanying prospectus.
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<PAGE>
THE OFFERED CERTIFICATES HAVE UNCERTAIN YIELDS TO MATURITY. The yield
on your offered certificates will depend on--
o the price you paid for your offered certificates, and
o the rate, timing and amount of payments on your offered
certificates.
The rate, timing and amount of payments on your offered certificates
will depend on:
o the pass-through rate for your offered certificates;
o the rate and timing of payments and other collections of
principal on the underlying mortgage loans;
o the rate and timing of defaults, and the severity of losses,
if any, on the underlying mortgage loans;
o the rate, timing, severity and allocation of other shortfalls
and expenses that reduce amounts available for payment on your
offered certificates;
o the collection and payment of prepayment premiums and yield
maintenance charges with respect to the underlying mortgage
loans; and
o servicing decisions with respect to the underlying mortgage
loans.
These factors cannot be predicted with any certainty. Accordingly, you
may find it difficult to analyze the effect that these factors might have on the
yield to maturity of your offered certificates.
See "Description of the Mortgage Pool", "Servicing of the Underlying
Mortgage Loans", "Description of the Offered Certificates--Payments" and
"--Reductions of Certificate Principal Balances in Connection With Realized
Losses and Additional Trust Fund Expenses" and "Yield and Maturity
Considerations" in this prospectus supplement. See also "Risk Factors--The
Investment Performance of Your Offered Certificates Will Depend Upon Payments,
Defaults and Losses on the Underlying Mortgage Loans; and Those Payments,
Defaults and Losses may be Highly Unpredictable" and "Yield and Maturity
Considerations" in the accompanying prospectus.
THE INVESTMENT PERFORMANCE OF YOUR OFFERED CERTIFICATES MAY VARY
MATERIALLY AND ADVERSELY FROM YOUR EXPECTATIONS BECAUSE THE RATE OF PREPAYMENTS
AND OTHER UNSCHEDULED COLLECTIONS OF PRINCIPAL ON THE UNDERLYING MORTGAGE LOANS
IS FASTER OR SLOWER THAN YOU ANTICIPATED. If you purchase your offered
certificates at a premium, and if payments and other collections of principal on
the mortgage loans in the trust occur at a rate faster than you anticipated at
the time of your purchase, then your actual yield to maturity may be lower than
you had assumed at the time of your purchase. Conversely, if you purchase your
offered certificates at a discount, and if payments and other collections of
principal on the mortgage loans in the trust occur at a rate slower than you
anticipated at the time of your purchase, then your actual yield to maturity may
be lower than you had assumed at the time of your purchase. You should consider
that prepayment premiums and yield maintenance charges may not be collected in
all circumstances. Furthermore, even if a prepayment premium or yield
maintenance charge
S-26
<PAGE>
is collected and payable on your offered certificates, it may not be sufficient
to offset fully any loss in yield on your offered certificates.
If you purchase class X certificates, your yield to maturity will be
particularly sensitive to the rate and timing of principal payments and losses
on the mortgage loans. Prior to investing in those certificates, you should
fully consider the associated risks, including the risk that an extremely rapid
rate of amortization, prepayment or other liquidation of the mortgage loans
could result in your failure to recover fully your initial investment. The
ratings on the class X certificates do not address whether a purchaser of those
certificates would be able to recover its initial investment in them.
The yield on the offered certificates with variable pass-through rates
could also be adversely affected if the mortgage loans with higher mortgage
interest rates pay principal faster than the mortgage loans with lower mortgage
interest rates. This is because those classes bear interest at pass-through
rates equal to, based upon or limited by, as applicable, a weighted average of
net interest rates derived from the mortgage loans.
ERISA CONSIDERATIONS. The regulations that govern pension and other
employee benefit plans subject to ERISA and plans and other retirement
arrangements subject to Section 4975(c) of the Internal Revenue Code of 1986 are
complex. Accordingly, if you are using the assets of a plan or arrangement to
acquire offered certificates, you are urged to consult legal counsel regarding
consequences under ERISA and the Internal Revenue Code of 1986 of the
acquisition, ownership and disposition of those certificates. In particular, the
purchase or holding of class B, C, D, E and F certificates by any plan or
arrangement may result in a prohibited transaction or the imposition of excise
taxes or civil penalties. As a result, these offered certificates should not be
acquired by, on behalf of, or with assets of any plan or arrangement, unless the
purchase and continued holding of the certificate or an interest in the
certificate is exempt from the prohibited transaction provisions of Section 406
of ERISA and Section 4975 of the Internal Revenue Code of 1986 under Sections I
and III of Prohibited Transaction Class Exemption 95-60. Sections I and III of
Prohibited Transaction Class Exemption 95-60 provide an exemption from the
prohibited transaction rules for some transactions involving an insurance
company general account.
See "ERISA Considerations" in this prospectus supplement and in the
accompanying prospectus.
RISKS RELATED TO THE UNDERLYING MORTGAGE LOANS
REPAYMENT OF THE UNDERLYING MORTGAGE LOANS DEPENDS ON THE OPERATION OF
THE MORTGAGED REAL PROPERTIES. The underlying mortgage loans are secured by
mortgage liens on ownership and/or leasehold interests in the following types of
real property:
[SPECIFY PROPERTY TYPES.]
The risks associated with lending on these types of real properties are
inherently different from those associated with lending on the security of
single-family residential properties. This is because, among other reasons,
repayment of each of the underlying mortgage loans is dependent on--
o the successful operation and value of the mortgaged real
property, and
o the related borrower's ability to sell or refinance the
mortgaged real property.
S-27
<PAGE>
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real Property,
Which may Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance" and "Description of the Trust
Assets--Mortgage Loans--A Discussion of Various Types of Multifamily and
Commercial Properties That May Secure Mortgage Loans Underlying a Series of
Offered Certificates" in the accompanying prospectus.
THE UNDERLYING MORTGAGE LOANS HAVE A VARIETY OF CHARACTERISTICS THAT
MAY EXPOSE INVESTORS TO GREATER RISK OF DEFAULT AND LOSS. When making an
investment decision, you should consider, among other things, the following
characteristics of the underlying mortgage loans and/or the mortgaged real
properties for those loans. Any or all of these characteristics can affect,
perhaps materially and adversely, the investment performance of your offered
certificates. Each of the respective items below includes a cross-reference to
where the associated risks are further discussed in this prospectus supplement
or in the accompanying prospectus. In addition, each of those items may include
a cross reference to where further information about the particular
characteristic may be found in this prospectus supplement.
o THE MORTGAGED REAL PROPERTY WILL BE THE SOLE ASSET AVAILABLE
TO SATISFY THE AMOUNTS OWING UNDER AN UNDERLYING MORTGAGE LOAN
IN THE EVENT OF DEFAULT. All of the mortgage loans that we
intend to include in the trust are or should be considered
nonrecourse loans. If the related borrower defaults on any of
the underlying mortgage loans, only the mortgaged real
property, and none of the other assets of the borrower, is
available to satisfy the debt. Even if the related loan
documents permit recourse to the borrower or a guarantor, the
trust may not be able to ultimately collect the amount due
under a defaulted mortgage loan. None of the mortgage loans
are insured or guaranteed by any governmental agency or
instrumentality or by any private mortgage insurer. See "Risk
Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying
Real Property, Which may Decline Over Time, and the Related
Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Most of the Mortgage Loans Underlying Your
Offered Certificates Will be Nonrecourse" in the accompanying
prospectus.
o IN SOME CASES, A MORTGAGED REAL PROPERTY IS DEPENDENT ON A
SINGLE TENANT OR ON ONE OR A FEW MAJOR TENANTS. In the case of
________ mortgaged real properties, securing ____% of the
initial mortgage pool balance, the related borrower has leased
the property to at least one tenant that occupies ____% or
more of the particular property. In the case of _____ of those
properties, securing ____% of the initial mortgage pool
balance, the related borrower has leased the particular
property to a single tenant that occupies all or substantially
all of it. Accordingly, the full and timely payment of each of
the related mortgage loans is highly dependent on the
continued operation of the major tenant or tenants, which, in
some cases, is the sole tenant, at the mortgaged real
property. See "Risk Factors--Repayment of a Commercial or
Multifamily Mortgage Loan Depends Upon the Performance and
Value of the Underlying Real Property, Which may Decline Over
Time and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance--The Successful
Operation of a Multifamily or Commercial Property Depends on
Tenants", "--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying
Real
S-28
<PAGE>
Property, Which may Decline Over Time and the Related
Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Dependence on a Single Tenant or a Small
Number of Tenants Makes a Property Riskier Collateral" and
"Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real
Property, Which may Decline Over Time and the Related
Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Tenant Bankruptcy Adversely Affects Property
Performance" in the accompanying prospectus.
o _____% OR MORE OF THE INITIAL MORTGAGE POOL BALANCE WILL BE
SECURED BY MORTGAGE LIENS ON EACH OF THE FOLLOWING PROPERTY
TYPES--[SPECIFY PROPERTY TYPES].
[ADD DISCLOSURE RELATING TO EACH PROPERTY TYPE AS TO WHICH
THERE EXISTS A MATERIAL CONCENTRATION BASED ON CUT-OFF DATE
PRINCIPAL BALANCES OF THE UNDERLYING MORTGAGE LOANS.]
The inclusion in the trust of a significant concentration of
mortgage loans that are secured by mortgage liens on a
particular type of income-producing property makes the overall
performance of the mortgage pool materially more dependent on
the factors that affect the operations at and value of that
property type. See "Description of the Trust Assets--Mortgage
Loans--A Discussion of Various Types of Multifamily and
Commercial Properties That May Secure Mortgage Loans
Underlying a Series of Offered Certificates" in the
accompanying prospectus.
o ____% OR MORE OF THE INITIAL MORTGAGE POOL BALANCE WILL BE
SECURED BY MORTGAGE LIENS ON REAL PROPERTY LOCATED IN EACH OF
THE FOLLOWING STATES--[SPECIFY STATES]. The mortgaged real
properties located in each of the following states secure
mortgage loans or allocated portions of mortgage loans that
represent ____% or more of the initial mortgage pool balance:
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES POOL BALANCE
----- ---------- ------------
The inclusion of a significant concentration of mortgage loans
that are secured by mortgage liens on real properties located
in a particular state makes the overall performance of the
mortgage pool materially more depending on economic and other
conditions or events in that state. See "Risk
Factors--Geographic Concentration Within a Trust Exposes
Investors to Greater Risk of Default and Loss" in the
accompanying prospectus.
o THE MORTGAGE POOL WILL INCLUDE ADJUSTABLE RATE MORTGAGE LOANS.
________ mortgage loans, representing ____% of the initial
mortgage pool balance, provide for adjustments
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<PAGE>
to their respective interest rates and corresponding
adjustments to their respective monthly debt service payments.
See "Risk Factors--Adjustable Rate Mortgage Loans Entail
Greater Risks of Default to Lenders than Fixed Rate Mortgage
Loans" in the accompanying prospectus.
o THE MORTGAGE POOL WILL INCLUDE MATERIAL CONCENTRATIONS OF
BALLOON LOANS AND LOANS WITH ANTICIPATED REPAYMENT DATES.
________ mortgage loans, representing ____% of the initial
mortgage pool balance, are balloon loans. In addition,
________ mortgage loans, representing ____% of the initial
mortgage pool balance, provide material incentives for the
related borrower to repay the loan by an anticipated repayment
date prior to maturity. The ability of a borrower to make the
required balloon payment on a balloon loan at maturity, and
the ability of a borrower to repay a mortgage loan on or
before any related anticipated repayment date, in each case
depends upon its ability either to refinance the loan or to
sell the mortgaged real property. Although a mortgage loan may
provide the related borrower with incentives to repay the loan
by an anticipated repayment date prior to maturity, the
failure of that borrower to do so will not be a default under
that loan. See "Description of the --- Mortgage Pool--Terms
and Conditions of the Underlying Mortgage Loans" in this
prospectus supplement and "Risk Factors--The Investment
Performance of Your Offered Certificates Will Depend Upon
Payments, Defaults and Losses on the Underlying Mortgage
Loans; and Those Payments, Defaults and Losses may be Highly
Unpredictable--There is an Increased Risk of Default
Associated with Balloon Payments" in the accompanying
prospectus.
o THE MORTGAGE POOL WILL INCLUDE SOME DISPROPORTIONATELY LARGE
MORTGAGE LOANS AND GROUPS OF CROSS-COLLATERALIZED MORTGAGE
LOANS. The inclusion in the mortgage pool of one or more loans
that have outstanding principal balances that are -----
substantially larger than the other mortgage loans can result
in losses that are more severe, relative to the size of the
mortgage pool, than would be the case if the total balance of
the mortgage pool were distributed more evenly. The
______largest mortgage loans and groups of
cross-collateralized mortgage loans to be included in the
trust represent ____% of the initial mortgage pool balance.
See "Description of the Mortgage Pool--General",
"--Cross-Collateralized Mortgage Loans, Multi-Property
Mortgage Loans and Mortgage Loans With Affiliated Borrowers"
and "--Significant Underlying Mortgage Loans" in this
prospectus supplement and "Risk Factors--Loan Concentration
Within a Trust Exposes Investors to Greater Risk of Default
and Loss" in the accompanying prospectus.
o THE MORTGAGE POOL WILL INCLUDE LEASEHOLD MORTGAGE LOANS.
________ mortgage loans, representing ____% of the initial
mortgage pool balance, are secured by mortgage liens on the
related borrower's leasehold interest in all or a portion of
the mortgaged real property, but not by the corresponding
ownership interest in the property that is subject to the
ground lease. Because of possible termination of the related
ground lease, lending on a leasehold interest in a real
property is riskier than lending on an actual ownership
interest in that property. See "Description of the Mortgage
Pool--Additional Loan and Property Information--Leaseholds" in
this prospectus supplement. See also "Risk Factors--Ground
Leases Create Risks for Lenders that are not Present When
Lending on an Actual Ownership Interest in a Real Property"
and "Legal Aspects of Mortgage Loans--Foreclosure--Leasehold
Considerations" in the accompanying prospectus.
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<PAGE>
o SOME OF THE MORTGAGED REAL PROPERTIES ARE LEGAL NONCONFORMING
USES OR LEGAL NONCONFORMING STRUCTURES. ________ mortgage
loans, representing ____% of the initial mortgage pool
balance, are secured by a mortgage lien on a real property
that is a legal nonconforming use or a legal nonconforming
structure. This may impair the ability of the borrower to
restore the improvements on an mortgaged real property to its
current form or use following a major casualty. See
"Description of the Mortgage Pool--Underwriting
Matters--Zoning and Building Code Compliance" in this
prospectus supplement and "Risk Factors--Changes in Zoning may
Adversely Affect the Use or Value of a Real Property" in the
accompanying prospectus.
o SOME OF THE MORTGAGED REAL PROPERTIES ARE ENCUMBERED BY
SUBORDINATE DEBT. ________ mortgage loans, representing ____%
of the initial mortgage pool balance, are secured by mortgaged
real properties that are known to us to be encumbered by
secured subordinate debt that is not part of the mortgage
pool. The existence of secured subordinate indebtedness may
adversely affect the borrower's financial viability and/or the
trust's security interest in the mortgaged real property. Any
or all of the following may result from the existence of
secured subordinate indebtedness on a mortgaged real property.
1. refinancing the related underlying mortgage loan at
maturity for the purpose of making any balloon
payments may be more difficult;
2. reduced cash flow could result in deferred
maintenance at the particular real property;
3. if the holder of the subordinated debt files for
bankruptcy or is placed in involuntary receivership,
foreclosing on the particular real property could be
delayed; and
4. if the mortgaged real property depreciates for
whatever reason, the related borrower's equity is
more likely to be wiped out, thereby eliminating the
related borrower's incentive to continue making
payments on its mortgage loan.
[The lender of any material subordinate debt on the mortgaged
real properties known to us, has agreed not to foreclose or
take other legal action against the particular real property
or the related borrower, for so long as the related mortgage
loan is outstanding and the trust has not done so.]
See "Description of the Mortgage Pool--Additional Loan and
Property Information--Additional and Other Financing" in this
prospectus supplement and "Risk Factors--Subordinate Debt
Increases the Likelihood That a Borrower Will Default on a
Mortgage Loan Underlying Your Offered Certificates" in the
accompanying prospectus.
o SOME OF THE MORTGAGED REAL PROPERTIES DO NOT COMPLY WITH THE
AMERICANS WITH DISABILITIES ACT OF 1990. Not all of the
mortgaged real properties securing mortgage loans that we
intend to include in the trust, comply with the Americans with
Disabilities Act of 1990. Compliance can be expensive. See
"Risk Factors--Compliance with the
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<PAGE>
Americans with Disabilities Act of 1990 May be Expensive" in
the accompanying prospectus.
o MULTIPLE MORTGAGED REAL PROPERTIES ARE OWNED BY THE SAME
BORROWER OR AFFILIATED BORROWERS OR ARE OCCUPIED, IN WHOLE OR
IN PART, BY THE SAME TENANT OR AFFILIATED TENANTS. ________
separate groups of mortgage loans that we intend to include in
the trust, have borrowers that, in the case of each of those
groups, are the same or under common control. See "Description
of the Mortgage Pool--Cross-Collateralized Mortgage Loans,
Multi-Property Mortgage Loans and Mortgage Loans With
Affiliated Borrowers" in this prospectus supplement.
In addition, there may be tenants which lease space at more
than one mortgaged real property securing mortgage loans that
we intend to include in the trust. Furthermore, there may be
tenants that are related to or affiliated with a borrower. See
Annex A to this prospectus supplement for a list of the
________ most significant tenants at each of the mortgaged
real properties used for [SPECIFY USE OF PROPERTIES].
The bankruptcy or insolvency of, or other financial problems
with respect to, any borrower or tenant that is, directly or
through affiliation, associated with two or more of the
mortgaged real properties could have an adverse effect on all
of those properties and on the ability of those properties to
produce sufficient cash flow to make required payments on the
related mortgage loans in the trust. See "Risk
Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends upon the Performance and Value of the Underlying
Real Property, Which may Decline Over Time and the Related
Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Tenant Bankruptcy Adversely Affects Property
Performance", "--Borrower Concentration Within a Trust Exposes
Investors to Greater Risk of Default and Loss" and "--Borrower
Bankruptcy Proceedings Can Delay and Impair Recovery on a
Mortgage Loan Underlying Your Offered Certificates" in the
accompanying prospectus.
o SOME BORROWERS UNDER THE UNDERLYING MORTGAGE LOANS WILL NOT BE
SPECIAL PURPOSE ENTITIES. The business activities of the
borrowers under pooled mortgage loans with cut-off date
principal balances below $______________, may not be limited
to owning their respective mortgaged real properties.
Accordingly, the financial success of each of those borrowers
may be affected by the performance of its other business
activities, including other real estate interests. Those other
business activities increase the possibility that the borrower
may become bankrupt or insolvent.
CHANGES IN MORTGAGE POOL COMPOSITION CAN CHANGE THE NATURE OF YOUR
INVESTMENT. If you purchase any of class B, C, D, E, F or X certificates other
than the class _____certificates, you will be more exposed to risks associated
with changes in concentrations of borrower, loan or property characteristics
than are persons who own class A-1 and class A-2 certificates. See "Risk
Factors--Changes in Pool Composition Will Change the Nature of Your Investment"
in the accompanying prospectus.
LENDING ON INCOME-PRODUCING REAL PROPERTIES ENTAILS ENVIRONMENTAL
RISKS. The trust could become liable for a material adverse environmental
condition at one of the mortgaged real properties
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<PAGE>
securing the mortgage loans in the trust. Any potential environmental liability
could reduce or delay payments on the offered certificates.
A third-party consultant conducted an environmental site assessment, or
updated a previously conducted assessment, with respect to ________ of the
mortgaged real properties for the underlying mortgage loans, during the
_____-month period ending on ______________. Each of those environmental site
assessments or updates, as the case may be, complied with industry-wide
standards. Not all of those environmental site assessments, however, satisfied
all the requirements necessary to be considered a Phase I environmental site
assessment. In ________ cases, a third-party consultant also conducted a Phase
II environmental site assessment of a mortgaged real property. If any assessment
or update revealed a material adverse environmental condition or circumstance at
any mortgaged real property and the consultant recommended action, then,
depending on the nature of the condition or circumstance, the borrower has--
o implemented or agreed to implement an operations and
maintenance plan, in the manner and within the time frames
specified in the related loan documents;
o agreed to monitor periodically nearby properties, in the
manner and within the time frames specified in the related
loan documents; or
o established a reserve account with the lender to cover the
estimated cost of addressing the condition or circumstances.
In many cases, the identified condition related to the presence of
asbestos-containing materials, lead-based paint and/or radon. Where these
substances were present, the environmental consultant generally recommended, and
the related loan documents required, the establishment of an operation and
maintenance plan to address the issue or, in the case of asbestos-containing
materials and lead-based paint, an abatement or removal program. In ________
cases, the particular asbestos-containing materials or lead-based paint was in
poor condition. This could result in a claim for damages by any party injured by
that condition.
In ________ cases, the cost to remediate, prevent or otherwise deal
with an adverse environmental condition at a mortgaged real property securing a
mortgage loan that we intend to include in the trust, was estimated to be more
than $_________.
[In ________ cases, the environmental consultant did not recommend that
any action be taken with respect to a potential adverse environmental condition
at a mortgaged real property securing a mortgage loan that we intend to include
in the trust, because a responsible party with respect to that condition had
already been identified.]
[In the case of ________ mortgaged real properties, securing ____% of
the initial mortgage pool balance, either--
o no environmental site assessment was conducted in connection
with the origination of the related underlying mortgage loan,
or
o a Phase II environmental site assessment was recommended but
not performed.]
S-33
<PAGE>
See "Risk Factors--Environmental Liabilities Will Adversely Affect the
Value and Operation of the Contaminated Property and May Deter a Lender from
Foreclosing" and "Legal Aspects of Mortgage Loans--Environmental Considerations"
in the accompanying prospectus.
LENDING ON INCOME-PRODUCING PROPERTIES ENTAILS RISKS RELATED TO
PROPERTY CONDITION. Licensed engineers inspected ________ of the mortgaged real
properties of the mortgage loans that we intend to include in the trust, during
the _____-month period preceding the cut-off date, to assess--
o the structure, exterior walls, roofing, interior construction,
mechanical and electrical systems, and
o the general condition of the site, buildings and other
improvements located at each property.
At ________ of those properties, the inspections identified conditions requiring
escrows to be established for repairs or replacements estimated to cost in
excess of $__________. In ________ of these cases, the originator required the
related borrower to fund reserves, or deliver letters of credit or other
instruments, to cover these costs.
LIMITATIONS ON ENFORCEABILITY OF CROSS-COLLATERALIZATION. The mortgage
pool will include ________ mortgage loans that are secured, including through
cross-collateralization with other mortgage loans, by multiple mortgaged real
properties. These mortgage loans are identified in the tables contained in Annex
A. The purpose of securing any particular mortgage loan or group of
cross-collateralized mortgage loans with multiple real properties is to reduce
the risk of default or ultimate loss as a result of an inability of any
particular property to generate sufficient net operating income to pay debt
service. [However, ________ of these mortgage loans permit--
o the release of one or more of the mortgaged real properties
from the related mortgage lien, and/or
o a full or partial termination of the applicable
cross-collateralization, in each case, upon the satisfaction
of the conditions described under "Description of the Mortgage
Pool--Terms and Conditions of the Mortgage Loans" in this
prospectus supplement.]
In addition, when multiple real properties secure a mortgage loan or
group of cross-collateralized mortgage loans, the amount of the mortgage
encumbering any particular one of those properties may be less than the full
amount of the related mortgage loan or group of cross-collateralized mortgage
loans, generally to avoid recording tax. This mortgage amount may equal the
appraised value or allocated loan amount for the mortgaged real property and
will limit the extent to which proceeds from the property will be available to
offset declines in value of the other properties securing the same mortgage loan
or group of cross-collateralized mortgage loans.
________ mortgage loans that we intend to include in the trust are, in
each case, secured by real properties located in two or more states. These
mortgage loans represent ____% of the initial mortgage pool balance. Foreclosure
actions are brought in state court and the courts of one state cannot exercise
jurisdiction over property in another state. Upon a default under any of these
mortgage loans, it may not be possible to foreclose on the related mortgaged
real properties simultaneously.
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<PAGE>
LIMITED INFORMATION CAUSES UNCERTAINTY. ________ of the mortgage loans
that we intend to include in the trust, are acquisition financing. Accordingly,
limited or no operating information is available with respect to the mortgaged
real properties for those mortgage loans. As a result, you may find it difficult
to analyze the performance of those properties.
[PRIOR BANKRUPTCIES. We are aware that, in the case of ________
mortgage loans that we intend to include in the trust--
o the related borrower or a principal in the related borrower
has been a party to, or
o the related mortgaged real property has been the subject of,
prior bankruptcy proceedings.]
CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT
From time to time we use capitalized terms in this prospectus
supplement. Each of those capitalized terms will have the meaning assigned to it
in the "Glossary" attached to this prospectus supplement.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus includes the
words "expects", "intends", "anticipates", "estimates" and similar words and
expressions. These words and expressions are intended to identify forward-
looking statements. Any forward-looking statements are made subject to risks and
uncertainties which could cause actual results to differ materially from those
stated. These risks and uncertainties include, among other things, declines in
general economic and business conditions, increased competition, changes in
demographics, changes in political and social conditions, regulatory initiatives
and changes in customer preferences, many of which are beyond our control and
the control of any other person or entity related to this offering. The
forward-looking statements made in this prospectus supplement are accurate as of
the date stated on the cover of this prospectus supplement. We have no
obligation to update or revise any forward-looking statement.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
We intend to include the ________ mortgage loans identified on Annex A
to this prospectus supplement in the trust. The mortgage pool consisting of
those loans will have an initial mortgage pool balance of $___________. However,
the actual initial mortgage pool balance may be as much as ____% smaller or
larger than that amount if any of those mortgage loans are removed from the
mortgage pool or any other mortgage loans are added to the mortgage pool. See
"--Changes in Mortgage Pool Characteristics" below.
S-35
<PAGE>
The initial mortgage pool balance will equal the total cut-off date
principal balance of the mortgage loans included in the trust. The cut-off date
principal balance of any mortgage loan is equal to its unpaid principal balance
as of the cut-off date, after application of all monthly debt service payments
due with respect to the mortgage loan on or before that date, whether or not
those payments were received. The cut-off date principal balance of each
mortgage loan that we intend to include in the trust is shown on Annex A to this
prospectus supplement. Those cut-off date principal balances range from
$_________ to $__________, and the average of those cut-off date principal
balances is $_________.
Each of the mortgage loans that we intend to include in the trust is an
obligation of the related borrower to repay a specified sum with interest. Each
of those mortgage loans is evidenced by a promissory note and secured by a
mortgage, deed of trust or other similar security instrument that creates a
mortgage lien on the ownership and/or leasehold interest of the related borrower
or another party in one or more commercial or multifamily real properties. That
mortgage lien will, in all cases, be a first priority lien, subject only to
Permitted Encumbrances.
You should consider each of the pooled mortgage loans to be a
nonrecourse obligation of the related borrower. In the event of a payment
default by the related borrower, recourse will be limited to the corresponding
mortgaged real property or properties for satisfaction of that borrower's
obligations. In those cases where recourse to a borrower or guarantor is
permitted under the related loan documents, we have not undertaken an evaluation
of the financial condition of any of these persons. None of the pooled mortgage
loans will be insured or guaranteed by any governmental entity or by any other
person.
We provide in this prospectus supplement a variety of information
regarding the mortgage loans that we intend to include in the trust. When
reviewing this information, please note that--
o All numerical information provided with respect to the
mortgage loans is provided on an approximate basis.
o All weighted average information provided with respect to the
mortgage loans reflects a weighting by their respective
cut-off date principal balances.
o When information with respect to mortgaged real properties is
expressed as a percentage of the initial mortgage pool
balance, the percentages are based upon the cut-off date
principal balances of the related mortgage loans.
o If a mortgage loan is secured by multiple mortgaged real
properties located in more than one state, a portion of that
mortgage loan has been allocated to each of those properties.
o Statistical information regarding the mortgage loans may
change prior to the date of initial issuance of the offered
certificates due to changes in the composition of the mortgage
pool prior to that date.
S-36
<PAGE>
CROSS-COLLATERALIZED MORTGAGE LOANS, MULTI-PROPERTY MORTGAGE LOANS AND MORTGAGE
LOANS WITH AFFILIATED BORROWERS
The mortgage pool will include ________ mortgage loans that are, in
each case, individually or through cross-collateralization with other mortgage
loans, secured by two or more real properties. [However, the amount of the
mortgage lien encumbering any particular one of those properties may be less
than the full amount of the related mortgage loan or group of
cross-collateralized mortgage loans, generally to avoid recording tax. The
mortgage amount may equal the appraised value or allocated loan amount for the
particular real property. This would limit the extent to which proceeds from
that property would be available to offset declines in value of the other
mortgaged real properties securing the same mortgage loan or group of
cross-collateralized mortgage loans.]
________ of the mortgage loans referred to in the prior paragraph
entitle the related borrower(s) to obtain a release of one or more of the
corresponding mortgaged real properties and/or a termination of any applicable
cross-collateralization, subject, in each case, to the fulfillment of one or
more of the following conditions--
o the pay down of the mortgage loan(s) in an amount equal to a
specified percentage, which is usually ____%, of the portion
of the total loan amount allocated to the property or
properties to be released;
o the satisfaction of debt service coverage and loan-to-value
tests for the property or properties that will remain as
collateral; and/or
o receipt by the lender of confirmation from each applicable
rating agency that the action will not result in a
qualification, downgrade or withdrawal of any of the
then-current ratings of the offered certificates.
In addition, ________ of the mortgage loans referred to in the prior paragraph
also entitle the related borrower to a release of one or more of the
corresponding mortgaged real properties through defeasance. See "--Terms and
Conditions of the Mortgage Loans--Defeasance Loans" below.
The table below identifies each group of mortgaged real properties that
secure an individual multi-property mortgage loan or a group of
cross-collateralized mortgage loans that represent at least ____% of the initial
mortgage pool balance.
<TABLE>
<CAPTION>
NUMBER OF STATES % OF
WHERE THE INITIAL
PROPERTIES ARE MORTGAGE
PROPERTY NAMES LOCATED POOL BALANCE
-------------- ------- ------------
<S> <C> <C>
</TABLE>
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<PAGE>
The table below shows each group of mortgaged real properties that:
o are owned by the same or affiliated borrowers; and
o secure two or more non-cross-collateralized mortgage loans
that represent at least ____% of the initial mortgage pool
balance.
<TABLE>
<CAPTION>
NUMBER OF STATES
WHERE THE % OF
PROPERTIES ARE INITIAL MORTGAGE
PROPERTY NAMES LOCATED POOL BALANCE
-------------- ------- ------------
<S> <C> <C>
</TABLE>
TERMS AND CONDITIONS OF THE UNDERLYING MORTGAGE LOANS
DUE DATES. All of the mortgage loans that we intend to include in the
trust provide for monthly debt service payments to be due on the _____ day of
each month.
MORTGAGE RATES; CALCULATIONS OF INTEREST. In general, each of the
mortgage loans that we intend to include in the trust bears interest at a
mortgage interest rate that, in the absence of default, is fixed until maturity.
However, as described below under "--ARD Loans, each of those mortgage loans
that has an anticipated repayment date will accrue interest after that date at a
rate that is in excess of its mortgage interest rate prior to that date. [IF ANY
OF THE MORTGAGE LOANS HAVE FLOATING OR ADJUSTABLE MORTGAGE INTEREST RATES,
DISCUSS CALCULATION OF THOSE RATES, INCLUDING INDICES, GROSS MARGINS, ADJUSTMENT
DATES, FLOORS AND CAPS.]
The mortgage interest rate for each of the mortgage loans that we
intend to include in the trust is shown on Annex A to this prospectus
supplement. As of the cut-off date, those mortgage interest rates ranged from
____% per annum to ____% per annum, and the weighted average of those mortgage
interest rates was ____% per annum.
Except in the case of mortgage loans with anticipated repayment dates,
none of the mortgage loans that we intend to include in the trust provides for
negative amortization or for the deferral of interest. [DESCRIBE ANY POTENTIAL
NEGATIVE AMORTIZATION.]
Each of the pooled mortgage loans will accrue interest on the basis of
one of the following conventions:
o the actual number of days elapsed during each one-month accrual period
in a year of 360 days; or
o a 360-day year consisting of twelve 30-day months; or
o [SPECIFY ANY OTHER BASIS].
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<PAGE>
The table below shows the number of, and percentage of initial mortgage
pool balance represented by, mortgage loans that accrue interest based on each
of the foregoing conventions.
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
INTEREST ACCRUAL BASIS MORTGAGE LOANS POOL BALANCE
<S> <C> <C>
Actual/360 Basis %
30/360 Basis %
[OTHER] %
</TABLE>
BALLOON LOANS. ________ of the mortgage loans that we intend to include
in the trust, representing ____% of the initial mortgage pool balance, are
characterized by--
o an amortization schedule that is significantly longer than the
actual term of the mortgage loan, and
o a substantial payment being due with respect to the mortgage
loan on its stated maturity date.
ARD LOANS. ________ of the mortgage loans that we intend to include in
the trust, representing ____% of the initial mortgage pool balance, are
characterized by the following features:
o A maturity date that is more than _____ years following
origination.
o The designation of an anticipated repayment date that is
generally _____ years following origination. The anticipated
repayment date for each of the ARD Loans is listed on Annex A
to this prospectus supplement.
o The ability of the related borrower to prepay the mortgage
loan, without restriction, including without any obligation to
pay a prepayment premium or a yield maintenance charge, at any
time on or after a date that is generally _____ to _____
months] prior to the related anticipated repayment date.
o Until its anticipated repayment date, the calculation of
interest at its initial mortgage interest rate.
o From and after its anticipated repayment date, the accrual of
interest at a revised annual rate that is, in most cases,
equal to the sum of--
1. its initial mortgage interest rate, plus
2. a specified margin that is, in ________ cases, not
more than _____ percentage points.
o The deferral of any additional interest accrued with respect
to the mortgage loan from and after the related anticipated
repayment date at the difference between its revised mortgage
interest rate and its initial mortgage interest rate. This
post-anticipated repayment date
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<PAGE>
additional interest may, in some cases, compound at the new
revised mortgage interest rate. Any post-anticipated repayment
date additional interest accrued with respect to the mortgage
loan following its anticipated repayment date will not be
payable until the entire principal balance of the mortgage
loan has been paid in full.
o From and after its anticipated repayment date, the accelerated
amortization of the mortgage loan out of any and all monthly
cash flow from the corresponding mortgaged real property which
remains after payment of the applicable monthly debt service
payments and permitted operating expenses and capital
expenditures. These accelerated amortization payments and the
post-anticipated repayment date additional interest are
considered separate from the monthly debt service payments due
with respect to the mortgage loan.
In the case of each of the ARD Loans that we intend to include in the
trust, the related borrower has agreed to enter into a cash management agreement
not less than _____ months prior to the related anticipated repayment date if it
has not already done so. The related borrower or the manager of the
corresponding mortgaged real property will be required under the terms of that
cash management agreement to deposit or cause the deposit of all revenue from
that property received after the related anticipated repayment date into a
designated account controlled by the lender under the ARD Loan.
FULLY AMORTIZING LOANS. ________ of the mortgage loans that we intend
to include in the trust, representing ____% of the initial mortgage pool
balance, are characterized by--
o constant monthly debt service payments throughout the
substantial term of the mortgage loan, and
o an amortization schedule that is approximately equal to the
actual term of the mortgage loan.
However, none of these fully amortizing loans has either--
o an anticipated repayment date, or
o the associated repayment incentives.
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<PAGE>
AMORTIZATION OF PRINCIPAL. The table below shows, in months, the
original and, as of the cut-off date, the remaining amortization schedules and
terms to maturity for the mortgage loans that we expect to back the offered
certificates or the specified sub-groups of those mortgage loans. For purposes
of the following table, the ARD Loans are assumed to mature on their respective
anticipated repayment dates.
<TABLE>
<CAPTION>
FULLY AMORTIZING ALL
BALLOON LOANS ARD LOANS LOANS MORTGAGE LOANS
------------- --------- ----- --------------
<S> <C> <C> <C> <C>
Original Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Remaining Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Original Amortization Term (mos.)
Maximum
Minimum
Weighted Average
Remaining Amortization Term (mos.)
Maximum
Minimum
Weighted Average
</TABLE>
Some of the pooled mortgage loans will, in each case, provide for a
recast of the amortization schedule and an adjustment of the monthly debt
service payments on the mortgage loan upon application of specified amounts of
condemnation proceeds or insurance proceeds to pay the related unpaid principal
balance.
[DISCUSS ANY ADJUSTMENTS TO THE MONTHLY DEBT SERVICE PAYMENTS FOR THE MORTGAGE
LOANS.]
VOLUNTARY PREPAYMENT PROVISIONS. In general, at origination, the
mortgage loans that we intend to include in the trust, provided for:
o a prepayment lock-out period, during which voluntary principal
prepayments are prohibited, followed by
o a prepayment consideration period, during which voluntary
prepayments are permitted, subject to the payment of an
additional consideration for the prepayment, followed by
o an open prepayment period, during which voluntary principal
prepayments may be made without any prepayment consideration.
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<PAGE>
Notwithstanding otherwise applicable lock-out periods, partial
prepayments of some of the pooled mortgage loans will be required under the
circumstances described under "--Terms and Conditions of the Underlying Mortgage
Loans--Other Prepayment Provisions" below.
The prepayment terms of each of the mortgage loans that we intend to
include in the trust are more particularly described in Annex A to this
prospectus supplement.
As described below under "--Defeasance Loans", [substantially all] of
the pooled mortgage loans will permit the related borrower to obtain a full or
partial release of the corresponding mortgaged real property from the related
mortgage lien by delivering U.S. government securities as substitute collateral.
None of these mortgage loans will permit defeasance prior to the _____
anniversary of the date of initial issuance of the offered certificates.
PREPAYMENT LOCK-OUT PERIODS. ________ of the mortgage loans that we
intend to include in the trust, representing ____% of the initial mortgage pool
balance, provide for prepayment lock-out periods as of the cut-off date, and--
o the maximum remaining prepayment lock-out period of those
mortgage loans as of that date is _____ months,
o the minimum remaining prepayment lock-out period of those
mortgage loans as of that date is _____ months, and
o the weighted average remaining prepayment lock-out period of
those mortgage loans as of that date is _____ months.
Notwithstanding otherwise applicable lock-out periods, partial
prepayments of some of the pooled mortgage loans will be required under the
circumstances described under "--Terms and Conditions of the Underlying Mortgage
Loans--Other Prepayment Provisions" below.
PREPAYMENT CONSIDERATION. Following an initial prepayment lock-out
period, ________ of the mortgage loans that we intend to include in the trust,
representing ____% of the initial mortgage pool balance, provide for the payment
of prepayment consideration in connection with a voluntary prepayment during
part of the loan term. That prepayment consideration will equal [SPECIFY
CALCULATION OF PREPAYMENT CONSIDERATION].
Prepayment premiums and yield maintenance charges received on the
pooled mortgage loans, whether in connection with voluntary or involuntary
prepayments, will be allocated and paid to the persons, in the amounts and in
accordance with the priorities described under "Description of the Offered
Certificates--Payments--Payments of Prepayment Premiums and Yield Maintenance
Charges" in this prospectus supplement. Limitations may exist under applicable
state law on the enforceability of the provisions of the pooled mortgage loans
that require payment of prepayment premiums or yield maintenance charges.
Neither we nor the underwriter makes any representation or warranty as to the
collectability of any prepayment premium or yield maintenance charge with
respect to any of the mortgage loans included in the trust. See "Risk
Factors--Some Provisions in the Mortgage Loans Underlying Your Offered
Certificates may be Challenged as Being Unenforceable--Prepayment Premiums, Fees
and Charges" and "Legal Aspects of Mortgage Loans--Default Interest and
Limitations on Prepayments" in the accompanying prospectus.
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<PAGE>
OPEN PREPAYMENT PERIODS. ________ of the mortgage loans that we intend
to include in the trust, representing ____% of the initial mortgage pool
balance, provide for an open prepayment period. That open prepayment period
generally begins _____ to _____ months prior to stated maturity [or, in the case
of an ARD Loan, prior to the related anticipated repayment date].
OTHER PREPAYMENT PROVISIONS. ________ of the mortgage loans that we
intend to include in the trust provide for mandatory partial prepayments,
notwithstanding any lock-out period that may otherwise be in effect. In ________
of these cases, the related borrower has established reserves or delivered a
letter of credit that will be applied to a partial prepayment of the mortgage
loan if one or more property performance conditions do not occur.
Investors should not expect any prepayment consideration to be paid in
connection with any mandatory partial prepayment described in the prior
paragraph.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS. ________ of the mortgage
loans that we intend to include in the trust, representing ____% of the initial
mortgage pool balance, contain both a due-on-sale clause and a
due-on-encumbrance clause. In general, except for the permitted transfers
discussed in the next paragraph, these clauses either--
o permit the holder of the related mortgage to accelerate the
maturity of the mortgage loan if the borrower sells or
otherwise transfers or encumbers the corresponding mortgaged
real property, or
o prohibit the borrower from doing so without the consent of the
holder of the mortgage.
See, however, "Risk Factors--The Investment Performance of Your Offered
Certificates Will Depend upon Payments, Defaults and Losses on the Underlying
Mortgage Loans; and Those Payments, Defaults and Losses may be Highly
Unpredictable--Delinquencies, Defaults and Losses on the Underlying Mortgage
Loans may Affect the Amount and Timing of Payments on Your Offered Certificates;
and the Rate and Timing of Those Delinquencies and Defaults, and the Severity of
Those Losses, are Highly Unpredictable" and "--Some Provisions in the Mortgage
Loans Underlying Your Offered Certificates may be Challenged as Being
Unenforceable--Due-on-Sale and Debt Acceleration Clauses" and "Legal Aspects of
Mortgage Loans--Due on Sale and Due-on-Encumbrance Provisions" in the
accompanying prospectus.
________ of the mortgage loans that we intend to include in the trust
permit one or more of the following types of transfers:
o transfers of the corresponding mortgaged real property if
specified conditions are satisfied, which conditions normally
include--
1. confirmation by each applicable rating agency that
the transfer will not result in a qualification,
downgrade or withdrawal of any of its then current
ratings of the certificates, or
2. the reasonable acceptability of the transferee to the
lender;
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o a transfer of the corresponding mortgaged real property to a
person that is affiliated with or otherwise related to the
borrower;
o transfers by the borrower of the corresponding mortgaged real
property to specified entities or types of entities; or
o a transfer of non-controlling ownership interests in the
related borrower.
DEFEASANCE LOANS. ________ of the mortgage loans that we intend to
include in the trust, representing ____% of the initial mortgage pool balance,
permit the borrower to deliver U.S. government securities as substitute
collateral.
Each of these mortgage loans permits the related borrower, during
specified periods and subject to specified conditions, to pledge to the holder
of the mortgage loan the requisite amount of direct, non-callable U.S.
government securities and obtain a full or partial release of the mortgaged real
property. In general, the U.S. government securities that are to be delivered in
connection with the defeasance of any mortgage loan, must provide for a series
of payments that--
o will be made prior, but as closely as possible, to all
successive due dates through and including the maturity date,
and
o will, in the case of each due date, be in a total amount equal
to or greater than the monthly debt service payment, including
any applicable balloon payment, scheduled to be due on that
date, with any excess to be returned to the related borrower.
[For purposes of determining the defeasance collateral for an ARD Loan,
however, that mortgage loan will be treated as if a balloon payment is due on
its anticipated repayment date.]
If fewer than all of the real properties securing any particular
mortgage loan or group of cross-collateralized mortgage loans are to be released
in connection with any defeasance, the requisite defeasance collateral will be
calculated based on the allocated loan amount for the properties to be released
and the portion of the monthly debt service payments attributable to that
allocated loan amount.
In connection with any delivery of defeasance collateral, the related
borrower will be required to deliver a security agreement granting the trust a
first priority security interest in the collateral, together with an opinion of
counsel confirming the first priority status of the security interest.
None of the mortgage loans that we intend to include in the trust may
be defeased prior to the _____ anniversary of the date of initial issuance of
the certificates.
MORTGAGE POOL CHARACTERISTICS
GENERAL. A detailed presentation of various characteristics of the
mortgage loans that we intend to include in the trust, and of the corresponding
mortgaged real properties, on an individual basis and in tabular format, is
shown on Annex A to this prospectus supplement. Some of the terms that appear in
those exhibits, as well as elsewhere in this prospectus supplement, are defined
or otherwise discussed in the "Glossary" to this prospectus supplement. The
statistics in the tables and schedules on Annex A to this prospectus supplement
were derived, in many cases, from information and operating statements
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furnished by or on behalf of the respective borrowers. The information and the
operating statements were generally unaudited and have not been independently
verified by us or the underwriter.
SIGNIFICANT MORTGAGE LOANS
[INSERT DESCRIPTION OF SIGNIFICANT MORTGAGE LOANS.]
ADDITIONAL LOAN AND PROPERTY INFORMATION
DELINQUENCIES. None of the mortgage loans that we intend to include in
the trust was as of the cut-off date, or has been at any time during the
______-month period preceding that date, _____ days or more delinquent with
respect to any monthly debt service payment.
TENANT MATTERS. Described and listed below are special considerations
regarding tenants at the mortgaged real properties for the mortgage loans that
we intend to include in the trust--
o [________ of the mortgaged real properties, securing ____% of
the initial mortgage pool balance, are, in each case, a
[SPECIFY PROPERTY TYPES] that is leased to one or more major
tenants that each occupy at least ____% of the net rentable
area of the particular property.
o A number of companies are major tenants at more than one of
the mortgaged real properties.
o There are ________ cases in which a particular entity is a
tenant at more than one of the mortgaged real properties, and
although it may not be a major tenant at any of those
properties, it is significant to the success of the
properties.
o ________ of the mortgaged real properties, securing ____% of
the initial mortgage pool balance, are multifamily rental
properties that have material concentrations of student
tenants.]
[GROUND LEASES. ________ of the mortgage loans that we intend to
include in the trust, representing ____% of the initial mortgage pool balance,
are secured, in whole or in material part, by a mortgage lien on the borrower's
leasehold interest in the corresponding mortgaged real property. In each case,
the related ground lease, giving effect to all extension options, expires more
than ten years after the stated maturity of the related mortgage loan and
either:
o the ground lessor has subordinated its interest in the
mortgaged real property to the interest of the holder of that
mortgage loan; or
o the ground lessor has agreed to give the holder of that
mortgage loan notice of, and the right to cure, any default or
breach by the lessee.]
[SPECIFY EXCEPTIONS.]
See "Risk Factors--Ground Leases Create Risks for Lenders That Are Not
Present When Lending on an Actual Ownership Interest in a Real Property" and
"Legal Aspects of Mortgage Loans--Foreclosure--Leasehold Considerations" in the
accompanying prospectus.
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[ADDITIONAL AND OTHER FINANCING. We are aware of ________ mortgaged
real properties, securing ____% of the initial mortgage pool balance, that are
encumbered by secured subordinate debt that is not part of the mortgage pool.
The following table identifies those properties, indicates the initial principal
amount of the secured subordinate debt and sets forth the cut-off date principal
balances of the related mortgage loans. [In the case of each of those
properties, the subordinate lender has entered into a subordination and
standstill agreement with the holder of the related mortgage loan whereby that
subordinate lender--
o expressly subordinated its right to receive collections and
proceeds from, and otherwise deal with, that property, and
o agrees not to take any enforcement or other legal action
against that property or the related borrower as long as the
corresponding pooled mortgage loan is outstanding and the
mortgagee under that mortgage loan has not taken any similar
enforcement or other legal action.]
<TABLE>
<CAPTION>
% OF INITIAL
CUT-OFF DATE MORTGAGE POOL
PRINCIPAL BALANCE BALANCE REPRESENTED INITIAL PRINCIPAL
OF RELATED BY RELATED AMOUNT OF SECURED
NAMES MORTGAGE LOANS MORTGAGE LOANS SUBORDINATE DEBT
----- -------------- -------------- ----------------
<S> <C> <C> <C>
</TABLE>
[In addition, we are aware that the borrowers under ________ of the
mortgage loans that we intend to include in the trust, representing ____% of the
initial mortgage pool balance, have unsecured debt. In ________ of those cases,
the lender on the debt is an affiliate of the borrower. In ________ of those
cases, the lender on the unsecured debt has executed and delivered a
subordination and standstill agreement in favor of the mortgagee under the
corresponding pooled mortgage loan. In addition, some of the pooled mortgage
loans will permit the related borrower to incur unsecured subordinated debt in
the future, subject to conditions such as--
o limiting the use of proceeds to refurbishing or renovating the
mortgaged real property, and/or
o acquiring furniture, fixtures and equipment for the mortgaged
real property.
Borrowers that do not meet special purpose entity, bankruptcy-remote criteria,
generally do not have any restriction on the incurrence of unsecured debt.
Additional debt, in any form, may cause a diversion of funds from property
maintenance and increase the likelihood that the borrower will become the
subject of a bankruptcy proceeding.] See "Risk Factors--Subordinate Debt
Increases the Likelihood That a Borrower Will Default on a Mortgage Loan
Underlying Your Offered Certificates" and "Legal Aspects of Mortgage
Loans--Subordinate Financing" in the accompanying prospectus.
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Except as disclosed under this "--Additional and Other Financing"
subsection, we have not been able to confirm whether the respective borrowers
under the mortgage loans that we intend to include in the trust, have any other
debt outstanding.
ZONING AND BUILDING CODE COMPLIANCE. In connection with the origination
of each mortgage loan that we intend to include in the trust, the related
originator examined whether the use and operation of the mortgaged real property
were in material compliance with zoning, land-use, building, fire and health
ordinances, rules, regulations and orders then-applicable to that property.
Evidence of this compliance may have been in the form of legal opinions,
certifications from government officials, title insurance endorsements,
engineering or consulting reports and/or representations by the related
borrower. In ________ cases, a certificate of occupancy was not available. Where
the property as currently operated is a permitted nonconforming use and/or
structure, an analysis was generally conducted as to--
o the likelihood that a material casualty would occur that would
prevent the property from being rebuilt in its current form,
and
o whether existing replacement cost hazard insurance or, if
necessary, supplemental law or ordinance coverage would, in
the event of a material casualty, be sufficient--
1. to satisfy the entire mortgage loan, or
2. taking into account the cost of repair, to pay down
the mortgage loan to a level that the remaining
collateral would be adequate security for the
remaining loan amount.
HAZARD, LIABILITY AND OTHER INSURANCE. [Although exceptions exist, the
loan documents for each of the mortgage loans that we intend to include in the
trust generally require the related borrower to maintain with respect to the
corresponding mortgaged real property the following insurance coverage--
o hazard insurance in an amount that is, subject to a customary
deductible, at least equal to the lesser of--
1. the outstanding principal balance of the mortgage
loan, and
2. the full insurable replacement cost of the
improvements located on the insured property;
o if any portion of the property was in an area identified in
the federal register by the Flood Emergency Management Agency
as having special flood hazards, flood insurance meeting the
requirements of the Federal Insurance Administration
guidelines, in an amount that is equal to the least of--
1. the outstanding principal balance of the related
mortgage loan,
2. the full insurable value of the insured property, and
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3. the maximum amount of insurance available under the
National Flood Insurance Act of 1968;
o comprehensive general liability insurance against claims for
personal and bodily injury, death or property damage occurring
on, in or about the insured property, in an amount at least
equal to $________ per occurrence; and
o business interruption or rent loss insurance either in an
amount not less than 100% of the projected rental income or
revenue from the insured property for at least six months or,
alternatively, in a specified dollar amount.]
[In general, the mortgaged real properties for the mortgage loans that
we intend to include in the trust, including those properties located in
California, are not insured against earthquake risks. In the case of those
properties located in California, other than those that are manufactured housing
communities or self storage facilities, a third party consultant conducted
seismic studies to assess the probable maximum loss for the property. In
general, when the resulting reports concluded that a mortgaged real property was
likely to experience a probable maximum loss in excess of 20% of the estimated
replacement cost of the improvements, the related originator required the
borrower to--
o obtain earthquake insurance, or
o establish reserves to cover the estimated costs of completing
seismic retrofitting recommended by the consultant,
unless, in any case, the original loan-to-value ratio was relatively low.]
[With respect to each of the mortgaged real properties for the pooled
mortgage loans, the master servicer is required to cause the maintenance of all
insurance coverage as is required under the related mortgage, to the extent--
o the trust has an insurable interest, and
o the master servicer can require maintenance of the insurance
under applicable law.]
[Where insurance coverage at the mortgaged real property for any pooled
mortgage loan is left to the lender's discretion, the master servicer will be
required to use reasonable efforts to cause the related borrower to maintain
insurance generally in the amounts, type and scopes of coverage required under
the other pooled mortgage loans.]
[Various forms of insurance maintained with respect to any of the
mortgaged real properties for the pooled mortgage loans, including casualty
insurance, environmental insurance and earthquake insurance, may be provided
under a blanket insurance policy. That blanket insurance policy will also cover
other real properties, some of which may not secure loans in the trust. As a
result of total limits under any of those blanket policies, losses at other
properties covered by the blanket insurance policy may reduce the amount of
insurance coverage with respect to a property securing one of the loans in the
trust. See "Risk Factors--Lack of Insurance Coverage Exposes a Trust to Risk for
Particular Special Hazard Losses" in the accompanying prospectus.]
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[With limited exception, the mortgage loans that we intend to include
in the trust generally provide that insurance and condemnation proceeds are to
be applied either--
o to restore the mortgaged real property; or
o towards payment of the mortgage loan.]
[If any mortgaged real property is acquired by the trust through
foreclosure, deed in lieu of foreclosure or otherwise following a default on the
related mortgage loan, the special servicer will be required to maintain for
that property generally the same types of insurance policies providing coverage
in the same amounts as were previously required under the mortgage that had
covered the property.]
[The master servicer and the special servicer may each satisfy its
obligations regarding maintenance of the hazard insurance policies referred to
in this prospectus supplement by maintaining a blanket insurance policy insuring
against hazard losses on all of the pooled mortgage loans for which it is
responsible. If any blanket insurance policy maintained by the master servicer
or special servicer contains a deductible clause, however, the master servicer
or the special servicer, as the case may be, will be required, in the event of a
casualty covered by that policy, to pay out of its own funds all sums that--
o are not paid because of the deductible clause, and
o would have been paid if an individual hazard insurance policy
referred to above had been in place.]
[The applicable originator and its successors and assigns are the
beneficiaries under separate title insurance policies with respect to each
mortgage loan that we intend to include in the trust. Each title insurer will
enter into co-insurance and reinsurance arrangements with respect to the title
insurance policy as are customary in the title insurance industry. Subject to
standard exceptions, including those regarding claims made in the context of
insolvency proceedings, each title insurance policy will provide coverage to the
trustee for the benefit of the series _____ certificateholders for claims made
against the trustee regarding the priority and validity of the borrowers' title
to the subject mortgaged real property.]
ASSESSMENTS OF PROPERTY CONDITION
PROPERTY INSPECTIONS. [______ of the mortgaged real properties for the
mortgage loans that we intend to include in the trust, were each inspected in
connection with the origination or acquisition of the related mortgage loan to
assess their general condition.] [DISCUSS RESULTS AND CORRESPONDING ACTIONS.]
APPRAISALS. [________ of the mortgaged real properties for the mortgage
loans that we intend to include in the trust, were appraised by a state
certified appraiser or an appraiser belonging to the Appraisal Institute. Those
appraisals were conducted in accordance with the Uniform Standards of
Professional Appraisal Practices.] [In general, the appraisal for each of those
properties or a separate letter contains a statement by the appraiser stating
that the guidelines in Title XI of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 were followed in preparing the appraisal.] We have
not independently verified the accuracy of that statement with respect to any of
those properties. The primary purpose of each of those appraisals was to provide
an opinion of the fair market value of the related mortgaged real property.
There can be no assurance that another appraiser would
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have arrived at the same opinion of value. The resulting appraised values are
shown on Annex A to this prospectus supplement.
ENVIRONMENTAL ASSESSMENTS. [A Phase I environmental site assessment was
performed with respect to ________ of the mortgaged real properties for the
mortgage loans that we intend to include in the trust. Each of those
environmental site assessments was conducted in connection with the origination
of the related mortgage loan. In ________ cases, additional environmental
testing, as recommended by that Phase I assessment, was performed.] [DISCUSS
RESULTS AND CORRESPONDING ACTIONS.]
ENGINEERING ASSESSMENTS. [In connection with the origination of the
related mortgage loans that we intend to include in the trust, a licensed
engineer inspected ________ of the mortgaged real properties to assess the
structure, exterior walls, roofing, interior structure and mechanical and
electrical systems.] [DISCUSS RESULTS AND CORRESPONDING ACTIONS.]
THE MORTGAGE LOAN SELLERS
We did not originate any of the mortgage loans that we intend to
include in the trust. We will acquire those mortgage loans from the following
entities:
o ______________________ -- _________ mortgage loans,
representing ____% of the initial mortgage pool balance; and
o ______________________ -- _________ mortgage loans,
representing ____% of the initial mortgage pool balance.
[INSERT DESCRIPTION OF MORTGAGE LOAN SELLERS.]
The information set forth in this prospectus supplement concerning each
of the mortgage loan sellers has been provided by the respective mortgage loan
sellers, and neither we nor the underwriter makes any representation or warranty
as to the accuracy or completeness of this information.
ASSIGNMENT OF THE UNDERLYING MORTGAGE LOANS
On or before the date of initial issuance of the offered certificates,
the following transfers of the underlying mortgage loans will occur. In each
case, the transferor will assign the subject mortgage loans, without recourse,
to the transferee.
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----------------------------------- --------------------------------
[mortgage loan seller] [mortgage loan seller]
----------------------------------- --------------------------------
_____ mortgage loans $_______ ____ mortgage loans $_______
-------------------------------
Salomon Brothers Mortgage
Securities VII, Inc.
-------------------------------
All mortgage loans
$__________
-------------------------------
Salomon Brothers Commercial
Mortgage Trust ___________
-------------------------------
In connection with the foregoing transfers, we will be required to
deliver the following documents, among others, to the trustee with respect to
each of the pooled mortgage loans--
[SPECIFY SELECT DOCUMENTS.]
The trustee, either directly or through a custodian, is required to
hold all of the documents delivered to it with respect to the pooled mortgage
loans, in trust for the benefit of the series _____ certificateholders. Within a
specified period of time following that delivery, the trustee, directly or
through a custodian, will be further required to conduct a review of those
documents. The scope of the trustee's review of those documents will, in
general, be limited solely to confirming that they have been received. None of
the trustee, the master servicer, the special servicer or any custodian is under
any duty or obligation to inspect, review or examine any of the documents
relating to the pooled mortgage loans to determine whether the document is
valid, effective, enforceable, in recordable form or otherwise appropriate for
the represented purpose.
If--
o any of the above-described documents required to be delivered
by us to the trustee is not delivered or is otherwise
defective, and
o that omission or defect materially and adversely affects the
value of, or the interests of the series _____
certificateholders in, the subject loan,
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then the omission or defect will constitute a material document defect as to
which the series _____ certificateholders will have the rights against us
described under "--Cures and Repurchases" below.
Within a specified period following the later of--
o the date on which the offered certificates are initially issued, and
o the date on which all recording information necessary to complete the
subject document is received by the trustee,
the trustee must submit for recording in the real property records of the
applicable jurisdiction each of the assignments of recorded loan documents in
its favor described above. Because most of the mortgage loans that we intend to
include in the trust are newly originated, many of those assignments cannot be
completed and recorded until the related mortgage and/or assignment of leases
and rents, reflecting the necessary recording information, is returned from the
applicable recording office.
REPRESENTATIONS AND WARRANTIES
As of the date of initial issuance of the offered certificates, we will
make, with respect to each mortgage loan that we include in the trust,
representations and warranties generally to the effect listed below, together
with any other representations and warranties as may be required by the rating
agencies.
The representations and warranties to be made by us with respect to
each pooled mortgage loan will include:
[SPECIFY SELECT REPRESENTATIONS AND WARRANTIES.]
If--
o there exists a breach of any of the above-described
representations and warranties made by us, and
o that breach materially and adversely affects the value of, or
the interests of the series _____ certificateholders in, the
subject mortgage loan,
then that breach will be a material breach as to which the series _____
certificateholders have the rights against us described under "--Cures and
Repurchases" below.
CURES AND REPURCHASES
If there exists a material breach of any of the representations and
warranties made by us with respect to any of the pooled mortgage loans, as
discussed under "--Representations and Warranties" above, or a material document
defect with respect to any pooled mortgage loan, as discussed under
"--Assignment of the Underlying Mortgage Loans" above, then we will be required
either:
o to remedy the material breach or the material document defect
in all material respects, or
o repurchase the affected mortgage loan at a price generally
equal to the sum of--
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1. the unpaid principal balance of that mortgage loan at
the time of purchase, plus
2. all unpaid interest, other than Post-ARD Additional
Interest and Default Interest, due with respect to
that mortgage loan through the due date in the
collection period of purchase, plus
3. all unreimbursed advances to cover reimbursable costs
and expenses relating to the servicing and
administration of that mortgage loan.
The time period within which we must complete that remedy or repurchase
will generally be limited to 90 days following the earlier of our discovery or
receipt of notice of the subject material breach or material document defect, as
the case may be. However, if we are diligently attempting to correct the problem
we will be entitled to an additional 90 days to complete that remedy or
repurchase. Furthermore, if any material document defect arises solely out of
the failure of the applicable recording office to return a recorded mortgage
loan document, and if we are diligently attempting to retrieve that document,
then the time period may be extended for up to two years following the date of
initial issuance of the offered certificates.
Our cure/repurchase obligations described above will constitute the
sole remedy available to the series _____ certificateholders in connection with
a material breach of any of our representations or warranties or a material
document defect, with respect to any mortgage loan in the trust. No other person
will be obligated to repurchase any affected mortgage loan in connection with a
material breach of any of the representations and warranties or a material
document defect, if we default on our obligation to do so.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this prospectus supplement of the mortgage pool is
based upon the mortgage pool as it is expected to be constituted at the time the
offered certificates are issued, with adjustments for the monthly debt service
payments due on the mortgage loans on or before the cut-off date. Prior to the
issuance of the offered certificates, one or more mortgage loans may be removed
from the mortgage pool if we consider the removal necessary or appropriate. A
limited number of other mortgage loans may be included in the mortgage pool
prior to the issuance of the offered certificates, unless including those
mortgage loans would materially alter the characteristics of the mortgage pool
as described in this prospectus supplement. We believe that the information in
this prospectus supplement will be generally representative of the
characteristics of the mortgage pool as it will be constituted at the time the
offered certificates are issued; however, the range of mortgage rates and
maturities, as well as the other characteristics of the pooled mortgage loans
described in this prospectus supplement, may vary, and the actual initial
mortgage pool balance may be as much as 5% larger or smaller than the initial
mortgage pool balance specified in this prospectus supplement.
A current report on Form 8-K will be available to purchasers of the
offered certificates on or shortly after the date of initial issuance of the
offered certificates. That current report on Form 8-K will be filed, together
with the pooling and servicing agreement, with the SEC within 15 days after the
initial issuance of the offered certificates. If mortgage loans are removed from
or added to the mortgage pool, that removal or addition will be noted in that
current report on Form 8-K.
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SERVICING OF THE UNDERLYING MORTGAGE LOANS
GENERAL
The servicing of the mortgage loans in the trust will be governed by
the pooling and servicing agreement. The following summaries describe some of
the provisions of the pooling and servicing agreement relating to the servicing
and administration of the pooled mortgage loans and any real estate owned by the
trust. You should also refer to the accompanying prospectus, in particular the
section captioned "Description of the Governing Documents" for additional
important information regarding provisions of the pooling and servicing
agreement that relate to the rights and obligations of the master servicer and
the special servicer. See "Description of the Governing Documents--Collection
and Other Servicing Procedures with Respect to Mortgage Loans" in the
accompanying prospectus.
The pooling and servicing agreement provides that the master servicer
and the special servicer must each service and administer the pooled mortgage
loans and any real estate owned by the trust for which it is responsible,
directly or through sub-servicers, in accordance with--
o any and all applicable laws, and
o the express terms of the pooling and servicing agreement and
the respective mortgage loans.
Furthermore, to the extent consistent with the foregoing, the master servicer
and the special servicer must each service and administer the pooled mortgage
loans and any real estate owned by the trust for which it is responsible in
accordance with the Servicing Standard.
In general, the master servicer will be responsible for the servicing
and administration of--
o all mortgage loans in the trust as to which no Servicing
Transfer Event has occurred, and
o all worked-out mortgage loans in the trust as to which no new
Servicing Transfer Event has occurred.
The special servicer, on the other hand, will be responsible for the
servicing and administration of each mortgage loan in the trust as to which a
Servicing Transfer Event has occurred and which has not yet become a worked-out
mortgage loan with respect to that Servicing Transfer Event. The special
servicer will also be responsible for the administration of each mortgaged real
property that has been acquired by the trust with respect to a defaulted
mortgage loan through foreclosure, deed-in-lieu of foreclosure or otherwise.
Despite the foregoing, the pooling and servicing agreement will require
the master servicer to continue to collect information and prepare all reports
to the trustee required to be collected or prepared with respect to any
specially serviced assets and, otherwise, to render other incidental services
with respect to any specially serviced assets. Neither the master servicer nor
the special servicer will have responsibility for the performance by the other
of its respective obligations and duties under the pooling and servicing
agreement.
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The master servicer will transfer servicing of a pooled mortgage loan
to the special servicer, if it has not already done so, upon the occurrence of a
Servicing Transfer Event with respect to that mortgage loan. The special
servicer will return the servicing of that mortgage loan to the master servicer,
and that mortgage loan will be considered to have been worked-out, if and when
all Servicing Transfer Events with respect to that mortgage loan cease to exist.
THE INITIAL MASTER SERVICER AND THE INITIAL SPECIAL SERVICER
THE MASTER SERVICER.
[INSERT INFORMATION RE MASTER SERVICER.]
The information set forth in this prospectus supplement concerning
___________ has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy or completeness of this
information.
THE SPECIAL SERVICER.
[INSERT INFORMATION RE SPECIAL SERVICER.]
The information set forth in this prospectus supplement concerning
___________ has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy of this information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
THE MASTER SERVICING FEE. The principal compensation to be paid to the
master servicer with respect to its master servicing activities will be the
master servicing fee.
The master servicing fee:
o will be earned with respect to each and every mortgage loan,
including--
1. each specially serviced mortgage loan, if any, and
2. each mortgage loan, if any, as to which the
corresponding mortgaged real property has been
acquired by the trust through foreclosure or
otherwise following a default; and
o in the case of each mortgage loan, will--
1. be calculated on a 30/360 basis,
2. accrue at the related master servicing fee rate,
3. accrue on the same principal amount as interest
accrues or is deemed to accrue from time to time with
respect to that mortgage loan, and
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4. be payable monthly from amounts received with respect
to interest on that mortgage loan.
The master servicing fee rate will be ____% per annum.
ADDITIONAL MASTER SERVICING COMPENSATION. As additional master
servicing compensation, the master servicer will be entitled to receive:
o any Prepayment Interest Excesses collected with respect to the
entire mortgage pool;
o any late payment charges and Default Interest, if any, that
were collected with respect to mortgage loans in the trust,
but only to the extent that those late payment charges and
Default Interest--
1. accrued with respect to the related mortgage loan
while no related Servicing Transfer Event existed,
and
2. have not otherwise been applied to pay the master
servicer, the special servicer or the trustee, as
applicable, interest on advances made thereby with
respect to the related mortgage loan.
In addition, all modification fees, assumption fees, assumption
application fees, consent/waiver fees and other comparable transaction fees and
charges, if any, collected with respect to the pooled mortgage loans will be
allocated between the master servicer and the special servicer, as additional
compensation, or otherwise applied to cover related expenses, as provided in the
pooling and servicing agreement.
The master servicer will be authorized to invest or direct the
investment of funds held in its collection account, or in any and all accounts
maintained by it that are escrow and/or reserve accounts, in Permitted
Investments. See "--Collection Account" below. The master servicer will be
entitled to retain any interest or other income earned on those funds and will
be required to cover any losses of principal from its own funds. The master
servicer will not be obligated, however, to cover any losses resulting from the
bankruptcy or insolvency of any depository institution or trust company holding
any of those accounts.
PREPAYMENT INTEREST SHORTFALLS. The pooling and servicing agreement
provides that, if any Prepayment Interest Shortfalls are incurred with respect
to the mortgage pool during any collection period, the master servicer must make
a non-reimbursable payment with respect to the related payment date in an amount
equal to the lesser of:
o the total amount of those Prepayment Interest Shortfalls, and
o the sum of the following components of the master servicer's
total servicing compensation for that same collection period--
[TO BE SPECIFIED].
No other master servicing compensation will be available to cover Prepayment
Interest Shortfalls.
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Any payments made by the master servicer with respect to any payment
date to cover Prepayment Interest Shortfalls will be included among the amounts
payable as principal and interest on the series _____ certificates on that
payment date as described under "Description of the Offered
Certificates--Payments" in this prospectus supplement. If the amount of the
payments made by the master servicer with respect to any payment date to cover
Prepayment Interest Shortfalls is less than the total of all the Prepayment
Interest Shortfalls incurred with respect to the mortgage pool during the
related collection period, then the resulting Net Aggregate Prepayment Interest
Shortfall will be allocated among the respective interest-bearing classes of the
series _____ certificates, in reduction of the interest payable on those
certificates, as and to the extent described under "Description of the Offered
Certificates--Payments--Payments of Interest" in this prospectus supplement.
PRINCIPAL SPECIAL SERVICING COMPENSATION. The principal compensation to
be paid to the special servicer with respect to its special servicing activities
will be--
o the special servicing fee,
o the workout fee, and
o the liquidation fee.
THE SPECIAL SERVICING FEE. The special servicing fee:
o will be earned with respect to--
1. each specially serviced mortgage loan, if any, and
2. each mortgage loan, if any, as to which the
corresponding mortgaged real property has been
acquired by the trust through foreclosure or
otherwise following a default;
o with respect to each mortgage loan, will--
1. be calculated on a 30/360 basis,
2. accrue at a special servicing fee rate of _____% per
annum, and
3. accrue on the same principal amount as interest
accrues or is deemed to accrue from time to time on
that mortgage loan, and
o will be payable monthly from general collections on all the
mortgage loans and any REO Properties in the trust, that are
on deposit in the master servicer's collection account from
time to time.
THE WORKOUT FEE. The special servicer will, in general, be entitled to
receive a workout fee with respect to each worked-out mortgage loan in the
trust. The workout fee will be payable out of, and will be calculated by
application of a workout fee rate of ____% to, each collection of interest and
principal received on the mortgage loan for so long as it remains a worked-out
mortgage loan, exclusive of any portion of that collection that represents a
recovery of Default Interest or Post-ARD Additional Interest.
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The workout fee with respect to any worked-out mortgage loan will cease to be
payable if a new Servicing Transfer Event occurs with respect to the loan.
However, a new workout fee would become payable if the mortgage loan again
became a worked-out mortgage loan with respect to that new Servicing Transfer
Event. If the special servicer is terminated other than for cause or resigns, it
will retain the right to receive any and all workout fees payable with respect
to mortgage loans that became worked-out mortgage loans during the period that
it acted as special servicer and remained worked-out mortgage loans at the time
of its termination or resignation. The successor special servicer will not be
entitled to any portion of those workout fees. Although workout fees are
intended to provide the special servicer with an incentive to better perform its
duties, the payment of any workout fee will reduce amounts payable to the series
_____ certificateholders.
THE LIQUIDATION FEE. The special servicer will be entitled to receive a
liquidation fee with respect to each specially serviced mortgage loan in the
trust for which it obtains a full or discounted payoff from the related
borrower. The special servicer will also be entitled to receive a liquidation
fee with respect to any specially serviced mortgage loan or REO Property in the
trust as to which it receives any liquidation proceeds, condemnation proceeds or
insurance proceeds, except as described in the next paragraph. As to each
specially serviced mortgage loan and REO Property in the trust, the liquidation
fee will be payable from, and will be calculated by application of a liquidation
fee rate of ____% to, the related payment or proceeds, exclusive of any portion
of that payment or proceeds that represents a recovery of Default Interest or
Post-ARD Additional Interest.
Despite anything to the contrary described in the prior paragraph, no
liquidation fee will be payable based on, or out of, proceeds received in
connection with:
o the repurchase or replacement of any mortgage loan in the
trust by us for a breach of representation or warranty or for
defective or deficient mortgage loan documentation, as
described under "Description of the Mortgage Pool--Cures and
Repurchases" in this prospectus supplement;
o the purchase of any defaulted mortgage loan or REO Property in
the trust by the master servicer, the special servicer or any
holder or holders of certificates evidencing a majority
interest in the controlling class of the series _____
certificates, as described under "--Sale of Defaulted Mortgage
Loans" below; or
o the purchase of all of the mortgage loans and REO Properties
in the trust by the master servicer, the special servicer or
any holder or holders of certificates evidencing a majority
interest in the controlling class of the series _____
certificates in connection with the termination of the trust,
as described under "Description of the Offered
Certificates--Termination" in this prospectus supplement.
Although liquidation fees are intended to provide the special servicer
with an incentive to better perform its duties, the payment of any liquidation
fee will reduce amounts payable to the series _____ certificateholders.
ADDITIONAL SPECIAL SERVICING COMPENSATION. As additional special
servicing compensation, the special servicer will be entitled to receive any
late payment charges and Default Interest collected with
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respect to mortgage loans in the trust, but only to the extent that those late
payment charges and Default Interest--
o that accrued while the related mortgage loan was a specially
serviced mortgage loan, and
o have not otherwise been applied to pay the master servicer,
the special servicer or the trustee, as applicable, interest
on advances made the master servicer, the special servicer or
the trustee, as the case may be, with respect to the related
mortgage loan.
All modification fees, assumption fees, assumption application fees and
other comparable transaction fees and charges, if any, collected with respect to
the specially serviced mortgage loans in the trust, will be allocated between
the master servicer and the special servicer, as additional compensation, or
otherwise applied to cover related expenses, as provided in the pooling and
servicing agreement.
In addition, the special servicer will be authorized to invest or
direct the investment of funds held in its REO account in Permitted Investments.
See "--REO Account" below. The special servicer will be entitled to retain any
interest or other income earned on those funds and will be required to cover any
losses of principal from its own funds without any right to reimbursement. The
special servicer will not be obligated, however, to cover any losses resulting
from the bankruptcy or insolvency of any depository institution or trust company
holding the special servicer's REO account.
PAYMENT OF EXPENSES; SERVICING ADVANCES. Each of the master servicer
and the special servicer will be required to pay its overhead and any general
and administrative expenses incurred by it in connection with its servicing
activities under the pooling and servicing agreement. The master servicer and
the special servicer will not be entitled to reimbursement for these expenses
except as expressly provided in the pooling and servicing agreement.
Any and all customary, reasonable and necessary out of pocket costs and
expenses incurred by the master servicer or the special servicer in connection
with the servicing of a pooled mortgage loan after a default, delinquency or
other unanticipated event, or in connection with the administration of any REO
Property, will be servicing advances. Servicing advances will be reimbursable
from future payments and other collections, including insurance proceeds,
condemnation proceeds and liquidation proceeds, in connection with the related
mortgage loan or REO Property. In addition, the special servicer may
periodically require the master servicer to reimburse the special servicer for
any servicing advances made by it. Upon reimbursing the special servicer for any
servicing advance, the master servicer will be deemed to have made the advance.
The special servicer may request the master servicer to make servicing
advances with respect to a specially serviced mortgage loan or REO Property, in
lieu of the special servicer's making that advance itself. The special servicer
must make the request in writing, in a timely manner that does not adversely
affect the interests of any series _____ certificateholder. The master servicer
must make the requested servicing advance within a specified number of days
following the master servicer's receipt of the request. If the request is timely
and properly made, the special servicer will be relieved of any obligations with
respect to a servicing advance that it requests the master servicer to make,
regardless of whether or not the master servicer actually makes that advance.
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If the master servicer or the special servicer is required under the
pooling and servicing agreement to make a servicing advance, but neither does so
within _____ days after the servicing advance is required to be made, then the
trustee will be required:
o if it has actual knowledge of the failure, to give the
defaulting party notice of its failure; and
o if the failure continues for _____ more business days, to make
the servicing advance.
Despite the foregoing discussion or anything else to the contrary in
this prospectus supplement, none of the master servicer, the special servicer or
the trustee will be obligated to make servicing advances that, in the reasonable
and good faith judgment of any party making a servicing advance, would not be
ultimately recoverable from expected collections on the related mortgage loan or
REO Property. If the master servicer, the special servicer or the trustee makes
any servicing advance that it subsequently determines, in its judgment, is not
recoverable from expected collections on the related mortgage loan or REO
Property, it may obtain reimbursement for that advance, together with interest
on that advance, out of general collections on the mortgage loans and any REO
Properties on deposit in the master servicer's collection account from time to
time.
The master servicer will be permitted to pay, and the special servicer
may direct the payment of, some servicing expenses directly out of the master
servicer's collection account and at times without regard to the relationship
between the expense and the funds from which it is being paid. The most
significant of those servicing expenses relate to the remediation of any adverse
environmental circumstance or condition at any of the mortgaged real properties.
In addition, the pooling and servicing agreement will require the master
servicer, at the direction of the special servicer if a specially serviced asset
is involved, to pay directly out of the master servicer's collection account any
servicing expense that, if advanced by the master servicer or the special
servicer, would not be recoverable from expected collections on the related
mortgage loan or REO Property. This is only to be done, however, when the master
servicer, or the special servicer if a specially serviced asset is involved, has
determined in accordance with the Servicing Standard that making the payment is
in the best interests of the certificateholders, as a collective whole.
The master servicer, the special servicer and the trustee will be
entitled to receive interest on servicing advances made by them. The interest
will accrue on the amount of each servicing advance, and compound monthly, for
so long as the servicing advance is outstanding, at a rate per annum equal to
the prime rate as published in the "Money Rates" section of THE WALL STREET
JOURNAL, as that prime rate may change from time to time. Interest accrued with
respect to any servicing advance will be payable in the collection period in
which that advance is reimbursed--
o FIRST, out of Default Interest and late payment charges
collected on the related mortgage loan during that collection
period, and
o THEN, if and to the extent that the Default Interest and late
charges referred to in clause FIRST above are insufficient to
cover the advance interest, out of any amounts then on deposit
in the master servicer's collection account.
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SUB-SERVICERS
The master servicer and the special servicer may each delegate any of
its servicing obligations under the pooling and servicing agreement to any one
or more third-party servicers. The master servicer or the special servicer, as
the case may be, will remain obligated under the pooling and servicing agreement
for any duties delegated to a sub-servicer. Each sub-servicing agreement between
the master servicer or special servicer, as the case may be, and a sub-servicer
must provide that, if for any reason the master servicer or special servicer, as
the case may be, is no longer acting in that capacity, the trustee or any other
successor to the master servicer or special servicer, as applicable, may:
o assume the party's rights and obligations under the
sub-servicing agreement;
o enter into a new sub-servicing agreement with the sub-servicer
on terms which are acceptable to the trustee or successor
master servicer or special servicer, as the case may be, and
that sub-servicer; or
o terminate the sub-servicing agreement without cause.
Some of the mortgage loans that we intend to include in the trust, are
currently being serviced by third-party servicers that are entitled to and will
become sub-servicers of these loans on behalf of the master servicer. Neither
the trustee nor any other successor master servicer may terminate the
sub-servicing agreement for any of those sub-servicers without cause, unless it
pays the particular sub-servicer a termination fee.
The master servicer and special servicer will each be required to
monitor the performance of sub-servicers retained by it. The master servicer and
special servicer will each be solely liable for all fees owed by it to any
sub-servicer retained by it, irrespective of whether its compensation under the
pooling and servicing agreement is sufficient to pay those fees. Each
sub-servicer will be reimbursed by the master servicer or special servicer, as
the case may be, for various expenditures which it makes, generally to the same
extent the master servicer or special servicer, as the case may be, would be
reimbursed under the pooling and servicing agreement.
THE CONTROLLING CLASS REPRESENTATIVE
CONTROLLING CLASS. As of any date of determination, the controlling
class of series _____ certificateholders will be the holders of the most
subordinate class of series _____ certificates then outstanding, other than the
class X, R-I, R-II and R-III certificates, that has a total principal balance
that is not less than ____% of that class's original total principal balance.
However, if no class of series _____ certificates, other than the class X, R-I,
R-II and R-III certificates, has a total principal balance that satisfies this
requirement, then the controlling class of series _____ certificateholders will
be the holders of the most subordinate class of series _____ certificates then
outstanding, other than the class X, R-I, R-II and R-III certificates.
ELECTION OF THE CONTROLLING CLASS REPRESENTATIVE. The controlling class
of series _____ certificateholders will be entitled to--
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o select a representative having the rights and powers described
under "--The Controlling Class Representative--Rights and
Powers of the Controlling Class Representative" below, or
o replace an existing controlling class representative.
The trustee will be required to notify promptly all the
certificateholders of the series _____ controlling class that they may select a
controlling class representative upon:
o the receipt by the trustee of written requests for the
selection of a controlling class representative from series
_____ certificateholders entitled to a majority of the voting
rights allocated to the controlling class of series _____
certificateholders;
o the resignation or removal of the person acting as controlling
class representative; or
o a determination by the trustee that the controlling class of
series _____ certificateholders has changed.
The notice will explain the process for selecting a controlling class
representative. The appointment of any person as a controlling class
representative will not be effective until:
o the trustee has received notice, in any form acceptable to the
trustee, that the appointment of that person as controlling
class representative is acceptable to series _____
certificateholders entitled to a majority of the voting rights
allocated to the controlling class of series _____
certificateholders; and
o that person provides the trustee with--
1. written confirmation of its acceptance of its
appointment,
2. an address and telecopy number for the delivery of
notices and other correspondence, and
3. a list of officers or employees of the person with
whom the parties to the pooling and servicing
agreement may deal, including their names, titles,
work addresses and telecopy numbers.
RESIGNATION AND REMOVAL OF THE CONTROLLING CLASS REPRESENTATIVE. The
controlling class representative may at any time resign by giving written notice
to the trustee and each certificateholder of the series _____ controlling class.
The series _____ certificateholders entitled to a majority of the voting rights
allocated to the controlling class of series _____ certificateholders, will be
entitled to remove any existing controlling class representative by giving
written notice to the trustee and to the existing controlling class
representative.
RIGHTS AND POWERS OF THE CONTROLLING CLASS REPRESENTATIVE. The
controlling class representative will be entitled to advise the special servicer
with respect to the following actions. In addition, the special servicer will
not be permitted to take any of the following actions as to which the
controlling class representative has objected in writing within _____ business
days of having been notified in
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writing of the particular action and having been provided with all reasonably
requested information with respect to the particular action--
o any foreclosure upon or comparable conversion, which may
include acquisitions of an REO Property, of the ownership of
properties securing those specially serviced mortgage loans in
the trust as come into and continue in default;
o any modification, amendment or waiver of a monetary term,
including the timing of payments, or any material non-monetary
term of a pooled mortgage loan;
o any proposed sale of a defaulted mortgage loan or any related
REO Property in the trust, other than in connection with the
termination of the trust as described under "Description of
the Offered Certificates--Termination" in this prospectus
supplement, for less than par;
o any acceptance of a discounted payoff with respect to a pooled
mortgage loan;
o any determination to bring an REO Property held by the trust
into compliance with applicable environmental laws or to
otherwise address hazardous material located at the REO
Property;
o any release of collateral for a pooled mortgage loan, other
than in accordance with the terms of, or upon satisfaction of,
that mortgage loan;
o any acceptance of substitute or additional collateral for a
pooled mortgage loan, other than in accordance with the terms
of that mortgage loan;
o any waiver of a due-on-sale or due-on-encumbrance clause with
respect to a pooled mortgage loan; and
o any acceptance of an assumption agreement releasing a borrower
from liability under a pooled mortgage loan.
In addition, the controlling class representative may direct the
special servicer to take, or to refrain from taking, any actions as the
controlling class representative may consider advisable or as to which provision
is otherwise made in the pooling and servicing agreement.
Notwithstanding the foregoing, no advice, direction or objection given
or made by the controlling class representative, as contemplated by either of
the two preceding paragraphs, may--
o require or cause the special servicer to violate applicable
law, the terms of any pooled mortgage loan or any other
provision of the pooling and servicing agreement described in
this prospectus supplement or the accompanying prospectus,
including the special servicer's obligation to act in
accordance with the Servicing Standard;
o result in an adverse tax consequence for the trust;
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o expose the trust, us, the master servicer, the special
servicer, the trustee or any of our or their respective
affiliates, directors, officers, employees or agents, to any
material claim, suit or liability; or
o materially expand the scope of the master servicer's or
special servicer's responsibilities under the pooling and
servicing agreement.
The special servicer is to disregard any advice, direction or objection on the
part of the controlling class representative that would have any of the effects
described in the immediately preceding four bullet points. Furthermore, the
special servicer will not be obligated to seek approval from the controlling
class representative for any actions to be taken by the special servicer with
respect to any particular specially serviced mortgage loan if--
o the special servicer has, as described in the first paragraph
under this "--Rights and Powers of the Controlling Class
Representative" subsection, notified the controlling class
representative in writing of various actions that the special
servicer proposes to take with respect to the work-out or
liquidation of that mortgage loan, and
o for 60 days following the first of those notices, the
controlling class representative has objected to all of those
proposed actions and has failed to suggest any alternative
actions that the special servicer considers to be consistent
with the Servicing Standard.
When reviewing the rest of this "Servicing of the Underlying Mortgage
Loans" section, it is important that you consider the effects that the rights
and powers of the controlling class representative discussed above could have on
the actions of the special servicer.
LIABILITY TO BORROWERS. In general, any and all expenses of the
controlling class representative are to be borne by the holders of the
controlling class, in proportion to their respective percentage interests in
that class, and not by the trust. However, if a claim is made against the
controlling class representative by a borrower with respect to the pooling and
servicing agreement or any particular mortgage loan, the controlling class
representative is to immediately notify the trustee, the master servicer and the
special servicer. The special servicer on behalf of the trust will, subject to
the discussion under "Description of the Governing Documents--Matters Regarding
the Master Servicer, the Special Servicer, the Manager and Us" in the
accompanying prospectus, assume the defense of the claim against the controlling
class representative, but only if--
o the special servicer or the trust are also named parties to
the same action, and
o in the sole judgment of the special servicer,
1. the controlling class representative acted in good
faith, without negligence or willful misfeasance,
with regard to the particular matter at issue, and
2. there is no potential for the special servicer or the
trust to be an adverse party in the action as regards
the controlling class representative.
LIABILITY TO THE TRUST AND CERTIFICATEHOLDERS. The controlling class
representative may have special relationships and interests that conflict with
those of the holders of one or more classes of the
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offered certificates. In addition, the controlling class representative does not
have any duties to the holders of any class of series _____ certificates other
than the controlling class. It may act solely in the interests of the
certificateholders of the series _____ controlling class and will have no
liability to any other series _____ certificateholders for having done so. No
series _____ certificateholder may take any action against the controlling class
representative for its having acted solely in the interests of the
certificateholders of the series _____ controlling class.
REPLACEMENT OF THE SPECIAL SERVICER
Series _____ certificateholders entitled to a majority of the voting
rights allocated to the controlling class of series _____ certificateholders may
terminate an existing special servicer and appoint a successor. In addition, if
the special servicer is terminated in connection with an event of default,
series _____ certificateholders entitled to a majority of the voting rights
allocated to the controlling class of series _____ certificateholders, may
appoint a successor. See "--Events of Default" and "--Rights Upon Event of
Default" below. In either case, any appointment of a successor special servicer
will be subject to, among other things, receipt by the trustee of--
1. written confirmation from each of __________ and __________
that the appointment will not result in a qualification,
downgrade or withdrawal of any of the ratings then assigned
thereby to the series _____ certificates, and
2. the written agreement of the proposed special servicer to be
bound by the terms and conditions of the pooling and servicing
agreement, together with an opinion of counsel regarding,
among other things, the enforceability of the pooling and
servicing agreement against the proposed special servicer.
Subject to the foregoing, any certificateholder or any affiliate of a
certificateholder may be appointed as special servicer.
If the controlling class of series _____ certificateholders terminate
an existing special servicer without cause, then the reasonable out-of-pocket
costs and expenses of any related transfer of servicing duties are to be paid by
the successor special servicer or the certificateholders that voted to remove
the terminated special servicer, as the parties may agree. The terminated
special servicer will be entitled to:
o payment out of the master servicer's collection account for
all accrued and unpaid special servicing fees; and
o reimbursement by the successor special servicer for any
outstanding servicing advances made by the terminated special
servicer, together with interest.
Upon reimbursement, any advance will be treated as if it were made by the
successor special servicer.
BENEFICIAL OWNERS OF THE CONTROLLING CLASS
If the controlling class of series _____ certificates is held in
book-entry form, then any beneficial owner of those certificates whose identity
and beneficial ownership interest has been proven to the satisfaction of the
trustee, will be entitled--
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o to receive all notices described under "--The Controlling
Class Representative" and "Replacement of the Special
Servicer" above, and
o to exercise directly all rights described under "--The
Controlling Class Representative" and "Replacement of the
Special Servicer" above,
that it otherwise would if it were the registered holder of certificates of the
series _____ controlling class.
ENFORCEMENT OF DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Subject to the discussion under "--The Controlling Class
Representative" above, the master servicer or the special servicer, as
applicable, will be required to determine, in a manner consistent with the
Servicing Standard, whether to exercise any right the lender under any pooled
mortgage loan may have under either a due-on-sale or due-on-encumbrance clause
to accelerate payment of that mortgage loan. However, under the circumstances
described below in this paragraph, neither the master servicer nor the special
servicer may waive its rights or grant its consent under any due-on-sale or
due-on-encumbrance clause unless it has received written confirmation from each
applicable rating agency that this action would not result in the qualification,
downgrade or withdrawal of any of the then-current ratings then assigned by the
rating agency to the series _____ certificates. With respect to due-on-sale
clauses, this requirement will apply only if the outstanding principal balance
of the subject mortgage loan, together with the total outstanding principal
balance of all other pooled mortgage loans that are cross-collateralized with
the subject mortgage loan or have been made to the same borrower or affiliated
borrowers, is equal to or greater than a specified percentage of the then total
principal balance of the mortgage pool. In the case of due-on-encumbrance
provisions, this requirement will always apply. In addition, the master servicer
may not waive its rights or grant its consent under any due-on-sale or
due-on-encumbrance clause without the consent of the special servicer.
MODIFICATIONS, WAIVERS, AMENDMENTS AND CONSENTS
Subject to the discussion under "--The Controlling Class
Representative" above, the special servicer, with respect to the specially
serviced mortgage loans in the trust, and the master servicer, with respect to
the other pooled mortgage loans, each may, consistent with the Servicing
Standard, agree to:
o modify, waive or amend any term of any mortgage loan;
o extend the maturity of any mortgage loan;
o defer or forgive the payment of interest on and principal of
any mortgage loan;
o defer or forgive the payment of prepayment premiums, yield
maintenance charges and late payment charges on any mortgage
loan;
o permit the release, addition or substitution of collateral
securing any mortgage loan; or
o permit the release, addition or substitution of the borrower
or any guarantor of any mortgage loan.
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The ability of the special servicer or the master servicer to agree to any of
the foregoing, however, is subject to each of the following limitations,
conditions and restrictions:
o With limited exception, including with respect to some routine
matters, the master servicer may not agree to modify, waive or
amend any term of, or take any of the other above-referenced
actions with respect to, any of the pooled mortgage loans
without the consent of the special servicer.
o With limited exception, including with respect to Post-ARD
Additional Interest, the special servicer may not agree to or
consent to the master servicer's agreeing to modify, waive or
amend any term of, or take or consent to the master servicer's
taking any of the other above-referenced actions with respect
to, any mortgage loan in the trust, if doing so would--
1. affect the amount or timing of any related payment of
principal, interest or other amount payable under the
mortgage loan, or
2. in the special servicer's judgment, materially impair
the security for the mortgage loan or reduce the
likelihood of timely payment of amounts due on the
mortgage loan,
unless a material default on the mortgage loan has occurred
or, in the special servicer's judgment, a default with respect
to payment on the mortgage loan is reasonably foreseeable, and
the modification, waiver, amendment or other action is
reasonably likely to produce a greater recovery to the
certificateholders, as a collective whole, on a present value
basis, than would liquidation.
o The special servicer may not extend or consent to the master
servicer's extending the date on which any balloon payment is
scheduled to be due on any mortgage loan in the trust to a
date beyond the earliest of--
1. the ________ anniversary of the mortgage loan's
original stated maturity date,
2. ________ years prior to the rated final payment date,
and
3. if the mortgage loan is secured by a mortgage solely
or primarily on the related borrower's leasehold
interest in the corresponding mortgaged real
property, ten years prior to the end of the then
current term of the related ground lease, plus any
unilateral options to extend.
o Neither the master servicer nor the special servicer may make
or permit any modification, waiver or amendment of any term
of, or take any of the other above-referenced actions with
respect to, any mortgage loan in the trust that would--
1. cause any of REMIC I, REMIC II or REMIC III to fail
to qualify as a REMIC under the Internal Revenue Code
of 1986,
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2. result in the imposition of any tax on prohibited
transactions or contributions after the startup date
of any of REMIC I, REMIC II or REMIC III under the
Internal Revenue Code of 1986, or
3. adversely affect the status of any portion of the
trust that is intended to be a grantor trust under
the Internal Revenue Code of 1986;
o The special servicer may not permit or consent to the master
servicer's permitting any borrower to add or substitute any
real estate collateral for any mortgage loan in the trust,
unless the special servicer has first--
1. determined, based upon an environmental assessment
prepared by an independent person who regularly
conducts environmental assessments, at the expense of
the borrower, that:
o the additional or substitute collateral is
in compliance with applicable environmental
laws and regulations, and
o that there are no circumstances or
conditions present with respect to the new
collateral relating to the use, management
or disposal of any hazardous materials for
which investigation, testing, monitoring,
containment, clean-up or remediation would
be required under any then applicable
environmental laws or regulations, and
2. received confirmation from each of __________ and
__________ that the addition or substitution of
collateral will not result in a qualification,
downgrade or withdrawal of any rating then assigned
by the rating agency to a class of series _____
certificates.
o Subject to limited exceptions, the special servicer may not
release or consent to the master servicer's releasing any
material collateral securing an outstanding mortgage loan in
the trust other than in accordance with the terms of, or upon
satisfaction of, the mortgage loan.
The foregoing limitations, conditions and restrictions will not apply
to any of the acts referenced in this "--Modifications, Waivers, Amendments and
Consents" section that is required under the terms of the subject mortgage loan
in effect on the date of initial issuance of the offered certificates or that is
solely within the control of the related borrower. Also, neither the master
servicer nor the special servicer will be required to oppose the confirmation of
a plan in any bankruptcy or similar proceeding involving a borrower if, in its
judgment, opposition would not ultimately prevent the confirmation of the plan
or one substantially similar, despite the discussion above.
Notwithstanding the foregoing, the master servicer will be permitted,
in the case of an ARD Loan, in its discretion, after the related anticipated
repayment date, to waive any or all of the Post-ARD Additional Interest accrued
on that mortgage loan, if the related borrower is ready and willing to pay all
other amounts due under the mortgage loan in full, including the entire
principal balance. However, the master servicer's determination to waive the
trust's right to receive that Post-ARD Additional Interest--
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o must be in accordance with the Servicing Standard, and
o will be subject to approval by the special servicer.
The master servicer will not have any liability to the trust, the series _____
certificateholders or any other person for any determination that is made in
accordance with the Servicing Standard. The pooling and servicing agreement will
also limit the master servicer's and the special servicer's ability to institute
an enforcement action solely for the collection of Post-ARD Additional Interest.
All modifications, waivers and amendments entered into with respect to
the pooled mortgage loans are to be in writing. Each of the master servicer and
the special servicer must deliver to the trustee for deposit in the related
mortgage file, an original counterpart of the agreement relating to each
modification, waiver or amendment agreed to by it, promptly following its
execution.
REQUIRED APPRAISALS
Promptly following the occurrence of any Appraisal Trigger Event with
respect to any of the pooled mortgage loans, the special servicer must obtain,
and deliver to the trustee and master servicer a copy of, an appraisal of the
related mortgaged real property from an independent appraiser meeting the
qualifications imposed in the pooling and servicing agreement, unless an
appraisal had previously been obtained within the prior _____ months.
Notwithstanding the foregoing, if the unpaid principal balance of the
subject mortgage loan, net of related unreimbursed advances of principal, is
less than $___________, the special servicer may perform an internal valuation
of the mortgaged real property.
As a result of any appraisal or other valuation, it may be determined
that an Appraisal Reduction Amount exists with respect to the subject mortgage
loan. An Appraisal Reduction Amount is relevant to the determination of the
amount of any advances of delinquent interest required to be made with respect
to the affected mortgage loan. See "Description of the Offered
Certificates--Advances of Delinquent Monthly Debt Service Payments" in this
prospectus supplement.
If an Appraisal Trigger Event occurs with respect to any mortgage loan
in the trust, then the special servicer will have an ongoing obligation to
obtain or perform, as the case may be, within _____ days of each anniversary of
the occurrence of that Appraisal Trigger Event, an update of the prior required
appraisal or other valuation. Based upon that update, the special servicer is to
redetermine and report to the trustee and the master servicer the new Appraisal
Reduction Amount, if any, with respect to the mortgage loan. This ongoing
obligation will cease if and when--
o the subject mortgage loan has become a worked-out mortgage
loan as contemplated under "--General" above,
o the subject mortgage loan has remained current for at least
_____ consecutive monthly debt service payments, and
o no other Servicing Transfer Event has occurred with respect to
the subject mortgage loan during the preceding _____ months.
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The cost of each required appraisal, and any update of that appraisal,
will be advanced by the master servicer and will be reimbursable to the master
servicer as a servicing advance.
At any time that an Appraisal Reduction Amount exists with respect to
any mortgage loan in the trust, the controlling class representative will be
entitled, at its own expense, to obtain and deliver to the master servicer, the
special servicer and the trustee an appraisal that satisfies the criteria for a
required appraisal. Upon request of the controlling class representative, the
special servicer will be required to recalculate the Appraisal Reduction Amount
with respect to the subject mortgage loan based on that appraisal.
COLLECTION ACCOUNT
GENERAL. The master servicer will be required to establish and maintain
a collection account for purposes of holding payments and other collections that
it receives with respect to the pooled mortgage loans. That collection account
must be maintained in a manner and with a depository institution that satisfies
rating agency standards for securitizations similar to the one involving the
offered certificates.
The funds held in the master servicer's collection account may be held
as cash or invested in Permitted Investments. Any interest or other income
earned on funds in the master servicer's collection account will be paid to the
master servicer as additional compensation subject to the limitations set forth
in the pooling and servicing agreement.
DEPOSITS. Under the pooling and servicing agreement, the master
servicer must deposit or cause to be deposited in its collection account within
one business day following receipt, in the case of payments and other
collections on the pooled mortgage loans, or as otherwise required under the
pooling and servicing agreement, the following payments and collections received
or made by or on behalf of the master servicer with respect to the mortgage pool
subsequent to the date of initial issuance of the offered certificates, other
than monthly debt service payments due on or before the cut-off date, which
monthly debt service payments belong to the related mortgage loan seller:
o all payments on account of principal on the mortgage loans,
including principal prepayments;
o all payments on account of interest on the mortgage loans,
including Default Interest and Post-ARD Additional Interest; o
all prepayment premiums, yield maintenance charges and late
payment charges collected with respect to the mortgage loans;
o all proceeds received under any hazard, flood, title or other
insurance policy that provides coverage with respect to a
mortgaged real property or the related mortgage loan, and all
proceeds received in connection with the condemnation or the
taking by right of eminent domain of a mortgaged real
property, in each case to the extent not otherwise required to
be applied to the restoration of the real property or released
to the related borrower;
o all amounts received and retained in connection with the
liquidation of defaulted mortgage loans by foreclosure or as
otherwise contemplated under "--Realization Upon Defaulted
Mortgage Loans" below;
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o any amounts paid by us in connection with the repurchase or
replacement of a mortgage loan as described under "Description
of the Mortgage Pool--Cures and Repurchases" in this
prospectus supplement;
o any amounts paid to purchase all the mortgage loans and any
REO Properties in connection with the termination of the trust
as contemplated under "Description of the Offered
Certificates--Termination" in this prospectus supplement;
o any amounts required to be deposited by the master servicer in
connection with losses incurred with respect to Permitted
Investments of funds held in the collection account;
o all payments required to be paid by the master servicer or the
special servicer with respect to any deductible clause in any
blanket insurance policy as described under "Description of
the Mortgage Pool--Underwriting Matters--Hazard, Liability and
Other Insurance" in this prospectus supplement;
o any amount required to be transferred from the special
servicer's REO account; and
o any amounts required to be transferred from any debt service
reserve accounts with respect to the mortgage loans.
Upon receipt of any of the amounts described in the first five bullet
points of the prior paragraph with respect to any specially serviced mortgage
loan in the trust, the special servicer is required to promptly remit these
amounts to the master servicer for deposit in the master servicer's collection
account.
WITHDRAWALS. The master servicer may make withdrawals from its
collection account for any of the following purposes, which are NOT listed in
any order of priority:
1. to remit to the trustee for deposit in the trustee's payment
account described under "Description of the Offered
Certificates--Payment Account" in this prospectus supplement,
on the business day preceding each payment date, all payments
and other collections on the mortgage loans and any REO
Properties in the trust that are then on deposit in the
collection account, exclusive of any portion of those payments
and other collections that represents one or more of the
following--
o monthly debt service payments due on a due date
subsequent to the end of the related collection
period,
o payments and other collections received after the end
of the related collection period, and
o amounts that are payable or reimbursable from the
collection account to any person other than the
series _____ certificateholders in accordance with
any of clauses 2. through 17. below;
2. to reimburse itself, the special servicer or the trustee, as
applicable, for any unreimbursed advances made by that party
under the pooling and servicing agreement, and the
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reimbursement is to be made out of collections on the mortgage
loan or REO Property as to which the advance was made;
3. to pay itself earned and unpaid master servicing fees with
respect to each mortgage loan in the trust, and the payment of
those fees is to be made out of collections on that mortgage
loan that are allocable as interest;
4. to pay the special servicer, out of general collections on the
mortgage loans and any REO Properties in the trust, earned and
unpaid special servicing fees with respect to each mortgage
loan in the trust that is either--
o a specially serviced mortgage loan, or
o a mortgage loan as to which the related mortgaged real
property has become an REO Property;
5. to pay the special servicer earned and unpaid workout fees and
liquidation fees to which it is entitled, and the payment of
those fees is to be made from the sources described under
"--Servicing and Other Compensation and Payment of Expenses"
above;
6. to reimburse itself, the special servicer or the trustee, as
applicable, out of general collections on the mortgage loans
and any REO Properties in the trust, for any unreimbursed
advance made by that party under the pooling and servicing
agreement that has been determined not to be ultimately
recoverable under clause 2. above;
7. to pay itself, the special servicer or the trustee, as
applicable, unpaid interest on any advance made by that party
under the pooling and servicing agreement, and the payment of
that unpaid interest is to be made out of Default Interest and
late payment charges received--
o with respect to the mortgage loan as to which the
advance was made, and
o during the collection period in which that advance is
reimbursed;
8. in connection with the reimbursement of advances as described
in clause 2. or 6. above, to pay itself, the special servicer
or the trustee, as the case may be, out of general collections
on the mortgage loans and any REO Properties in the trust, any
interest accrued and payable on that advance and not otherwise
payable under clause 7. above;
9. to pay itself any items of additional master servicing
compensation on deposit in the collection account as discussed
under "--Servicing and Other Compensation and Payment of
Expenses--Additional Master Servicing Compensation" above;
10. to pay the special servicer any items of additional special
servicing compensation on deposit in the collection account as
discussed under "--Servicing and Other Compensation and
Payment of Expenses--Additional Special Servicing
Compensation" above;
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11. to pay any unpaid liquidation expenses incurred with respect
to any liquidated mortgage loan or REO Property in the trust,
and payment of those expenses is to be made out of collections
on that mortgage loan or REO Property, as the case may be;
12. to pay, out of general collections on the mortgage loans and
any REO Properties in the trust, any servicing expenses that
would, if advanced, be nonrecoverable under clause 2. above;
13. to pay, out of general collections on the mortgage loans and
any REO Properties in the trust, for costs and expenses
incurred by the trust in connection with the remediation of
adverse environmental conditions at any mortgaged real
property that secures a defaulted mortgage loan in the trust;
14. to pay itself, the special servicer, the trustee, us or any of
their or our respective directors, officers, employees and
agents, as the case may be, out of general collections on the
mortgage loans and any REO Properties in the trust, any of the
reimbursements or indemnities to which we or any of those
other persons or entities are entitled as described under
"Description of the Governing Documents--Matters Regarding the
Master Servicer, the Special Servicer, the Manager and Us" and
"--Matters Regarding the Trustee" in the accompanying
prospectus;
15. to pay, out of general collections on the mortgage loans and
any REO Properties in the trust, for the costs of various
opinions of counsel, the cost of recording the pooling and
servicing agreement and expenses properly incurred by the tax
administrator in connection with providing advice to the
special servicer;
16. to pay any other items described in this prospectus supplement
as being payable from the collection account;
17. to withdraw amounts deposited in the collection account in
error, including amounts received on any mortgage loan or REO
Property that has been purchased or otherwise removed from the
trust; and
18. to clear and terminate the collection account upon the
termination of the pooling and servicing agreement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The pooling and servicing agreement grants to the master servicer, the
special servicer and any single certificateholder or group of certificateholders
of the controlling class, a right to purchase from the trust defaulted mortgage
loans in the priority described in the next paragraph.
If the special servicer has determined, in its judgment, that the sale
of any defaulted mortgage loan by the trust under the circumstances described
below in this paragraph, is in accordance with the Servicing Standard, the
special servicer must give prompt written notice of its determination to the
trustee and the master servicer. The trustee will then be required, within five
days after receipt of that notice, to provide a similar notice to all
certificateholders of the series _____ controlling class. Any single
certificateholder or group of certificateholders of the series _____ controlling
class may, at its or
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their option, within ten days after receiving the notice from the trustee,
purchase that defaulted mortgage loan from the trust, at a cash price generally
equal to--
o the outstanding principal balance of the mortgage loan,
o all accrued and unpaid interest on the mortgage loan, and
o all unreimbursed servicing advances with respect to, the
subject mortgage loan.
If two or more separate certificateholders or groups of certificateholders of
the series _____ controlling class want to purchase the defaulted mortgage loan,
preference will be given to the certificateholder or group of certificateholders
with the largest interest in the series _____ controlling class. If
certificateholders of the series _____ controlling class have not purchased that
defaulted mortgage loan within _____ days of their having received the relevant
notice, then for a limited period, either the special servicer or the master
servicer, in that order of priority, may at its option purchase the defaulted
mortgage loan from the trust at the same cash price as was applicable for the
certificateholders of the series _____ controlling class. Each of the master
servicer and the special servicer may designate an affiliate to complete the
purchase.
The special servicer may offer to sell, on behalf of the trust, any
defaulted mortgage loan not otherwise purchased as described in the preceding
paragraph, if and when the special servicer determines, consistent with the
Servicing Standard, that a sale would be in the best economic interests of the
series _____ certificateholders, as a collective whole. Any offer must be made
in a commercially reasonable manner for a period of not less than ten days.
Subject to the discussion in the next paragraph and under "--The Controlling
Class Representative" above, the special servicer will be required to accept the
highest cash bid received from any person that is a fair price, determined in
accordance with the pooling and servicing agreement, for the mortgage loan.
The special servicer will not be obligated to accept the highest cash
bid if the special servicer determines, in accordance with the Servicing
Standard, that rejection of the highest cash bid would be in the best interests
of the series _____ certificateholders, as a collective whole. Furthermore,
subject to the discussion under "--The Controlling Class Representative" above,
the special servicer may accept a lower cash bid from any person or entity other
than itself or an affiliate if it determines, in accordance with the Servicing
Standard, that acceptance of the bid would be in the best interests of the
series _____ certificateholders, as a collective whole. For example, the
prospective buyer making the lower bid may be more likely to perform its
obligations or the terms, other than the price, offered by the prospective buyer
making the lower bid may be more favorable.
Neither the trustee, in its individual capacity, nor any of its
affiliates may bid for or purchase from the trust any defaulted mortgage loan or
any REO Property.
In connection with the sale of any defaulted mortgage loan on behalf of
the trust, the special servicer may charge prospective bidders, and retain, fees
that approximate the special servicer's actual costs in the preparation and
delivery of information pertaining to the sales or evaluating bids without
obligation to deposit the amounts into the master servicer's collection account.
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If a default on a pooled mortgage loan has occurred or, in the special
servicer's judgment, a payment default is imminent, then, subject to the
discussion under "--The Controlling Class Representative" above, the special
servicer may, on behalf of the trust, take any of the following actions:
o institute foreclosure proceedings;
o exercise any power of sale contained in the related mortgage;
o obtain a deed in lieu of foreclosure; or
o otherwise acquire title to the corresponding mortgaged real
property, by operation of law or otherwise.
The special servicer may not, however, acquire title to any mortgaged
real property, have a receiver of rents appointed with respect to any mortgaged
real property or take any other action with respect to any mortgaged real
property that would cause the trustee, for the benefit of the
certificateholders, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of the particular real property within the meaning of the federal environmental
laws, unless--
o the special servicer has previously received a report prepared
by a person who regularly conducts environmental audits, which
report will be an expense of the trust, and
o either:
1. the report indicates that--
o the particular real property is in
compliance with applicable environmental
laws and regulations, and
o there are no circumstances or conditions
present at the real property that have
resulted in any contamination for which
investigation, testing, monitoring,
containment, clean-up or remediation could
be required under any applicable
environmental laws and regulations; or
2. the special servicer, based solely as to
environmental matters and related costs on the
information set forth in the report, determines that
taking the actions necessary to bring the particular
real property into compliance with applicable
environmental laws and regulations and/or taking any
of the other actions contemplated by clause 1. above,
is reasonably likely to produce a greater recovery,
taking into account the time value of money, than not
taking those actions.
If the trust acquires title to any mortgaged real property, the special
servicer, on behalf of the trust, has to sell the particular real property prior
to the close of the third taxable year following the taxable year in which that
acquisition occurred, subject to limited exceptions as described under "--REO
Properties" below.
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If liquidation proceeds collected with respect to a defaulted mortgage
loan in the trust are less than the outstanding principal balance of the
defaulted mortgage loan, together with accrued interest on and reimbursable
expenses incurred by the special servicer and/or the master servicer in
connection with the defaulted mortgage loan, then the trust will realize a loss
in the amount of the shortfall. The special servicer and/or the master servicer
will be entitled to reimbursement out of the liquidation proceeds recovered on
any defaulted mortgage loan, prior to the payment of the liquidation proceeds to
the series _____ certificateholders, for--
o any and all amounts that represent unpaid servicing
compensation with respect to the mortgage loan,
o unreimbursed servicing expenses incurred with respect to the
mortgage loan, and
o any unreimbursed advances of delinquent payments made with
respect to the mortgage loan.
In addition, amounts otherwise payable on the series _____ certificates may be
further reduced by interest payable to the master servicer and/or special
servicer on the servicing expenses and advances.
REO PROPERTIES
If title to any mortgaged real property is acquired by the special
servicer on behalf of the trust, the special servicer will be required to sell
that property not later than the end of the third calendar year following the
year of acquisition, unless--
o the IRS grants an extension of time to sell the property, or
o the special servicer obtains an opinion of independent counsel
generally to the effect that the holding of the property
subsequent to the end of the third calendar year following the
year in which the acquisition occurred will not result in the
imposition of a tax on the trust assets or cause any of REMIC
I, REMIC II or REMIC III to fail to qualify as a REMIC under
the Internal Revenue Code of 1986.
Subject to the foregoing, the special servicer will generally be
required to solicit cash offers for any REO Property held by the trust in a
manner that will be reasonably likely to realize a fair price for the property.
The special servicer may retain an independent contractor to operate and manage
the REO Property. The retention of an independent contractor will not relieve
the special servicer of its obligations with respect to the REO Property.
Regardless of whether the special servicer applies for or is granted an
extension of time to sell the property, the special servicer must act in
accordance with the Servicing Standard to liquidate the property on a timely
basis. If an extension is granted or opinion given, the special servicer must
sell the REO Property within the period specified in the extension or opinion.
In general, the special servicer or an independent contractor employed
by the special servicer at the expense of the trust will be obligated to operate
and manage any REO Property held by the trust in a manner that:
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1. maintains its status as foreclosure property under the REMIC
provisions of the Internal Revenue Code of 1986, and
2. is in accordance with the Servicing Standard.
The special servicer must review the operation of each REO Property
held by the trust and consult with the trustee, or any person appointed by the
trustee to act as tax administrator, to determine the trust's federal income tax
reporting position with respect to the income it is anticipated that the trust
would derive from the property. The special servicer could determine that it
would not be consistent with the Servicing Standard to manage and operate the
property in a manner that would avoid the imposition of--
o a tax on net income from foreclosure property, within the
meaning of Section 857(b)(4)(B) of the Internal Revenue Code
of 1986, or
o a tax on prohibited transactions under Section 860F of the
Internal Revenue Code of 1986.
This determination is most likely to occur in the case of an REO Property that
is a hotel or residential health care facility. To the extent that income the
trust receives from an REO Property is subject to--
o a tax on net income from foreclosure property, that income
would be subject to federal tax at the highest marginal
corporate tax rate, which is currently 35%, or
o a tax on prohibited transactions, that income would be subject
to federal tax at a 100% rate.
The determination as to whether income from an REO Property held by the
trust would be subject to a tax will depend on the specific facts and
circumstances relating to the management and operation of each REO Property.
Generally, income from an REO Property that is directly operated by the special
servicer would be apportioned and classified as service or non-service income.
The service portion of the income could be subject to federal tax either at the
highest marginal corporate tax rate or at the 100% rate. The non-service portion
of the income could be subject to federal tax at the highest marginal corporate
tax rate or, although it appears unlikely, at the 100% rate. Any tax imposed on
the trust's income from an REO Property would reduce the amount available for
payment to the series _____ certificateholders. See "Federal Income Tax
Consequences" in this prospectus supplement and in the accompanying prospectus.
The reasonable out-of-pocket costs and expenses of obtaining professional tax
advice in connection with the foregoing will be payable out of the master
servicer's collection account.
The special servicer will be required to segregate and hold all funds
collected and received in connection with any REO Property held by the trust
separate and apart from its own funds and general assets. If an REO Property is
acquired by the trust, the special servicer will be required to establish and
maintain an account for the retention of revenues and other proceeds derived
from the REO Property. That REO account must be maintained in a manner and with
a depository institution that satisfies rating agency standards for
securitizations similar to the one involving the offered certificates. The
special servicer will be required to deposit, or cause to be deposited, in its
REO account, upon receipt, all net income, insurance proceeds, condemnation
proceeds and liquidation proceeds received with respect to
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each REO Property held by the trust. The funds held in this REO account may be
held as cash or invested in Permitted Investments. Any interest or other income
earned on funds in the special servicer's REO account will be payable to the
special servicer, subject to the limitations described in the pooling and
servicing agreement.
The special servicer will be required to withdraw from its REO account
funds necessary for the proper operation, management, leasing, maintenance and
disposition of any REO Property held by the trust, but only to the extent of
amounts on deposit in the account relating to that particular REO Property.
Promptly following the end of each collection period, the special servicer will
be required to withdraw from the REO account and deposit, or deliver to the
master servicer for deposit, into the master servicer's collection account the
total of all amounts received with respect to each REO Property held by the
trust during that collection period, net of--
o any withdrawals made out of those amounts as described in the
preceding sentence, and
o any portion of those amounts that may be retained as reserves
as described in the next sentence.
The special servicer may, subject to the limitations described in the pooling
and servicing agreement, retain in its REO account the portion of the proceeds
and collections as may be necessary to maintain a reserve of sufficient funds
for the proper operation, management, leasing, maintenance and disposition of
the related REO Property, including the creation of a reasonable reserve for
repairs, replacements, necessary capital improvements and other related
expenses.
The special servicer shall keep and maintain separate records, on a
property-by-property basis, for the purpose of accounting for all deposits to,
and withdrawals from, its REO account.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The special servicer will be required, at the expense of the trust, to
inspect or cause an inspection of the corresponding mortgaged real property as
soon as practicable after any pooled mortgage loan becomes a specially serviced
mortgage loan. The master servicer also will be required, at its own expense, to
inspect or cause an inspection of each mortgaged real property at least once
every _______________, if the special servicer has not already undertaken an
inspection in that period as described in the preceding sentence. The master
servicer and the special servicer will each be required to prepare or cause the
preparation of a written report of each inspection performed by it that
generally describes the condition of the particular real property and that
specifies--
o any sale, transfer or abandonment of the property of which the
master servicer or the special servicer, as applicable, is
aware, or
o any change in the property's condition, occupancy or value
that the master servicer or the special servicer, as
applicable, in accordance with the Servicing Standard,
considers to be material.
The special servicer, in the case of each specially serviced mortgage
loan in the trust, and the master servicer, in the case of each other mortgage
loan in the trust, will each be required to use
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reasonable efforts to collect from the related borrower and review the following
items, to the extent that those items are required to be delivered under the
related loan documents:
o the quarterly and annual operating statements, budgets and
rent rolls of the corresponding mortgaged real property; and
o the quarterly and annual financial statements of the borrower.
The special servicer will also be required to cause quarterly and
annual operating statements, budgets and rent rolls to be prepared for each REO
Property in the trust. However, there can be no assurance that any operating
statements required to be delivered by a borrower will in fact be delivered, nor
is the master servicer or the special servicer likely to have any practical
means of compelling delivery.
EVIDENCE AS TO COMPLIANCE
On or before _____________ of each year, beginning _______________,
each of the master servicer and the special servicer must--
o at its expense, cause a firm of independent public
accountants, that is a member of the American Institute of
Certified Public Accountants to furnish a statement to the
trustee, among others, to the effect that--
1. the firm has examined the servicing operations of the
master servicer or the special servicer, as the case
may be, for the previous year, and
2. on the basis of that examination, conducted
substantially in compliance with USAP, the firm
confirms that the master servicer or the special
servicer, as applicable, has complied with the
minimum servicing standards identified in USAP, in
all material respects, except for the significant
exceptions or errors in records that, in the opinion
of the firm, USAP requires it to report.
In rendering its report the firm may rely, as to matters
relating to the direct servicing of commercial and multifamily
mortgage loans by sub-servicers, upon comparable reports of
firms of independent certified public accountants rendered on
the basis of examinations conducted in accordance with the
same standards, within one year of the report, with respect to
those sub-servicers.
o deliver to the trustee, among others, a statement signed by an
officer of the master servicer or the special servicer, as the
case may be, to the effect that, to the best knowledge of that
officer, the master servicer or special servicer, as the case
may be, has fulfilled its obligations under the pooling and
servicing agreement in all material respects throughout the
preceding calendar year or portion of that year during which
the series _____ certificates were outstanding.
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EVENTS OF DEFAULT
Each of the following events, circumstances and conditions will be
considered events of default under the pooling and servicing agreement:
o the master servicer or the special servicer fails to deposit,
or to remit to the appropriate party for deposit, into the
master servicer's collection account or the special servicer's
REO account, as applicable, any amount required to be so
deposited, and that failure continues unremedied for _____
business days following the date on which the deposit or
remittance was required to be made;
o the master servicer fails to remit to the trustee for deposit
in the trustee's payment account any amount required to be so
remitted, and that failure continues unremedied for _____
business days following the date on which the remittance was
required to be made;
o the master servicer or the special servicer fails to timely
make any servicing advance required to be made by it under the
pooling and servicing agreement, and that failure continues
unremedied for _____ business days following the date on which
notice has been given to the master servicer or the special
servicer, as the case may be, by the trustee;
o the master servicer or the special servicer fails to observe
or perform in any material respect any of its other covenants
or agreements under the pooling and servicing agreement, and
that failure continues unremedied for _____ days after written
notice of it has been given to the master servicer or the
special servicer, as the case may be, by any other party to
the pooling and servicing agreement or by series _____
certificateholders entitled to not less than ____% of the
voting rights for the series;
o it is determined that there is a breach by the master servicer
or the special servicer of any of its representations or
warranties contained in the pooling and servicing agreement
that materially and adversely affects the interests of any
class of series _____ certificateholders, and that breach
continues unremedied for _____ days after written notice of it
has been given to the master servicer or the special servicer,
as the case may be, by any other party to the pooling and
servicing agreement or by the series _____ certificateholders
entitled to not less than ____% of the voting rights for the
series;
o a decree or order of a court having jurisdiction in an
involuntary case for the appointment of a receiver,
liquidator, trustee or similar official in any bankruptcy,
insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings is entered against the
master servicer or the special servicer and the decree or
order remains in force for a period of _____ days;
o the master servicer or special servicer consents to the
appointment of a receiver, liquidator, trustee or similar
official relating to it or of or relating to all or
substantially all of its property;
S-80
<PAGE>
o the master servicer or special servicer admits in writing its
inability to pay its debts or takes other actions indicating
its insolvency or inability to pay its obligations;
o one or more ratings assigned by either ____________ or
____________ to the series _____ certificates are qualified,
downgraded or withdrawn as a result of the master servicer or
special servicer acting in that capacity; and
o the trustee receives written notice from either ____________
or ____________ that the continuation of the master servicer
or the special servicer, as the case may be, in that capacity
would result in a qualification, downgrade or withdrawal of
any rating then assigned by that rating agency to any class of
the series _____ certificates.
When a single entity acts as master servicer and special servicer, an
event of default in one capacity will be an event of default in the other
capacity.
RIGHTS UPON EVENT OF DEFAULT
If an event of default described above under "--Events of Default"
occurs with respect to the master servicer or the special servicer and remains
unremedied, the trustee will be authorized, and at the direction of the series
_____ certificateholders entitled to not less than ____% of the voting rights
for the series, the trustee will be required, to terminate all of the rights and
obligations of the defaulting party under the pooling and servicing agreement
and in and to the trust assets other than any rights the defaulting party may
have as a series _____ certificateholder. Upon any termination, the trustee must
either:
o succeed to all of the responsibilities, duties and liabilities
of the master servicer or special servicer, as the case may
be, under the pooling and servicing agreement; or
o appoint an established mortgage loan servicing institution to
act as successor master servicer or special servicer, as the
case may be.
The holders of series _____ certificates entitled to a majority of the voting
rights for the series may require the trustee to appoint an established mortgage
loan servicing institution to act as successor master servicer or special
servicer, as the case may be, rather than have the trustee act as that
successor. The appointment of a successor special servicer by the trustee is
subject to the rights of the controlling class of series _____
certificateholders to designate a successor special servicer as described under
"--Replacement of the Special Servicer" above.
In general, the series _____ certificateholders entitled to at least
_____% of the voting rights allocated to each class of series _____ certificates
affected by any event of default may waive the event of default. However, the
events of default described in the _____ bullet points under "--Events of
Default" above may only be waived by all of the holders of the affected classes
of the series _____ certificates. Furthermore, if the trustee is required to
spend any monies in connection with any event of default, then that event of
default may not be waived unless and until the trustee has been reimbursed, with
interest, by the defaulting party. Upon any waiver of an event of default, the
event of default will cease to exist and will be deemed to have been remedied
for every purpose under the pooling and servicing agreement.
S-81
<PAGE>
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
The series _____ certificates will be issued, on or about
____________________, under the pooling and servicing agreement. They will
represent the entire beneficial ownership interest of the trust. The assets of
the trust will include:
o the pooled mortgage loans;
o any and all payments under and proceeds of the pooled mortgage
loans received after the cut-off date, exclusive of payments
of principal, interest and other amounts due on or before that
date;
o the loan documents for the pooled mortgage loans;
o any REO Properties acquired by the trust with respect to
defaulted mortgage loans; and
o those funds or assets as from time to time are deposited in
the master servicer's collection account, the special
servicer's REO account, the trustee's payment account
described under "--Payment Account" below or the trustee's
interest reserve account described under "--Payments--Interest
Reserve Account" below.
The series _____ certificates will include the following classes:
o the A-1, A-2, B, C, D, E, F and X classes, which are the
classes of series _____ certificates that are offered by this
prospectus supplement, and
o the G, H, J, K, L, M, N, R-I, R-II and R-III classes, which
are the classes of series _____ certificates that--
1. will be retained or privately placed by us, and
2. are not offered by this prospectus supplement.
The class A-1, A-2, B, C, D, E, F, G, H, J, K, L, M and N certificates
are the only certificates that will have principal balances. The principal
balance of any of these certificates will represent the total payments of
principal to which the holder of the certificate is entitled over time out of
payments, or advances in lieu of payments, and other collections on the assets
of the trust. Accordingly, on each payment date, the principal balance of each
of these certificates will be permanently reduced by any payments of principal
actually made with respect to the certificate on that payment date. See
"--Payments" below. On any particular payment date, the principal balance of
each of these certificates may also be permanently reduced, without any
corresponding payment, in connection with losses on the underlying mortgage
loans and default-related and otherwise unanticipated expenses of the trust. See
"--Reductions in Certificate Principal Balances in Connection with Realized
Losses and Additional Trust Fund Expenses" below.
S-82
<PAGE>
The class X certificates will not have principal balances, and the
holders of the class X certificates will not be entitled to receive payments of
principal. However, each class X certificate will have a notional amount for
purposes of calculating the accrual of interest with respect to that
certificate. The total notional amount of all the class X certificates will
equal the total principal balance of all the class A-1, A-2, B, C, D, E, F, G,
H, J, K, L, M and N certificates outstanding from time to time.
In general, principal balances and notional amounts will be reported on
a class-by-class basis. In order to determine the principal balance or notional
amount of any of your offered certificates from time to time, you may multiply
the original principal balance or notional amount of that certificate as of the
date of initial issuance of the offered certificates, as specified on the face
of that certificate, by the then-applicable certificate factor for the relevant
class. The certificate factor for any class of offered certificates, as of any
date of determination, will equal a fraction, expressed as a percentage, the
numerator of which will be the then outstanding total principal balance or
notional amount, as applicable, of that class, and the denominator of which will
be the original total principal balance or notional amount, as applicable, of
that class. Certificate factors will be reported monthly in the trustee's
payment date statement.
REGISTRATION AND DENOMINATIONS
GENERAL. The offered certificates will be issued in book-entry form in
original denominations of:
o in the case of the class X certificates, $________ initial
notional amount and in any whole dollar denomination in excess
of $________; and
o in the case of the other offered certificates, $________
initial principal balance and in any whole dollar denomination
in excess of $________.
Each class of offered certificates will initially be represented by one
or more certificates registered in the name of Cede & Co., as nominee of The
Depository Trust Company. You will not be entitled to receive an offered
certificate issued in fully registered, certificated form, except under the
limited circumstances described in the accompanying prospectus under
"Description of the Certificates--Book-Entry Registration". For so long as any
class of offered certificates is held in book-entry form--
o all references to actions by holders of those certificates
will refer to actions taken by DTC upon instructions received
from beneficial owners of those certificates through its
participating organizations, and
o all references in this prospectus supplement to payments,
notices, reports, statements and other information to holders
of those certificates will refer to payments, notices, reports
and statements to DTC or Cede & Co., as the registered holder
of those certificates, for payment to beneficial owners of
offered certificates through its participating organizations
in accordance with DTC's procedures.
The trustee will initially serve as registrar for purposes of providing
for the registration of the offered certificates and, if and to the extent
physical certificates are issued to the actual beneficial owners of any of the
offered certificates, the registration of transfers and exchanges of those
certificates.
S-83
<PAGE>
For a discussion of DTC, see "Description of the
Certificates--Book-Entry Registration" in the accompanying prospectus.
PAYMENT ACCOUNT
GENERAL. The trustee must establish and maintain an account in which it
will hold funds pending their payment on the series _____ certificates and from
which it will make those payments. That payment account must be maintained in a
manner and with a depository institution that satisfies rating agency standards
for securitizations similar to the one involving the offered certificates. Funds
held in the trustee's payment account will remain uninvested.
DEPOSITS. On the business day prior to each payment date, the master
servicer will be required to remit to the trustee for deposit in the payment
account the following funds:
o All payments and other collections on the mortgage loans and
any REO Properties in the trust that are then on deposit in
the master servicer's collection account, exclusive of any
portion of those payments and other collections that
represents one or more of the following:
1. monthly debt service payments due on a due date
subsequent to the end of the related collection
period;
2. payments and other collections received after the end
of the related collection period;
3. amounts that are payable or reimbursable from the
master servicer's collection account to any person
other than the series _____ certificateholders,
including--
o amounts payable to the master servicer or
the special servicer as compensation,
including master servicing fees, special
servicing fees, workout fees, liquidation
fees, assumption fees, modification fees
and, to the extent not otherwise applied to
cover interest on advances, Default Interest
and late payment charges,
o amounts payable in reimbursement of
outstanding advances, together with interest
on those advances, and
o amounts payable with respect to other
expenses of the trust; and
4. amounts deposited in the master servicer's collection
account in error.
o Any advances of delinquent monthly debt service payments made
with respect to that payment date.
o Any payments made by the master servicer to cover Prepayment
Interest Shortfalls incurred during the related collection
period.
S-84
<PAGE>
See "--Advances of Delinquent Monthly Debt Service Payments" below and
"Servicing of the Underlying Mortgage Loans--Collection Account" and "Servicing
and Other Compensation and Payment of Expenses" in this prospectus supplement.
With respect to each payment date that occurs during March, commencing
in March ______, the trustee will be required to transfer from its interest
reserve account, which we describe under "--Interest Reserve Account" below, to
its payment account the interest reserve amounts that are then being held in
that interest reserve account with respect to those pooled mortgage loans that
accrue interest on an actual/360 basis.
WITHDRAWALS. The trustee may from time to time make withdrawals from
its payment account for any of the following purposes:
o to pay itself a monthly fee which is described under "--The
Trustee" below;
o to indemnify itself and various related persons as described
under "Description of the Governing Documents--Matters
Regarding the Trustee" in the accompanying prospectus;
o to pay for any opinions of counsel required to be obtained in
connection with any amendments to the pooling and servicing
agreement;
o to pay any federal, state and local taxes imposed on the
trust, its assets and/or transactions, together with all
incidental costs and expenses, that are required to be borne
by the trust as described under "Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other
Taxes" in the accompanying prospectus and "Servicing of the
Underlying Mortgage Loans--REO Properties" in this prospectus
supplement;
o with respect to each payment date during February of any year
or during January of any year that is not a leap year,
commencing in ______, to transfer to the trustee's interest
reserve account the interest reserve amounts required to be so
transferred in that month with respect to those pooled
mortgage loans that accrue interest on an actual/360 basis;
and
o to pay to the person entitled thereto any amounts deposited in
the payment account in error.
On each payment date, all amounts on deposit in the trustee's payment
account, exclusive of any portion of those amounts that are to be withdrawn for
the purposes contemplated in the foregoing paragraph, will be withdrawn and
applied to make payments on the series _____ certificates. For any payment date,
those funds will consist of three separate components--
o the portion of those funds that represent prepayment
consideration collected on the pooled mortgage loans as a
result of voluntary or involuntary prepayments that occurred
during the related collection period, which will be paid to
the holders of the offered certificates as described under
"--Payments--Payments of Prepayment Premiums and Yield
Maintenance Charges" below,
S-85
<PAGE>
o the portion of those funds that represent Post-ARD Additional
Interest collected on the ARD Loans in the trust during the
related collection period, which will be paid to the holders
of the class _____ certificates as described under
"--Payments--Payments of Post-ARD Additional Interest" below,
and
o the remaining portion of those funds, which--
(i) we refer to as the Available P&I Funds, and
(ii) will be paid to the holders of all the series
_____ certificates, [other than the class____
certificates], as described under
"--Payments--Priority of Payments" below.
INTEREST RESERVE ACCOUNT
The trustee must maintain an account in which it will hold the interest
reserve amounts described in the next paragraph with respect to those underlying
mortgage loans that accrue interest on an actual/360 basis. That interest
reserve account must be maintained in a manner and with a depository that
satisfies rating agency standards for similar securitizations as the one
involving the offered certificates. Funds held in the trustee's interest reserve
account will remain uninvested.
During January, except in a leap year, and February of each calendar
year, beginning in ______, the trustee will, on or before the payment date in
that month, withdraw from its payment account and deposit in its interest
reserve account the interest reserve amounts with respect to those underlying
mortgage loans that accrue interest on an actual/360 basis and for which the
monthly debt service payment due in that month was either received or advanced.
That interest reserve amount for each of those mortgage loans will equal one
day's interest accrued at the related mortgage interest rate on the Stated
Principal Balance of that loan as of the end of the related collection period.
During March of each calendar year, beginning in ______, the trustee
will, on or before the payment date in that month, withdraw from its interest
reserve account and deposit in its payment account any and all interest reserve
amounts then on deposit in the interest reserve account with respect to those
underlying mortgage loans that accrue interest on an actual/360 basis. All
interest reserve amounts that are so transferred from the interest reserve
account to the payment account will be included in the Available P&I Funds for
the payment date during the month of transfer.
PAYMENTS
GENERAL. On each payment date, the trustee will, subject to the
available funds, make all payments required to be made on the series _____
certificates on that date to the holders of record as of the close of business
on the last business day of the calendar month preceding the month in which
those payments are to occur. The final payment of principal and/or interest on
any offered certificate, however, will be made only upon presentation and
surrender of that certificate at the location to be specified in a notice of the
pendency of that final payment.
In order for a series _____ certificateholder to receive payments by
wire transfer on and after any particular payment date, that certificateholder
must provide the trustee with written wiring instructions
S-86
<PAGE>
no later than the last day of the calendar month preceding the month in which
that payment date occurs. Otherwise, that certificateholder will receive its
payments by check mailed to it.
Cede & Co. will be the registered holder of your offered certificates,
and you will receive payments on your offered certificates through DTC and its
participating organizations, until physical certificates are issued to the
actual beneficial owners. See "--Registration and Denominations" above.
PAYMENTS OF INTEREST. All of the classes of the series _____
certificates will bear interest, except for the R-I, R-II and R-III classes.
With respect to each interest-bearing class of the series _____
certificates, that interest will accrue during each interest accrual period
based upon--
o the pass-through rate for that class and the related payment
date,
o the total principal balance or notional amount, as the case
may be, of that class outstanding immediately prior to the
related payment date, and
o the assumption that each year consists of twelve 30-day
months.
On each payment date, subject to the Available P&I Funds for that date
and the priorities of payment described under "--Payments--Priority of Payments"
below, the holders of each interest-bearing class of the series _____
certificates will be entitled to receive--
o the total amount of interest accrued during the related
interest accrual period with respect to that class of
certificates, reduced by
o the portion of any Net Aggregate Prepayment Interest Shortfall
for that payment date that is allocable to that class of
certificates.
If the holders of any interest-bearing class of the series _____
certificates do not receive all of the interest to which they are entitled on
any payment date, then they will continue to be entitled to receive the unpaid
portion of that interest on future payment dates, subject to the Available P&I
Funds for those future payment dates and the priorities of payment described
under "--Payments--Priority of Payments" below.
The portion of any Net Aggregate Prepayment Interest Shortfall for any
payment date that is allocable to any particular interest-bearing class of the
series _____ certificates will equal the product of--
o the total amount of interest accrued during the related
interest accrual period with respect to that class of
certificates, multiplied by
o a fraction, the numerator of which is the total amount of
interest accrued during the related interest accrual period
with respect to that class of certificates, and the
denominator of which is the total amount of interest accrued
during the related interest accrual period with respect to all
of the interest-bearing classes of the series _____
certificates.
S-87
<PAGE>
CALCULATION OF PASS-THROUGH RATES.
General. The pass-through rate for each class of the series _____
certificates, other than the class X certificates, will be [fixed] at the rate
per annum set forth with respect to each of those classes in the table on page
S-____.
The pass-through rate applicable to the class X certificates for each
payment date will equal the excess, if any, of--
o the Weighted Average Pool Pass-Through Rate for that payment
date, over
o the weighted average of the pass-through rates for each of the
other interest-bearing classes of the series _____
certificates for that payment date, weighted on the basis of
the relative total principal balances of those other classes
of series _____ certificates outstanding immediately prior to
that payment date.
The calculation of the Weighted Average Pool Pass-Through Rate will be
unaffected by any change in the mortgage interest rate for any mortgage loan,
including in connection with any bankruptcy or insolvency of the related
borrower or any modification of that mortgage loan agreed to by the master
servicer or the special servicer.
The class R-I, R-II and R-III certificates will not be interest-bearing
and, therefore, will not have pass-through rates.
PAYMENTS OF PRINCIPAL. Subject to the Available P&I Funds and the
priority of payments described under "--Payments--Priority of Payments" below,
the total amount of principal payable with respect to each class of the series
_____ certificates, other than the class X, R-I, R-II and R-III certificates, on
each payment date will equal that class's allocable share of the Total Principal
Payment Amount for that payment date.
In general, the portion of the Total Principal Payment Amount that will
be allocated to the class A-1 and A-2 certificates on each payment date will
equal:
o in the case of the class A-1 certificates, the lesser of--
1. the entire Total Principal Payment Amount for that
payment date and
2. the total principal balance of the class A-1
certificates immediately prior to that payment date;
and
o in the case of the class A-2 certificates, the lesser of--
1. the entire Total Principal Payment Amount for that
payment date, reduced by any portion of that amount
allocable to the class A-1 certificates as described
in the preceding bullet point, and
2. the total principal balance of the class A-2
certificates immediately prior to that payment date.
S-88
<PAGE>
However, if both of those classes are outstanding at a time when the
total principal balance of the class B, C, D, E, F, G, H, J, K, L, M and N
certificates has been reduced to zero as described under "--Reductions to
Certificate Principal Balances in Connection With Realized Losses and Additional
Trust Fund Expenses" below, then the Total Principal Payment Amount for each
payment date thereafter will be allocable between those two classes on a PRO
RATA basis in accordance with their respective total principal balances
immediately prior to that payment date, in each case up to that total principal
balance.
WHILE THE CLASS A-1 AND A-2 CERTIFICATES ARE OUTSTANDING, NO PORTION OF
THE TOTAL PRINCIPAL PAYMENT AMOUNT FOR ANY PAYMENT DATE WILL BE ALLOCATED TO ANY
OTHER CLASS OF SERIES _____ CERTIFICATES.
Following the retirement of the class A-1 and A-2 certificates, the
Total Principal Payment Amount for each payment date will be allocated to the
respective classes of series _____ certificates identified in the table below
and in the order of priority set forth in that table, in each case up to the
lesser of--
o the portion of that Total Principal Payment Amount that
remains unallocated, and
o the total principal balance of the particular class
immediately prior to that payment date.
ORDER OF ALLOCATION CLASS
------------------- -----
1st B
2nd C
3rd D
4th E
5th F
6th G
7th H
8th J
9th K
10th L
11th M
12th N
IN NO EVENT WILL THE HOLDERS OF ANY CLASS OF SERIES _____ CERTIFICATES
LISTED IN THE FOREGOING TABLE BE ENTITLED TO RECEIVE ANY PAYMENTS OF PRINCIPAL
UNTIL THE TOTAL PRINCIPAL BALANCE OF THE CLASS A-1 AND A-2 CERTIFICATES IS
REDUCED TO ZERO. FURTHERMORE, IN NO EVENT WILL THE HOLDERS OF ANY CLASS OF
SERIES _____ CERTIFICATES LISTED IN THE FOREGOING TABLE BE ENTITLED TO RECEIVE
ANY PAYMENTS OF PRINCIPAL UNTIL THE TOTAL PRINCIPAL BALANCE OF ALL OTHER CLASSES
OF SERIES _____ CERTIFICATES, IF ANY, LISTED ABOVE IT IN THE FOREGOING TABLE IS
REDUCED TO ZERO.
REIMBURSEMENT AMOUNTS. As discussed under "--Reductions of Certificate
Principal Balances in Connection with Realized Losses and Additional Trust Fund
Expenses" below, the total principal balance of any class of series _____
certificates, other than the class X, R-I, R-II and R-III certificates, may be
reduced without a corresponding payment of principal. If that occurs with
respect to any class of series _____ certificates, other than the class X, R-I,
R-II and R-III certificates, then, subject to
S-89
<PAGE>
Available P&I Funds and the priority of payment described under
"--Payments--Priority of Payments" below, the holders of that class will be
entitled to be reimbursed for the amount of that reduction, WITHOUT INTEREST.
References to the "loss reimbursement amount" under "--Payments--Priority of
Payments" below mean, in the case of any class of series _____ certificates,
other than the class X, R-I, R-II and R-III certificates, for any payment date,
the total amount to which the holders of that class are entitled as
reimbursement for all previously unreimbursed reductions, if any, made in the
total principal balance of that class on all prior payment dates as discussed
under "--Reductions of Certificate Principal Balances in Connection with
Realized Losses and Additional Trust Fund Expenses" below.
PRIORITY OF PAYMENTS. On each payment date, the trustee will apply the
Available P&I Funds for that date to make the following payments in the
following order of priority, in each case to the extent of the remaining
Available P&I Funds:
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
------- ---------------- --------------------------
<S> <C> <C>
1st A-1, A-2 and X Interest up to the total interest payable on those classes, PRO RATA based on
entitlement
2nd A-1 and A-2 Principal up to the total principal payable on those classes, allocable as between
those classes as described immediately following this table
3rd A-1 and A-2 Reimbursement up to the reimbursement amounts for those classes, PRO RATA based on
entitlement as described immediately following this table
4th B Interest up to the total interest payable on that class
5th B Principal up to the total principal payable on that class
6th B Reimbursement up to the loss reimbursement amount for that class
7th C Interest up to the total interest payable on that class
8th C Principal up to the total principal payable on that class
9th C Reimbursement up to the loss reimbursement amount for that class
10th D Interest up to the total interest payable on that class
11th D Principal up to the total principal payable on that class
12th D Reimbursement up to the loss reimbursement amount for that class
13th E Interest up to the total interest payable on that class
14th E Principal up to the total principal payable on that class
15th E Reimbursement up to the loss reimbursement amount for that class
</TABLE>
S-90
<PAGE>
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
------- ---------------- --------------------------
<S> <C> <C>
16th F Interest up to the total interest payable on that class
17th F Principal up to the total principal payable on that class
18th F Reimbursement up to the loss reimbursement amount for that class
19th G Interest up to the total interest payable on that class
20th G Principal up to the total principal payable on that class
21st G Reimbursement up to the loss reimbursement amount for that class
22nd H Interest up to the total interest payable on that class
23rd H Principal up to the total principal payable on that class
24th H Reimbursement up to the loss reimbursement amount for that class
25th J Interest up to the total interest payable on that class
26th J Principal up to the total principal payable on that class
27th J Reimbursement up to the loss reimbursement amount for that class
28th K Interest up to the total interest payable on that class
29th K Principal up to the total principal payable on that class
30th K Reimbursement up to the loss reimbursement amount for that class
31st L Interest up to the total interest payable on that class
32nd L Principal up to the total principal payable on that class
33rd L Reimbursement up to the loss reimbursement amount for that class
34th M Interest up to the total interest payable on that class
35th M Principal up to the total principal payable on that class
36th M Reimbursement up to the loss reimbursement amount for that class
</TABLE>
S-91
<PAGE>
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
------- ---------------- --------------------------
<S> <C> <C>
37th N Interest up to the total interest payable on that class
38th N Principal up to the total principal payable on that class
39th N Reimbursement up to the loss reimbursement amount for that class
40th R-I, R-II and R-III Any remaining Available P&I Funds
</TABLE>
In general, no payments of principal will be made with respect to the
class A-2 certificates until the total principal balance of the class A-1
certificates is reduced to zero. However, if both of those classes are
outstanding at a time when the total principal balance of the class B, C, D, E,
F, G, H, J, K, L, M and N certificates has been reduced to zero as described
under "--Reductions to Certificate Principal Balances in Connection With
Realized Losses and Additional Trust Fund Expenses" below, payments of principal
on the class A-1 certificates and the class A-2 certificates will be made on a
PRO RATA basis in accordance with the respective total principal balances of
those classes then outstanding.
PAYMENTS OF PREPAYMENT PREMIUMS AND YIELD MAINTENANCE CHARGES. If any
prepayment consideration is collected during any particular collection period
with respect to any mortgage loan in the trust, regardless of whether that
prepayment consideration is calculated as a percentage of the amount prepaid or
in accordance with a yield maintenance formula, then on the payment date
corresponding to that collection period, the trustee will pay a portion of that
prepayment consideration to the holders of each class of series ___
certificates, if any, that--
o is senior to the class _____ certificates, and
o is entitled to payments of principal on that payment date,
up to an amount equal to the product of--
o the full amount of that prepayment consideration, net of
workout fees and liquidation fees payable from it, multiplied
by
o a fraction, which in no event may be greater than 1.0 or less
than 0.0, the numerator of which is equal to the excess, if
any, of the pass-through rate for that class of certificates
over the monthly equivalent of the relevant discount rate, and
the denominator of which is equal to the excess, if any, of
the mortgage interest rate of the prepaid mortgage loan over
the monthly equivalent of the relevant discount rate, and
further multiplied by
o a fraction, the numerator of which is equal to the amount of
principal payable to that class of certificates on that
payment date, and the denominator of which is the Total
Principal Payment Amount for that payment date.
S-92
<PAGE>
The discount rate applicable to any class of series ____ certificates
with respect to any prepaid mortgage loan will equal the average yield for "This
Week" as reported by the Federal Reserve Board in Federal Reserve Statistical
Release H.15(519) for the constant maturity treasury security having a maturity
coterminous with _____________________________________________________________.
If there are no constant maturity treasuries having that maturity, then the
discount rate will equal the interpolation of the yields of the constant
maturity treasuries with maturities longer and shorter than
_______________________________________________________________________________.
The trustee will thereafter pay any remaining portion of the prepayment
consideration, net of workout fees and workout fees payable from it, to the
holders of the class X certificates. After the payment date on which the total
principal balance of all classes of series ___ certificates, other than the
class X certificates, senior to the class _____ certificates has been reduced to
zero, the trustee will pay any prepayment consideration, net of workout fees and
liquidation fees payable from it, collected on the pooled mortgage loans,
entirely to the holders of the class X certificates.
Neither we nor the underwriter makes any representation as to--
o the enforceability of the provision of any promissory note
evidencing one of the mortgage loans requiring the payment of
a prepayment premium or yield maintenance charge, or
o the collectability of any prepayment premium or yield
maintenance charge.
See "Description of the Mortgage Pool--Terms and Conditions of the Mortgage
Loans--Prepayment Provisions" in this prospectus supplement.
PAYMENTS OF ADDITIONAL INTEREST. The class _____ certificates will
entitle the holders to all amounts, if any, applied as Post-ARD Additional
Interest collected on the ARD Loans in the trust.
TREATMENT OF REO PROPERTIES. Notwithstanding that any mortgaged real
property may be acquired as part of the trust assets through foreclosure, deed
in lieu of foreclosure or otherwise, the related mortgage loan will be treated
as having remained outstanding, until the REO Property is liquidated, for
purposes of determining--
o payments on the series _____ certificates,
o allocations of Realized Losses and Additional Trust Fund
Expenses to the series _____ certificates, and
o the amount of all fees payable to the master servicer, the
special servicer and the trustee under the pooling and
servicing agreement.
In connection with the foregoing, that mortgage loan will be taken into account
when determining the Weighted Average Pool Pass-Through Rate and the Total
Principal Payment Amount for each payment date.
Operating revenues and other proceeds derived from an REO Property will
be applied--
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o FIRST, to pay, or to reimburse the master servicer, the
special servicer and/or the trustee for the payment of, some
of the costs and expenses incurred in connection with the
operation and disposition of the REO Property, and
o THEREAFTER, as collections of principal, interest and other
amounts due on the related mortgage loan.
To the extent described under "--Advances of Delinquent Monthly Debt
Service Payments" below, the master servicer and the trustee will be required to
advance delinquent monthly debt service payments with respect to each pooled
mortgage loan as to which the corresponding mortgaged real property has become
an REO Property, in all cases as if the mortgage loan had remained outstanding.
REDUCTIONS TO CERTIFICATE PRINCIPAL BALANCES IN CONNECTION WITH REALIZED LOSSES
AND ADDITIONAL TRUST FUND EXPENSES
As a result of Realized Losses and Additional Trust Fund Expenses, the
total Stated Principal Balance of the mortgage pool may decline below the total
principal balance of the series ___ certificates. If this occurs following the
payments made to the certificateholders on any payment date, then the respective
total principal balances of the following classes of the series ___ certificates
are to be successively reduced in the following order, until the total principal
balance of those classes of certificates equals the total Stated Principal
Balance of the mortgage pool that will be outstanding immediately following that
payment date.
ORDER OF ALLOCATION CLASS
------------------- -----
1st N
2nd M
3rd L
4th K
5th J
6th H
7th G
8th F
9th E
10th D
11th C
12th B
13th A-1 and A-2,
PRO RATA based on
total principal balances.
----------------
The reductions in the total principal balances of the respective
classes of series ___ certificates with principal balances, as described in the
previous paragraph, will represent an allocation of the Realized Losses and/or
Additional Trust Fund Expenses that caused the particular mismatch in balances
between the pooled mortgage loans and those classes of certificates. A reduction
of this type in the total principal balance of any of the foregoing classes of
series ____certificates will result in a corresponding reduction in the total
notional amount of the class X certificates.
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The Realized Loss with respect to a liquidated mortgage loan, or
related REO Property, is an amount generally equal to the excess, if any, of:
o the outstanding principal balance of the mortgage loan as of
the date of liquidation, together with--
1. all accrued and unpaid interest on the mortgage loan to
but not including the due date in the collection period in
which the liquidation occurred, exclusive, however, of any
portion of that interest that represents Default Interest
or Post-ARD Additional Interest, and
2. all related unreimbursed servicing advances and unpaid
liquidation expenses, over
o the total amount of liquidation proceeds, if any, recovered in
connection with the liquidation.
If any portion of the debt due under a mortgage loan is forgiven, whether in
connection with a modification, waiver or amendment granted or agreed to by the
master servicer or the special servicer or in connection with the bankruptcy,
insolvency or similar proceeding involving the related borrower, the amount
forgiven, other than Default Interest and Post-ARD Additional Interest, also
will be treated as a Realized Loss.
Some examples of Additional Trust Fund Expenses are:
o any special servicing fees, workout fees and liquidation fees
paid to the special servicer;
o any interest paid to the master servicer, the special servicer
and/or the trustee with respect to unreimbursed advances,
which interest payment is not covered out of late payment
charges and Default Interest actually collected on the related
mortgage loan in the trust;
o the cost of various opinions of counsel required or permitted
to be obtained in connection with the servicing of the pooled
mortgage loans and the administration of the other trust
assets;
o any unanticipated, non-mortgage loan specific expenses of the
trust, including--
1. any reimbursements and indemnifications to the
trustee described under "Description of the Governing
Documents--Matters Regarding the Trustee" in the
accompanying prospectus,
2. any reimbursements and indemnification to the master
servicer, the special servicer and us described under
"Description of the Governing Documents--Matters
Regarding the Master Servicer, the Special Servicer,
the Manager and Us" in the accompanying prospectus,
and
3. any federal, state and local taxes, and tax-related
expenses, payable out of the trust assets, as
described under "Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and
Other Taxes" in the accompanying prospectus;
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o rating agency fees, other than on-going surveillance fees,
that cannot be recovered from the borrower; and
o any amounts expended on behalf of the trust to remediate an
adverse environmental condition at any mortgaged real property
securing a defaulted mortgage loan as described under
"Servicing of the Underlying Mortgage Loans--Realization Upon
Defaulted Mortgage Loans" in this prospectus supplement.
ADVANCES OF DELINQUENT MONTHLY DEBT SERVICE PAYMENTS
The master servicer will be required to make, for each payment date, a
total amount of advances of principal and/or interest generally equal to all
monthly debt service payments other than balloon payments, and assumed monthly
debt service payments, in each case net of related master servicing fees, that-
o were due or deemed due, as the case may be, with respect to
the mortgage pooled loans during the related collection
period, and
o were not paid by or on behalf of the respective borrowers or
otherwise collected as of the close of business on the last
day of the related collection period.
Notwithstanding the foregoing, if it is determined that an Appraisal
Reduction Amount exists with respect to any mortgage loan in the trust, then the
master servicer will reduce the interest portion, but not the principal portion,
of each P&I advance that it must make with respect to that mortgage loan during
the period that the Appraisal Reduction Amount exists. The interest portion of
any P&I advance required to be made with respect to any mortgage loan as to
which there exists an Appraisal Reduction Amount, will equal the product of:
o the amount of the interest portion of that P&I advance that
would otherwise be required to be made for the subject payment
date without regard to this sentence and the prior sentence,
multiplied by
o a fraction, the numerator of which is equal to the Stated
Principal Balance of the mortgage loan, net of the Appraisal
Reduction Amount, and the denominator of which is equal to the
Stated Principal Balance of the mortgage loan.
With respect to any payment date, the master servicer will be required
to make P&I advances either out of its own funds or, subject to the replacement
as and to the extent provided in the pooling and servicing agreement, funds held
in the master servicer's collection account that are not required to be paid on
the series ___ certificates on that payment date.
The trustee will be required to make any P&I advance that the master
servicer fails to make. See "--The Trustee" below.
The master servicer and the trustee will each be entitled to recover
any P&I advance made by it, out of its own funds, from collections on the
mortgage loan as to which the advance was made. Neither the master servicer nor
the trustee will be obligated to make any P&I advance that, in its judgment,
would not ultimately be recoverable out of collections on the related mortgage
loan. If the master
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servicer or the trustee makes any P&I advance that it subsequently determines,
in its judgment, will not be recoverable out of collections on the related
mortgage loan, it may obtain reimbursement for that advance, together with
interest accrued on the advance as described in the next paragraph, out of
general collections on the mortgage loans and any REO Properties in the trust on
deposit in the master servicer's collection account from time to time. See
"Description of the Certificates--Advances" in the accompanying prospectus and
"Servicing of the Underlying Mortgage Loans--Collection Account" in this
prospectus supplement.
The master servicer and the trustee will each be entitled to receive
interest on P&I advances made thereby out of its own funds. That interest will
accrue on the amount of each P&I advance, and compound monthly, for so long as
that advance is outstanding at an annual rate equal to the prime rate as
published in the "Money Rates" section of THE WALL STREET JOURNAL, as that prime
rate may change from time to time. Interest accrued with respect to any P&I
advance will be payable in the collection period in which that advance is
reimbursed--
o FIRST, out of Default Interest and late payment charges
collected on the related mortgage loan during that collection
period, and
o THEN, if and to the extent that the Default Interest and late
charges referred to in clause FIRST are insufficient to cover
the advance interest, out of any amounts then on deposit in
the master servicer's collection account.
Any delay between a sub-servicer's receipt of a late collection of a
monthly debt service payment as to which a P&I advance was made and the
forwarding of that late collection to the master servicer, will increase the
amount of interest accrued and payable to the master servicer or the trustee, as
the case may be, on that P&I advance. To the extent not offset by Default
Interest and/or late payment charges accrued and actually collected, interest
accrued on outstanding P&I advances will result in a reduction in amounts
payable on the certificates.
A monthly debt service payment will be assumed to be due with respect
to:
o each pooled mortgage loan that is delinquent with respect to
its balloon payment beyond the end of the collection period in
which its maturity date occurs and as to which no arrangements
have been agreed to for the collection of the delinquent
amounts, including an extension of maturity; and
o each pooled mortgage loan as to which the corresponding
mortgaged real property has become an REO Property.
The assumed monthly debt service payment deemed due on any mortgage loan
described in the prior sentence that is delinquent as to its balloon payment,
will equal, for its stated maturity date and for each successive due date that
it remains outstanding and part of the trust, the monthly debt service payment
that would have been due on the mortgage loan on the relevant date if the
related balloon payment had not come due and the mortgage loan had, instead,
continued to amortize and accrue interest according to its terms in effect prior
to that stated maturity date. The assumed monthly debt service payment deemed
due on any mortgage loan described in the second preceding sentence as to which
the related mortgaged real property has become an REO Property, will equal, for
each due date that the REO Property remains part of the trust, the monthly debt
service payment or, in the case of a mortgage loan delinquent with
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respect to its balloon payment, the assumed monthly debt service payment due or
deemed due on the last due date prior to the acquisition of that REO Property.
[Assumed monthly debt service payments for ARD Loans do not include Post-ARD
Additional Interest or accelerated amortization payments.]
REPORTS TO CERTIFICATEHOLDERS; AVAILABLE INFORMATION
CERTIFICATEHOLDER REPORTS. Based solely on historical information
provided by the monthly loan sellers and information provided in monthly reports
prepared by the master servicer and the special servicer and delivered to the
trustee, the trustee will be required to provide or otherwise make available as
described under "--Information Available Electronically" below, on each payment
date, to each registered holder of an offered certificate and to each beneficial
owner of an offered certificate held in book-entry form that is identified to
the reasonable satisfaction of the trustee, a payment date statement
substantially in the form of Annex D to this prospectus supplement.
[COMMENCING IN ___________, the master servicer or the special
servicer, as specified in the pooling and servicing agreement, is required to
deliver to the trustee monthly, and the trustee is required to make available as
described below under "--Information Available Electronically", a copy of each
of the following reports with respect to the pooled mortgage loans and the
corresponding mortgaged real properties:
o A CMSA loan periodic update file, CMSA financial file and a
CMSA property file setting forth the customary information
contained in those files with respect to the pooled mortgage
loans and the corresponding mortgaged real properties,
respectively.
o A delinquent loan status report setting forth, among other
things, those mortgage loans which, as of the close of
business on the last day of the related collection period,
were delinquent 30-59 days, delinquent 60-89 days, delinquent
90 days or more, current but specially serviced, or in
foreclosure but not yet an REO Property. The report will
include additional commentary such as whether the related
borrower has filed for bankruptcy or similar protection.
o An historical loan modification report setting forth, among
other things, those mortgage loans which, as of the close of
business on the last business day of the related collection
period, have been modified under the pooling and servicing
agreement during the related collection period and since the
cut-off date, showing the original and revised terms thereof.
o An historical liquidation report setting forth, among other
things, as of the close of business on the last business day
of the related collection period, on a loan-by-loan basis--
1. the total number of net liquidation proceeds received
during the related collection period and
historically, and
2. the amount of Realized Losses occurring during the
related collection period and historically.
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o An REO status report setting forth, among other things, with
respect to each REO Property that was included in the trust as
of the close of business on the last business day of the
related collection period--
1. the acquisition date of that REO Property, and
2. the value of that REO Property based on the most
recent appraisal or other valuation then available to
the special servicer, including any valuation
prepared internally by the special servicer.
o A comparative financial status report setting forth, among
other things--
1. the occupancy of each mortgaged real property and
debt service coverage ratio for each mortgage loan as
of the date of the latest financial information
received, covering no less than 12-months trailing
available, immediately preceding the preparation of
the report, and
2. the revenue and net operating income or net cash flow
for each of the following periods, to the extent the
information is in the master servicer's or the
special servicer's possession--
(a) each of the two previous consecutive
available fiscal years stated separately,
and
(b) the "base year" representing the original
analysis of information used as of the
cut-off date.
o A servicer watch list identifying all pooled mortgage loans
that constitute one of the following types, as of the last
business day of the related collection period--
1. a mortgage loan that has a then-current 12-months
trailing debt service coverage ratio that is less
than 1.10x,
2. a mortgage loan as to which any required inspection
of the related mortgaged real property conducted by
the master servicer indicates a problem that the
master servicer determines can reasonably be expected
to materially adversely affect the cash flow
generated by that property,
3. a mortgage loan as to which the master servicer has
actual knowledge of material damage or waste at the
related mortgaged real property,
4. a mortgage loan as to which it has come to the master
servicer's attention in the performance of its duties
under the pooling and servicing agreement that any
tenant or group of tenants occupying 25% or more of
the space in the property has vacated or intends to
vacate that space without being replaced by a
comparable tenant and lease, or has declared or
intends to declare bankruptcy, or is within six
months of the relevant lease expiration(s).
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5. a mortgage loan that is at least 30 days delinquent
in payment, and
6. a mortgage loan that is within 60 days of maturity.]
[Within __ days after receipt by the master servicer, as to performing
mortgage loans in the trust, and within __ days after receipt by the special
servicer, as to specially serviced mortgage loans in the trust, of any annual,
quarterly, monthly or other periodic operating statements or related rent rolls
with respect to any mortgaged real property, and commencing for the quarter
ending on ______________ for current 12 months trailing data and ______________
for annual, year-end data, the master servicer or special servicer, as
applicable, will, based upon those operating statements and rent rolls, prepare
or, if previously prepared, update, a written operating statement analysis
report. The special servicer will remit each operating statement analysis report
prepared by it or related data fields, together with the related operating
statements and rent rolls, to the master servicer. All operating statement
analysis reports will be maintained by the master servicer with respect to each
mortgaged real property, and the master servicer will periodically forward
copies of each operating statement analysis report, together with the related
operating statements and rent rolls, to the trustee, which will make them
available as described under "--Information Available Electronically" below.
Upon the request of any holder of a series ___ certificate or, to the extent
identified to the reasonable satisfaction of the trustee, any beneficial owner
of an offered certificate, the trustee will, to the extent delivered by the
master servicer, make available to the requesting party, during normal business
hours at the offices of the trustee or its agent, copies of the operating
statement analysis report. In the case of outstanding mortgage loans,
preparation and maintenance of the report will depend on the receipt of the
requisite underlying information from the related borrower.]
BOOK-ENTRY CERTIFICATES. If you hold your offered certificates in
book-entry from through DTC, you may obtain direct access to the monthly reports
of the trustee as if you were a certificateholder, provided that you deliver a
written certification to the trustee confirming your beneficial ownership in the
offered certificates. Otherwise, until definitive certificates are issued with
respect to your offered certificates, the information contained in those monthly
reports will be available to you only to the extent that it is made available
through DTC and the DTC participants or is available on the trustee's internet
website. Conveyance of notices and other communications by DTC to the DTC
participants, and by the DTC participants to beneficial owners of the offered
certificates, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time. We,
the master servicer, the special servicer, the trustee and the series ____
certificate registrar are required to recognize as certificateholders only those
persons in whose names the series ____ certificates are registered on the books
and records of the certificate registrar.
INFORMATION AVAILABLE ELECTRONICALLY. The trustee will make available
each month, to any interested party, the Payment Date Statement, any Mortgage
Pool Data Update Report, the CMSA Loan Periodic Update Files, the CMSA Loan
Setup Files, [SPECIFY OTHER REPORTS] via the trustee's internet website,
electronic bulletin board and fax-on-demand service. The trustee's internet
website will initially be located at ____________________.
The trustee's electronic bulletin board may be accessed by calling
___-___-____, and its fax-on- demand service may be accessed by calling
___-___-____. For assistance with regard to the services described above,
investors may call ___-___-____.
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The trustee will make no representations or warranties as to the
accuracy or completeness of, and may disclaim responsibility for, any
information made available by the trustee for which it is not the original
source.
The trustee may require registration and the acceptance of a disclaimer
in connection with providing access to its electronic bulletin board and
internet website. The trustee shall not be liable for the dissemination of
information made in accordance with the pooling and servicing agreement.
OTHER INFORMATION. The pooling and servicing agreement will obligate
the trustee to make available at its offices, during normal business hours, upon
reasonable advance written notice, for review by any holder or beneficial owner
of an offered certificate or any person identified to the trustee as a
prospective transferee of an offered certificate or any interest in that offered
certificate, originals or copies of, among other things, the following items:
o the pooling and servicing agreement, including exhibits, and
any amendments to the pooling and servicing agreement;
o all monthly reports of the trustee delivered, or otherwise
electronically made available, to series ___
certificateholders since the date of initial issuance of the
offered certificates;
o all officer's certificates delivered to the trustee by the
master servicer and/or the special servicer since the date of
initial issuance of the certificates, as described under
"Servicing of the Underlying Mortgage Loans--Evidence as to
Compliance" in this prospectus supplement;
o all accountant's reports delivered to the trustee with respect
to the master servicer and/or the special servicer since the
date of initial issuance of the offered certificates, as
described under "Servicing of the Underlying Mortgage
Loans--Evidence as to Compliance" in this prospectus
supplement;
o the most recent inspection report with respect to each
mortgaged real property for a pooled mortgage loan prepared by
the master servicer or the special servicer and delivered to
the trustee as described under "Servicing of the Underlying
Mortgage Loans--Inspections; Collection of Operating
Information" in this prospectus supplement;
o the most recent appraisal, if any, with respect to each
mortgaged real property for a pooled mortgage loan obtained by
the master servicer or the special servicer and delivered to
the trustee;
o the most recent quarterly and annual operating statement and
rent roll for each mortgaged real property for a pooled
mortgage loan and financial statements of the related borrower
collected by the master servicer or the special servicer and
delivered to the trustee as described under "Servicing of the
Underlying Mortgage Loans--Inspections; Collection of
Operating Information" in this prospectus supplement; and
o the mortgage files, including all documents, such as
modifications, waivers and amendments of the pooled mortgage
loans, that are to be added to the mortgage files from time to
time.
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Copies of any and all of the foregoing items will be available from the
trustee upon request. However, the trustee will be permitted to require payment
of a sum sufficient to cover the reasonable costs and expenses of providing the
copies.
In connection with providing access to or copies of the items described
above, the trustee may require:
o in the case of a beneficial owner of an offered certificate
held in book-entry form, a written confirmation executed by
the requesting person or entity, in a form reasonably
acceptable to the trustee, generally to the effect that the
person or entity is a beneficial owner of offered certificates
and will keep the information confidential; and
o in the case of a prospective purchaser of an offered
certificate or any interest in that offered certificate,
confirmation executed by the requesting person or entity, in a
form reasonably acceptable to the trustee, generally to the
effect that the person or entity is a prospective purchaser of
offered certificates or an interest in offered certificates,
is requesting the information for use in evaluating a possible
investment in the offered certificates and will otherwise keep
the information confidential.
Registered holders of the offered certificates will be deemed to have agreed to
keep the information described above confidential by the acceptance of their
certificates.
VOTING RIGHTS
The voting rights for the series ___ certificates will be allocated as
follows: [SPECIFY ALLOCATION]. Voting rights allocated to a class of series ___
certificateholders will be allocated among those certificateholders in
proportion to their respective percentage interests in that class.
TERMINATION
The obligations created by the pooling and servicing agreement will
terminate following the earliest of--
1. the final payment or advance on, other liquidation of, the
last mortgage loan or related REO Property remaining in the
trust, and
2. the purchase of all of the mortgage loans and REO Properties
remaining in the trust by us, the master servicer, the special
servicer or any single certificateholder or group of
certificateholders in the series ___ controlling class, in
that order of preference.
Written notice of termination of the pooling and servicing agreement
will be given to each series _____ certificateholder. The final payment with
respect to each series ___ certificate will be made only upon surrender and
cancellation of that certificate at the office of the series ___ certificate
registrar or at any other location specified in the notice of termination.
Any purchase by us, the master servicer, the special servicer or any
single holder or group of holders of the controlling class of all the mortgage
loans and REO Properties remaining in the trust is required to be made at a
price equal to:
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o the sum of--
1. the total principal balance of all the mortgage loans
then included in the trust, other than any mortgage
loans as to which the mortgaged real properties have
become REO Properties, together with interest, other
than Default Interest and Post-ARD Additional
Interest, on and unreimbursed servicing advances for
those mortgage loans, and
2. the appraised value of all REO Properties then
included in the trust, as determined by an appraiser
mutually agreed upon by the master servicer, the
special servicer and the trustee, minus
o solely in the case of a purchase by the master servicer or the
special servicer, the total of all amounts payable or
reimbursable to the purchaser under the pooling and servicing
agreement.
The purchase will result in early retirement of the outstanding series ___
certificates. However, but the right of us, the master servicer, the special
servicer or any single holder or group of holders of the series ___ controlling
class to make the purchase is subject to the requirement that the total Stated
Principal Balance of the mortgage pool be less than ____% of the initial
mortgage pool balance. The termination price, exclusive of any portion of the
termination price payable or reimbursable to any person other than the series
___ certificateholders, will constitute part of the Available P&I Funds for the
final payment date. Any person or entity making the purchase will be responsible
for reimbursing the parties to the pooling and servicing agreement for all
reasonable out-of-pocket costs and expenses incurred by the parties in
connection with the purchase.
Any exchange by any single holder of all of the series ____
certificates for all of the mortgage loans and each REO Property remaining in
the trust may be made by giving written notice to each of the parties to the
pooling and servicing agreement no later than ___ days prior to the anticipated
date of exchange. In the event that any single holder of all the series ____
certificates elects to exchange those certificates for all of the mortgage loans
and each REO Property remaining in the trust, that holder, no later than the
business day immediately preceding the payment date on which the final payment
on the series ____ certificates is to occur, must deposit in the master
servicer's collection account immediately available funds in an amount equal to
all amounts then due and owing to the master servicer, the special servicer, the
trustee and their respective agents under the pooling and servicing agreement.
THE TRUSTEE
[INSERT DESCRIPTION OF TRUSTEE.]
The trustee is at all times required to be a corporation, bank, trust
company or association organized and doing business under the laws of the U.S.
or any State of the U.S. or the District of Columbia. In addition, the trustee
must at all times--
o be authorized under those laws to exercise trust powers,
o have a combined capital and surplus of at least $50,000,000,
and
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o be subject to supervision or examination by federal or state
authority.
If the corporation, bank, trust company or association publishes reports of
condition at least annually, in accordance with law or to the requirements of
the supervising or examining authority, then the combined capital and surplus of
the corporation, bank, trust company or association will be deemed to be its
combined capital and surplus as described in its most recent published report of
condition.
We, the master servicer, the special servicer and our and their
respective affiliates, may from time to time enter into normal banking and
trustee relationships with the trustee and its affiliates. The trustee and any
of its respective affiliates may hold series ___ certificates in their own
names. In addition, for purposes of meeting the legal requirements of some local
jurisdictions, the master servicer and the trustee acting jointly will have the
power to appoint a co-trustee or separate trustee of all or any part of the
trust assets. All rights, powers, duties and obligations conferred or imposed
upon the trustee will be conferred or imposed upon the trustee and the separate
trustee or co-trustee jointly, or in any jurisdiction in which the trustee shall
be incompetent or unqualified to perform some acts, singly upon the separate
trustee or co-trustee who shall exercise and perform its rights, powers, duties
and obligations solely at the direction of the trustee.
The trustee will be entitled to a monthly fee for its services, which
fee will accrue on a 30/360 basis at ____% per annum on the Stated Principal
Balance outstanding from time to time of each pooled mortgage loan. The trustee
fee is payable out of general collections on the mortgage loans and any REO
Properties in the trust.
See also "Description of the Governing Documents--The Trustee",
"--Duties of the Trustee", "--Matters Regarding the Trustee" and "--Resignation
and Removal of the Trustee" in the accompanying prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
GENERAL. The yield on any offered certificate will depend on:
o the price at which the certificate is purchased by an
investor, and
o the rate, timing and amount of payments on the certificate.
The rate, timing and amount of payments on any offered certificate will
in turn depend on, among other things,
o the pass-through rate for the certificate,
o the rate and timing of principal payments, including principal
prepayments, and other principal collections on the underlying
mortgage loans and the extent to which those amounts are to be
applied or otherwise result in reduction of the principal
balance or notional amount of the certificate,
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o the rate, timing and severity of Realized Losses and
Additional Trust Fund Expenses and the extent to which those
losses and expenses result in the reduction of the principal
balance or notional amount of the certificate, and
o the timing and severity of any Net Aggregate Prepayment
Interest Shortfalls and the extent to which those shortfalls
result in the reduction of the interest payments on the
certificate.
PASS-THROUGH RATES. The pass-through rate for each class of offered
certificates other than the class X certificates, is [fixed]. However, the
pass-through rate applicable to the class X certificates will be variable and
will be calculated based in part on the weighted average mortgage pass-through
rate from time to time. Accordingly, the yield on the class X certificates will
be sensitive to changes in the relative composition of the mortgage pool as a
result of scheduled amortization, voluntary prepayments and liquidations of
underlying mortgage loans following default. In addition, the pass-through rate
for the class X certificates will vary with changes in the relative sizes of the
total principal balances of the other interest-bearing classes of the series ___
certificates. The weighted average mortgage pass-through rate and the
pass-through rate for the class X certificates will not be affected by
modifications, waivers and amendments with respect to the underlying mortgage
loans.
See "Description of the Offered Certificates--Payments--Calculation of
Pass-Through Rates" and "Description of the Mortgage Pool" in this prospectus
supplement and "--Rate and Timing of Principal Payments" below.
RATE AND TIMING OF PRINCIPAL PAYMENTS. The yield to maturity on the
class X certificates will be extremely sensitive to, and the yield to maturity
on any other offered certificates purchased at a discount or a premium will be
affected by, the rate and timing of principal payments made in reduction of the
total principal balances or notional amounts of the series ___ certificates. In
turn, the rate and timing of principal payments that are paid or otherwise
result in reduction of the total principal balance or notional amount, as the
case may be, of any offered certificate will be directly related to the rate and
timing of principal payments on or with respect to the underlying mortgage
loans. Finally, the rate and timing of principal payments on or with respect to
the underlying mortgage loans will be affected by their amortization schedules,
the dates on which balloon payments are due and the rate and timing of principal
prepayments and other unscheduled collections on them, including for this
purpose, collections made in connection with liquidations of mortgage loans due
to defaults, casualties or condemnations affecting the mortgaged real
properties, or purchases or other removals of underlying mortgage loans from the
trust.
Prepayments and other early liquidations of the underlying mortgage
loans will result in payments on the series ___ certificates of amounts that
would otherwise be paid over the remaining terms of the mortgage loans. This
will tend to shorten the weighted average lives of those series ___ certificates
with principal balances. Defaults on the underlying mortgage loans, particularly
at or near their maturity dates, may result in significant delays in payments of
principal on the mortgage loans and, accordingly, on the series ___
certificates, while work-outs are negotiated or foreclosures are completed.
These delays will tend to lengthen the weighted average lives of those
certificates. See "Servicing of the Underlying Mortgage Loans--Modifications,
Waivers, Amendment and Consent" in this prospectus supplement. In addition, the
ability of a borrower under an ARD Loan, to repay that loan on the related
anticipated repayment date will generally depend on its ability to either
refinance the mortgage loan or
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sell the corresponding mortgaged real property. Also, a borrower may have little
incentive to repay its mortgage loan on the related anticipated repayment date
if then prevailing interest rates are relatively high. Accordingly, there can be
no assurance that any ARD Loan in the trust will be paid in full on its
anticipated repayment date.
The extent to which the yield to maturity on any offered certificate
may vary from the anticipated yield will depend upon the degree to which the
certificate is purchased at a discount or premium and when, and to what degree,
payments of principal on the underlying mortgage loans are in turn paid or
otherwise result in a reduction of the principal balance or notional amount of
the certificate. If you purchase your offered certificates at a discount, you
should consider the risk that a slower than anticipated rate of principal
payments on the underlying mortgage loans could result in an actual yield to you
that is lower than your anticipated yield. If you purchase class X certificates,
or if you purchase any other offered certificates at a premium, you should
consider the risk that a faster than anticipated rate of principal payments on
the underlying mortgage loans could result in an actual yield to you that is
lower than your anticipated yield.
If you are contemplating an investment in the class X certificates, you
should fully consider the risk that an extremely rapid rate of principal
payments on the underlying mortgage loans could result in your failure to recoup
fully your initial investment.
Because the rate of principal payments on or with respect to the
underlying mortgage loans will depend on future events and a variety of factors,
no assurance can be given as to the rate or the rate of principal prepayments in
particular. We are not aware of any relevant publicly available or authoritative
statistics with respect to the historical prepayment experience of a large group
of real estate loans comparable to those in the mortgage pool.
Even if they are available and payable on your offered certificates,
prepayment premiums and yield maintenance charges may not be sufficient to
offset fully any loss in yield on your offered certificates attributable to the
related prepayments of the underlying mortgage loans.
DELINQUENCIES AND DEFAULTS ON THE MORTGAGE LOANS. The rate and timing
of delinquencies and defaults on the underlying mortgage loans will affect the
amount of payments on your offered certificates, the yield to maturity of your
offered certificates, the rate of principal payments on your offered
certificates and the weighted average life of your offered certificates.
Delinquencies on the underlying mortgage loans, unless covered by P&I advances,
may result in shortfalls in payments of interest and/or principal on your
offered certificates for the current month. Although any shortfalls in payments
of interest may be made up on future payment dates, no interest would accrue on
those shortfalls. Thus, any shortfalls in payments of interest would adversely
affect the yield to maturity of your offered certificates.
If--
o you calculate the anticipated yield to maturity for your
offered certificates based on an assumed rate of default and
amount of losses on the underlying mortgage loans that is
lower than the default rate and amount of losses actually
experienced, and
o the additional losses result in a reduction of the total
payments on or the total principal balance or notional amount
of your offered certificates,
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then your actual yield to maturity will be lower than you calculated and could,
under some scenarios, be negative.
The timing of any loss on a liquidated mortgage loan that results in a
reduction of the total payments on or the total principal balance or notional
amount of your offered certificates will also affect your actual yield to
maturity, even if the rate of defaults and severity of losses are consistent
with your expectations. In general, the earlier your loss occurs, the greater
the effect on your yield to maturity.
Even if losses on the underlying mortgage loans do not result in a
reduction of the total payments on or the total principal balance or notional
amount of your offered certificates, the losses may still affect the timing of
payments on, and the weighted average life and yield to maturity of, your
offered certificates.
RELEVANT FACTORS. The following factors, among others, will affect the
rate and timing of principal payments and defaults and the severity of losses on
or with respect to the underlying mortgage loans in the trust:
o prevailing interest rates;
o the terms of the mortgage loans, including provisions that
require the payment of prepayment premiums and yield
maintenance charges, provisions that impose prepayment
lock-out periods and amortization terms that require balloon
payments;
o the demographics and relative economic vitality of the areas
in which the mortgaged real properties are located;
o the general supply and demand for commercial and multifamily
rental space of the type available at the mortgaged real
properties in the areas in which the mortgaged real properties
are located;
o the quality of management of the mortgaged real properties;
o the servicing of the mortgage loans;
o possible changes in tax laws; and
o other opportunities for investment.
See "Risk Factors--Risks Related to the Mortgage Loans", "Description
of the Mortgage Pool" and "Servicing of the Underlying Mortgage Loans" in this
prospectus supplement and "Description of the Governing Documents" and "Yield
and Maturity Considerations--Yield and Prepayment Considerations" in the
accompanying prospectus.
The rate of prepayment on the mortgage loans in the trust is likely to
be affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. When the prevailing market interest rate
is below the annual rate at which a mortgage loan accrues interest, the related
borrower may have an increased incentive to refinance the mortgage loan.
Conversely, to the extent prevailing market interest rates exceed the annual
rate at which a mortgage loan accrues interest, the
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related borrower may be less likely to voluntarily prepay the mortgage loan.
Assuming prevailing market interest rates exceed the revised mortgage interest
rate at which an ARD Loan accrues interest following its anticipated repayment
date, the primary incentive for the related borrower to prepay the mortgage loan
on or before its anticipated repayment date is to give the borrower access to
excess cash flow, all of which, net of the minimum required debt service,
approved property expenses and any required reserves, must be applied to pay
down principal of the mortgage loan. Accordingly, there can be no assurance that
any ARD Loan in the trust will be prepaid on or before its anticipated repayment
date or on any other date prior to maturity.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some underlying borrowers may
sell their mortgaged real properties in order to realize their equity in those
properties, to meet cash flow needs or to make other investments. In addition,
some underlying borrowers may be motivated by federal and state tax laws, which
are subject to change, to sell their mortgaged real properties prior to the
exhaustion of tax depreciation benefits.
A number of the underlying borrowers are limited or general
partnerships. The bankruptcy of the general partner in a partnership may result
in the dissolution of the partnership. The dissolution of a borrower
partnership, the winding-up of its affairs and the distribution of its assets
could result in an acceleration of its payment obligations under the related
mortgage loan.
We make no representation or warranty regarding:
o the particular factors that will affect the rate and timing of
prepayments and defaults on the underlying mortgage loans;
o the relative importance of those factors;
o the percentage of the total principal balance of the
underlying mortgage loans that will be prepaid or as to which
a default will have occurred as of any particular date; or
o the overall rate of prepayment or default on the underlying
mortgage loans.
UNPAID INTEREST. If the portion of the Available P&I Funds payable with
respect to interest on any class of offered certificates on any payment date is
less than the total amount of interest then payable for the class, the shortfall
will be payable to the holders of those certificates on subsequent payment
dates, subject to the Available P&I Funds on those subsequent payment dates and
the priority of payments described under "Description of the Offered
Certificates--Payments--Priority of Payments" in this prospectus supplement.
That shortfall will not bear interest, however, and will therefore negatively
affect the yield to maturity of that class of offered certificates for so long
as it is outstanding.
DELAY IN PAYMENTS. Because monthly payments will not be made on the
certificates until several days after the due dates for the mortgage loans
during the related collection period, your effective yield will be lower than
the yield that would otherwise be produced by your pass-through rate and
purchase price, assuming that purchase price did not account for a delay.
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YIELD SENSITIVITY
The tables on Annex C-1 hereto show the pre-tax corporate bond
equivalent or CBE yield to maturity with respect to each class of offered
certificates, and the modified duration, weighted average life, first payment
date on which principal is to be paid and final payment date on which principal
is to be paid with respect to each class of offered certificates, other than the
class X certificates. We prepared those tables using the Modeling Assumptions.
Where applicable, they also show the specified assumed purchase prices, which
prices do not include accrued interest. Assumed purchase prices are expressed in
32nds as a percentage of the initial total principal balance or notional amount
of each class of offered certificates. For example, ___ means __%.
We calculated the yields set forth in the tables on Annex C-1 by--
o determining the monthly discount rates which, when applied to
the assumed stream of cash flows to be paid on each class of
offered certificates, would cause the discounted present value
of that assumed stream of cash flows to equal the assumed
purchase prices, plus accrued interest from and including the
cut-off date to but excluding the assumed settlement date
specified as part of the offered certificates, and
o converting those monthly rates to semi-annual corporate bond
equivalent rates.
That calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by them
as payments on the offered certificates and, consequently, does not purport to
reflect the return on any investment in the offered certificates when those
reinvestment rates are considered.
For purposes of the tables on Annex C-1, modified duration has been
calculated using the modified Macaulay Duration as specified in the "PSA
Standard Formulas". The Macaulay Duration is calculated as the present value
weighted average time to receive future payments of principal and interest, and
the PSA Standard Formula modified duration is calculated by dividing the
Macaulay Duration by the appropriate semi-annual compounding factor. The
duration of a security may be calculated according to various methodologies.
Accordingly, no representation is made by us or any other person that the
modified duration approach used in this prospectus supplement is appropriate.
Duration, like yield, will be affected by the prepayment rate of the underlying
mortgage loans and extensions with respect to balloon payments that actually
occur during the life of the class A-1, class A-2, class B, class C, class D,
class E and class F certificates and by the actual performance of the underlying
mortgage loans, all of which may differ, and may differ significantly, from the
assumptions used in preparing the yield tables.
Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this prospectus supplement is the Constant
Prepayment Rate or CPR model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of the
then outstanding principal balance of the subject mortgage loan(s).
The characteristics of the mortgage loans in the trust will differ in
some respects from those assumed in preparing the tables on Annex C-1. Those
tables are presented for illustrative purposes only. Thus, neither the mortgage
pool nor any pooled mortgage loan will prepay at any constant rate, and it is
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unlikely that the pooled mortgage loans will prepay in a manner consistent with
any designated scenario for the tables on Annex C-1. In addition, there can be
no assurance that--
o the pooled mortgage loans will prepay at any particular rate,
o the pooled mortgage loans will not prepay, involuntarily or
otherwise, during lockout periods, yield maintenance periods
and/or declining premium periods,
o the ARD Loans in the trust will be paid in full on their
respective anticipated repayment dates,
o the actual pre-tax yields on, or any other payment
characteristics of, any class of offered certificates will
correspond to any of the information shown in the tables on
Annex C-1, or
o the total purchase prices of the offered certificates will be
as assumed.
You must make your own decision as to the appropriate assumptions,
including prepayment assumptions, to be used in deciding whether to purchase the
offered certificates.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The weighted average life of any offered certificate, other than a
class X certificate, refers to the average amount of time that will elapse from
the date of its issuance until each dollar to be applied in reduction of the
principal balance of that certificate is distributed to the investor. For
purposes of this prospectus supplement, the weighted average life of any offered
certificate, other than a class X certificate, is determined as follows:
o multiply the amount of each principal payment on the
certificate by the number of years from the assumed settlement
date to the related payment date;
o sum the results; and
o divide the sum by the total amount of the reductions in the
principal balance of the certificate.
Accordingly, the weighted average life of any offered certificate, other than a
class X certificate, will be influenced by, among other things, the rate at
which principal of the underlying mortgage loans is paid or otherwise collected
or advanced and the extent to which those payments, collections and/or advances
of principal are in turn applied in reduction of the principal balance of the
class of principal to which the certificate belongs.
As described in this prospectus supplement, the principal payment
amount for each payment date will be payable first with respect to the class A-1
and/or class A-2 certificates until the total principal balances of those
classes are reduced to zero, and will thereafter be distributable entirely with
respect to the other classes of certificates with principal balances,
sequentially based upon their relative seniority, in each case until the related
principal balance is reduced to zero. As a consequence of the foregoing, the
weighted average lives of the class A-1 and class A-2 certificates may be
shorter, and the weighted
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average lives of the other classes of certificates with principal balances may
be longer, than would otherwise be the case if the principal payment amount for
each payment date was being paid on a PRO RATA basis among the respective
classes of certificates with principal balances.
The tables set forth in Annex C-2 show with respect to each class of
offered certificates, other than the class X certificates--
o the weighted average life of that class, and
o the percentage of the initial total principal balance of that
class that would be outstanding after each of the specified
dates,
based upon each of the indicated levels of CPR and the Modeling Assumptions.
We make no representation that--
o the mortgage loans in the trust will prepay in accordance with
the assumptions set forth in this prospectus supplement at any
of the CPRs shown or at any other particular prepayment rate,
o all the mortgage loans in the trust will prepay in accordance
with the assumptions set forth in this prospectus supplement
at the same rate, or
o mortgage loans in the trust that are in a lockout period, a
yield maintenance period or declining premium period will not
prepay as a result of involuntary liquidations upon default or
otherwise.
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the offered
certificates will be used by us to purchase the mortgage loans that we will
include in the trust and to pay those expenses incurred in connection with the
issuance of the series ____ certificates.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Upon the issuance of the offered certificates, ___________________, our
counsel, will deliver its opinion generally to the effect that, assuming
compliance with the pooling and servicing agreement, and subject to any other
assumptions set forth in the opinion, REMIC I, REMIC II and REMIC III,
respectively, will each qualify as a REMIC under the Internal Revenue Code of
1986.
The assets of REMIC I will generally include--
o the pooled mortgage loans,
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o any REO Properties acquired on behalf of the series ___
certificateholders,
o the master servicer's collection account,
o the special servicer's REO account, and
o the trustee's payment account and interest reserve account,
but will exclude any collections of Post-ARD Additional Interest on the ARD
Loans.
For federal income tax purposes,
o the separate non-certificated regular interests in REMIC I
will be the regular interests in REMIC I and will be the
assets of REMIC II,
o the class R-I certificates will evidence the sole class of
residual interests in REMIC I,
o the separate non-certificated regular interests in REMIC II
will be the regular interests in REMIC II and will be the
assets of REMIC III,
o the class R-II certificates will evidence the sole class of
residual interests in REMIC II,
o the class A-1, A-2, X, B, C, D, E, F, G, H, J, K, L, M and N
certificates will evidence the regular interests in, and will
generally be treated as debt obligations of, REMIC III, and
o the class R-III certificates will evidence the sole class of
residual interests in REMIC III.
DISCOUNT AND PREMIUM; PREPAYMENT CONSIDERATION
For federal income tax reporting purposes, it is anticipated that the
class _____ and class _____ certificates will be issued with more than a DE
MINIMIS amount of original issue discount. The class _____ certificates will be
issued with a DE MINIMIS amount of original issue discount. The other classes of
offered certificates will not be issued with original issue discount. When
determining the rate of accrual of market discount and premium, if any, for
federal income tax purposes the prepayment assumption used will be that
subsequent to the date of any determination:
o [the ARD Loans in the trust will be paid in full on their
respective anticipated repayment dates,]
o no mortgage loan in the trust will otherwise be prepaid prior
to maturity, and
o there will be no extension of maturity for any mortgage loan
in the trust.
However, no representation is made as to the actual rate at which the pooled
mortgage loans will prepay, if at all. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" in the
accompanying prospectus.
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The IRS has issued regulations under Sections 1271 to 1275 of the
Internal Revenue Code of 1986 generally addressing the treatment of debt
instruments issued with original issue discount. You should be aware, however,
that those regulations and Section 1272(a)(6) of the Internal Revenue Code of
1986 do not adequately address all issues relevant to, or are not applicable to,
prepayable securities such as the offered certificates. We recommend that you
consult with your own tax advisor concerning the tax treatment of your offered
certificates.
If the method for computing original issue discount described in the
accompanying prospectus results in a negative amount for any period with respect
to any holder of offered certificates, the amount of original issue discount
allocable to that period would be zero. This is a possibility of particular
relevance to a holder of a class X certificate. The holder would be permitted to
offset the negative amount only against future original issue discount, if any,
attributable to his or her certificates. Although the matter is not free from
doubt, a holder of a class X certificate 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 holder is entitled, assuming
no further prepayments of the underlying mortgage loans. Any loss might be
treated as a capital loss.
Some classes of the offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
these classes of offered certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the payments remaining to be made on the certificate at the time of
its acquisition by the certificateholder. If you acquire an interest in any
class of offered certificates issued at a premium, you should consider
consulting your own tax advisor regarding the possibility of making an election
to amortize the premium. See "Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Premium" in the accompanying
prospectus.
Prepayment premiums and yield maintenance charges actually collected on
the underlying mortgage loans will be paid on the offered certificates as and to
the extent described in this prospectus supplement. It is not entirely clear
under the Code when the amount of a prepayment premium or yield maintenance
charge should be taxed to the holder of a class of offered certificates entitled
to that amount. For federal income tax reporting purposes, the tax administrator
will report prepayment premiums or yield maintenance charges as income to the
holders of a class of offered certificates entitled thereto only after the
master servicer's actual receipt of those amounts. The IRS may nevertheless seek
to require that an assumed amount of prepayment premiums and yield maintenance
charges be included in payments projected to be made on the offered certificates
and that taxable income be reported based on the projected constant yield to
maturity of the offered certificates. Therefore, the projected prepayment
premiums and yield maintenance charges would be included prior to their actual
receipt by holders of the offered certificates. If the projected prepayment
premiums and yield maintenance charges were not actually received, presumably
the holder of an offered certificate would be allowed to claim a deduction or
reduction in gross income at the time the unpaid prepayment premiums and yield
maintenance charges had been projected to be received. Moreover, it appears that
prepayment premiums and yield maintenance charges are to be treated as ordinary
income rather than capital gain. The correct characterization of the income is
not entirely clear. We recommend you consult your own tax advisors concerning
the treatment of prepayment premiums and yield maintenance charges.
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CONSTRUCTIVE SALES OF CLASS X CERTIFICATES
The Taxpayer Relief Act of 1997 added a provision to the Internal
Revenue Code of 1986 that requires the recognition of gain upon the constructive
sale of an appreciated financial position. A constructive sale of a financial
position may occur if a taxpayer enters into a transaction or series of
transactions that have the effect of substantially eliminating the taxpayer's
risk of loss and opportunity for gain with respect to the financial instrument.
Debt instruments that:
o entitle the holder to a specified principal amount,
o pay interest at a fixed or variable rate, and
o are not convertible into the stock of the issuer or a related
party,
cannot be the subject of a constructive sale for this purpose. Accordingly, only
class X certificates, which do not have principal balances, could be subject to
this provision and only if a holder of those certificates engages in a
constructive sale transaction.
CHARACTERIZATION OF INVESTMENTS IN OFFERED CERTIFICATES
Except to the extent noted below, the offered certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(B) of the Internal
Revenue Code of 1986 in the same proportion that the assets of the trust would
be so treated. In addition, interest, including original issue discount, if any,
on the offered certificates will be interest described in Section 856(c)(3)(B)
of the Internal Revenue Code of 1986 to the extent that those certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(B) of
the Internal Revenue Code of 1986.
Most of the mortgage loans to be included in the trust are not secured
by real estate used for residential or other purposes prescribed in Section
7701(a)(19)(C) of the Internal Revenue Code of 1986. Consequently, the offered
certificates will be treated as assets qualifying under that section to only a
limited extent. Accordingly, investment in the offered certificates may not be
suitable for a thrift institution seeking to be treated as a "domestic building
and loan association" under Section 7701(a)(19)(C) of the Internal Revenue Code
of 1986. The offered certificates will be treated as "qualified mortgages" for
another REMIC under Section 860G(a)(3)(C) of the Internal Revenue Code of 1986
and "permitted assets" for a "financial asset securitization investment trust"
under Section 860L(c) of the Internal Revenue Code of 1986.
To the extent an offered certificate represents ownership of an
interest in a mortgage loan that is secured in part by the related borrower's
interest in a bank account, that mortgage loan is not secured solely by real
estate. Therefore:
o a portion of that certificate may not represent ownership of
"loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Internal
Revenue Code of 1986;
o a portion of that certificate may not represent ownership of
"real estate assets" under Section 856(c)(5)(B) of the
Internal Revenue Code of 1986; and
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o the interest on that certificate may not constitute "interest
on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Internal Revenue
Code of 1986.
See "Description of the Mortgage Pool" in this prospectus supplement and
"Federal Income Tax Consequences--REMICs--Characterization of Investments in
REMIC Certificates" in the accompanying prospectus.
For further information regarding the federal income tax consequences
of investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the accompanying prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended and the
Internal Revenue Code of 1986 impose various requirements on--
o ERISA Plans, and
o persons that are fiduciaries with respect to ERISA Plans,
in connection with the investment of the assets of an ERISA Plan. For purposes
of this discussion, ERISA Plans may include individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts,
including as applicable, insurance company general accounts, in which other
ERISA Plans are invested.
A fiduciary of any ERISA Plan should carefully review with its legal
advisors whether the purchase or holding of offered certificates could be or
give rise to a transaction that is prohibited or is not otherwise permitted
either under ERISA or Section 4975 of the Internal Revenue Code of 1986 or
whether there exists any statutory or administrative exemption applicable
thereto. Some fiduciary and prohibited transaction issues arise only if the
assets of the trust are "plan assets" for purposes of Part 4 of Title I of ERISA
and Section 4975 of the Internal Revenue Code of 1986. Whether the assets of the
trust will be plan assets at any time will depend on a number of factors,
including the portion of any class of certificates that is held by benefit plan
investors within the meaning of U.S. Department of Labor Regulation Section
2510.3-101.
The U.S. Department of Labor has issued an individual prohibited
transaction exemption to the underwriter, identified as Prohibited Transaction
Exemption 91-23. Subject to the satisfaction of conditions set forth in PTE
91-23, PTE 91-23 generally exempts from the application of the prohibited
transaction provisions of Sections 406(a) and (b) and 407(a) of ERISA, and the
excise taxes imposed on these prohibited transactions under Sections 4975(a) and
(b) of the Internal Revenue Code of 1986, specified transactions relating to,
among other things, the servicing and operation of pools of real estate loans,
such as the mortgage pool, and the purchase, sale and holding of mortgage
pass-through certificates, such as the class A-1, A-2 and X certificates, that
are underwritten by an Exemption-Favored Party.
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PTE 91-23 sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of a class A-1, A-2 or X
certificate to be eligible for exemptive relief under that exemption. The
conditions are as follows:
o FIRST, the acquisition of the certificate by a plan must be on
terms that are at least as favorable to the ERISA Plan as they
would be in an arm's-length transaction with an unrelated
party;
o SECOND, the rights and interests evidenced by that certificate
must not be subordinated to the rights and interests evidenced
by the other certificates;
o THIRD, at the time of its acquisition by the plan, that
certificate must be rated in one of the three highest generic
rating categories by Moody's, Fitch, Standard & Poor's or Duff
& Phelps;
o FOURTH, the trustee cannot be an affiliate of any other member
of the restricted group, which consists of--
1. the trustee,
2. the Exemption-Favored Parties,
3. us,
4. the master servicer,
5. the special servicer,
6. any sub-servicers,
7. the mortgage loan sellers,
8. each borrower, if any, with respect to mortgage loans
constituting more than 5.0% of the total unamortized
principal balance of the mortgage pool as of the date
of initial issuance of the offered certificates, and
9. any and all affiliates of any of the aforementioned
persons;
o FIFTH, the following must be true--
1. the sum of all payments made to and retained by
Exemption-Favored Parties must represent not more
than reasonable compensation for underwriting the
relevant class of certificates,
2. the sum of all payments made to and retained by us in
connection with the assignment of mortgage loans to
the trust must represent not more than the fair
market value of the obligations, and
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3. the sum of all payments made to and retained by the
master servicer, the special servicer and any
sub-servicer must represent not more than reasonable
compensation for that person's services under the
pooling and servicing agreement and reimbursement of
that person's reasonable expenses in connection
therewith; and
o SIXTH, the investing ERISA Plan must be an accredited investor
as defined in Rule 501(a)(1) of Regulation D under the
Securities Act of 1933, as amended.
Because the class A-1, A-2 and X certificates are not subordinated to
any other class of certificates, the second general condition set forth above is
satisfied with respect to the class A-1, A-2 and X certificates. It is a
condition of their issuance that the class A-1, A-2 and X certificates be rated
not lower than "_____" by _____________ and "_____" by ______________. In
addition, the initial trustee is not an affiliate of any other member of the
restricted group. Accordingly, as of the date of initial issuance of the
certificates, the third and fourth general conditions set forth above will be
satisfied with respect to the class A-1, A-2 and X certificates. A fiduciary of
an ERISA Plan contemplating the purchase of a class A-1, A-2 or X certificate in
the secondary market must make its own determination that, at the time of the
purchase, the certificate continues to satisfy the third and fourth general
conditions set forth above. A fiduciary of an ERISA Plan contemplating the
purchase of a class A-1, A-2 or X certificate, whether in the initial issuance
of the certificate or in the secondary market, must make its own determination
that the first and fifth general conditions set forth above will be satisfied
with respect to the certificate as of the date of the purchase. An ERISA Plan's
authorizing fiduciary will be deemed to make a representation regarding
satisfaction of the sixth general condition set forth above in connection with
the purchase of a class A-1, A-2 or X certificate.
PTE 91-23 also requires that the trust meet the following requirements:
o the trust assets must consist solely of assets of the type
that have been included in other investment pools;
o certificates evidencing interests in those other investment
pools must have been rated in one of the three highest generic
categories of Moody's, Fitch, Standard & Poor's or Duff &
Phelps for at least one year prior to the ERISA Plan's
acquisition of a class A-1, A-2 or X certificate; and
o certificates evidencing interests in those other investment
pools must have been purchased by investors other than ERISA
Plans for at least one year prior to any ERISA Plan's
acquisition of a class A-1, A-2 or X certificate.
We believe that these requirements have been satisfied as of the date
of this prospectus supplement.
If the general conditions of PTE 91-23 are satisfied, PTE 91-23 may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code of 1986 by reason of Sections 4975(c)(1)(A) through (D) of
the Internal Revenue Code of 1986, in connection with--
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o the direct or indirect sale, exchange or transfer of class
A-1, A-2 or X certificates acquired by an ERISA Plan upon
initial issuance from us or an Exemption-Favored Party when we
are, or either mortgage loan seller, the trustee, the master
servicer, the special servicer or any sub-servicer, provider
of credit support, Exemption-Favored Party or mortgagor is, a
Party in Interest with respect to the investing ERISA Plan,
o the direct or indirect acquisition or disposition in the
secondary market of class A-1, A-2 or X certificates by an
ERISA Plan, and
o the continued holding of class A-1, A-2 or X certificates by
an ERISA Plan.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
class A-1, A-2 or X certificate that is--
1. on behalf of an ERISA Plan sponsored by any member of the
restricted group, and
2. by any person who has discretionary authority or renders
investment advice with respect to the assets of that ERISA
Plan.
Moreover, if the general conditions of PTE 91-23, as well as other
conditions set forth in PTE 91-23, are satisfied, PTE 91-23 may also provide an
exemption from the restrictions imposed by Sections 406(b)(1) and (b)(2) of
ERISA and the taxes imposed by Section 4975(c)(1)(E) of the Internal Revenue
Code of 1986 in connection with:
o the direct or indirect sale, exchange or transfer of class
A-1, A-2 or X certificates in the initial issuance of those
certificates between us or an Exemption-Favored Party and an
ERISA Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of
the assets of the ERISA Plan in those certificates is--
1. a borrower with respect to 5.0% or less of the fair
market value of the underlying mortgage loans, or
2. an affiliate of this person;
o the direct or indirect acquisition or disposition in the
secondary market of class A-1, A-2 or X certificates by an
ERISA Plan; and
o the continued holding of class A-1, A-2 or X certificates by
an ERISA Plan.
Further, if the general conditions of PTE 91-23, as well as other
conditions set forth in PTE 91-23, are satisfied, PTE 91-23 may provide an
exemption from the restrictions imposed by Sections 406(a), 406(b) and 407(a) of
ERISA, and the taxes imposed by Sections 4975(a) and (b) of the Internal Revenue
Code of 1986 by reason of Section 4975(c) of the Internal Revenue Code of 1986,
for transactions in connection with the servicing, management and operation of
the trust assets.
Lastly, if the general conditions of PTE 91-23 are satisfied, PTE 91-23
also may provide an exemption from the restrictions imposed by Sections 406(a)
and 407(a) of ERISA, and the taxes
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imposed by Section 4975(a) and (b) of the Internal Revenue Code of 1986, by
reason of Sections 4975(c)(1)(A) through (D) of the Internal Revenue Code of
1986, if the restrictions are deemed to otherwise apply merely because a person
is deemed to be a Party in Interest with respect to an investing plan by virtue
of--
o providing services to the ERISA Plan, or
o having a specified relationship to this person,
solely as a result of the ERISA Plan's ownership of class A-1, A-2 or X
certificates.
Before purchasing a class A-1, A-2 or X certificate, a fiduciary of an
ERISA Plan should itself confirm that:
o the class A-1, A-2 and X certificates are "certificates" for
purposes of PTE 91-23, and
o the general and other conditions set forth in PTE 91-23 and
the other requirements set forth in PTE 91-23 would be
satisfied at the time of the purchase.
In addition to determining the availability of the exemptive relief
provided in PTE 91-23, a fiduciary of an ERISA Plan considering an investment in
class A-1, A-2 or X certificates should consider the availability of any other
prohibited transaction class exemptions. See "ERISA Considerations" in the
accompanying prospectus. There can be no assurance that any exemption described
in the accompanying prospectus will apply with respect to any particular
investment by an ERISA Plan in class A-1, A-2 or X certificates or, even if it
were deemed to apply, that it would apply to all prohibited transactions that
may occur in connection with the investment. A purchaser of class A-1, A-2 or X
certificates should be aware, however, that even if the conditions specified in
one or more class exemptions are satisfied, the scope of relief provided by a
class exemption may not cover all acts which might be construed as prohibited
transactions.
The characteristics of the class B, C, D, E and F certificates do not
meet the requirements of PTE 91-23. Accordingly, those offered certificates may
not be acquired by, on behalf of or with the assets of an ERISA Plan, except in
the case of an insurance company using funds in its general account, which may
be able to rely on Section III of Prohibited Transaction Class Exemption 95-60,
which we discuss below.
So long as the applicable conditions are satisfied, Section III of PTCE
95-60 exempts from the application of the prohibited transaction provisions of
Sections 406(a), 406(b) and 407(a) of ERISA and Section 4975 of the Internal
Revenue Code of 1986 transactions in connection with the servicing, management
and operation of the trust under circumstances where an insurance company
general account has an interest in the trust as a result of its acquisition of
series ___ certificates. If these conditions are met, insurance company general
accounts would be allowed to purchase the classes of offered certificates, such
as the class B, C, D, E and F certificates, that do not meet requirements of PTE
91-23 solely because they--
o are subordinated to other classes of the certificates or
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o have not received a rating at the time of the purchase in one
of the three highest rating categories from [Moody's, Fitch,
Standard & Poor's or Duff & Phelps].
All other conditions of PTE 91-23 would have to be satisfied in order for PTCE
95-60 to be available. Before purchasing any class B, C, D, E or F certificates,
an insurance company general account seeking to rely on Section III of PTCE
95-60 should itself confirm that all applicable conditions and other
requirements have been satisfied.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986.
However, a governmental plan may be subject to a federal, state or local law
which is, to a material extent, similar to the foregoing provisions of ERISA or
the Internal Revenue Code of 1986. A fiduciary of a governmental plan should
make its own determination as to the need for and the availability of any
exemptive relief under any similar law.
Any fiduciary of an ERISA Plan considering whether to purchase an
offered certificate on behalf of that ERISA Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 to the
investment.
The sale of offered certificates to an ERISA Plan is in no way a
representation or warranty by us or the underwriter that the investment meets
all relevant legal requirements with respect to investments by ERISA Plans
generally or by any particular ERISA Plan, or that the investment is appropriate
for ERISA Plans generally or for any particular ERISA Plan.
LEGAL INVESTMENT
[Upon issuance, the class A-1, A-2, B and X certificates will
constitute mortgage related securities for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended. However, in order to remain mortgage
related securities, the class A-1, A-2, B and X certificates must, among other
things, continue to be rated in one of the two highest rating categories by at
least one nationally recognized statistical rating organization. In addition,
the class A-1, A-2, B and X certificates will constitute mortgage related
securities in part because they evidence interest in notes secured by first
mortgage liens on one or more real properties upon which is located a
residential, commercial or mixed residential and commercial structure.
The remaining offered certificates will NOT be mortgage related
securities for purposes of SMMEA. As a result, the appropriate characterization
of these remaining certificates under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase those
certificates, is subject to significant interpretive uncertainties.]
Neither we nor the underwriter makes any representation as to the
ability of particular investors to purchase the offered certificates under
applicable legal investment or other restrictions. All institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the offered certificates--
o are legal investments for them, or
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o are subject to investment, capital or other restrictions.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, prudent investor provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not interest
bearing or income paying.
There may be other restrictions on the ability of investors, including
depository institutions, either to purchase offered certificates or to purchase
offered certificates 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 offered certificates are legal
investments for the investors.
See "Legal Investment" in the accompanying prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement dated
_____________ between us and the underwriter, the underwriter has agreed to
purchase from us and we have agreed to sell to the underwriter _____% of each
class of the offered certificates. Proceeds to us from the sale of the offered
certificates, before deducting expenses payable by us, will be approximately
____% of the total principal balance of the offered certificates, plus accrued
interest on all the offered certificates from _______________. It is expected
that delivery of the offered certificates will be made to the underwriter in
book-entry form through the same day funds settlement system of DTC on or about
______________ against payment therefor in immediately available funds.
The underwriting agreement provides that the obligation of the
underwriter to pay for and accept delivery of the offered certificates is
subject to, among other things:
o the receipt of various legal opinions; and
o the satisfaction of various conditions, including that--
1. no stop order suspending the effectiveness of our
registration statement shall be in effect, and
2. no proceedings for the purpose of obtaining a stop
order shall be pending before or threatened by the
SEC.
The distribution of the offered certificates by the underwriter may be
accomplished from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. The
underwriter may accomplish the transactions by selling the offered certificates
to or through dealers, and the dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriter. The
underwriter may be deemed to have received compensation from us, in connection
with the sale of the offered certificates, in the form of underwriting
compensation. The underwriter and any dealers that participate with the
underwriter in the distribution of the offered certificates may be deemed to be
statutory underwriters and any profit on the resale of the
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offered certificates positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
The underwriting agreement provides that we will indemnify the
underwriter, and that under limited circumstances the underwriter will indemnify
us, against various civil liabilities under the Securities Act of 1933, as
amended, relating to the disclosure in this prospectus supplement, the
accompanying prospectus or our registration statement.
We have also been advised by the underwriter that it presently intends
to make a market in the offered certificates. The underwriter has no obligation
to do so, however, and any market making may be discontinued at any time. There
can be no assurance that an active public market for the offered certificates
will develop. See "Risk Factors--Risks Related to the Offered Certificates--Many
Factors, Including Lack of Liquidity, Can Adversely Affect the Market Value of
Your Offered Certificates" in this prospectus supplement and "Risk Factors--Lack
of Liquidity Will Impair Your Ability to Sell Your Offered Certificates and May
Have an Adverse Effect on the Market Value of Your Offered Certificates" in the
accompanying prospectus.
The underwriter is one of our affiliates.
LEGAL MATTERS
Particular legal matters relating to the certificates will be passed
upon for us and the underwriter by ___________________, New York, New York.
RATINGS
It is a condition to their issuance that the respective classes of
offered certificates be rated as follows:
CLASS [RATING AGENCY] [RATING AGENCY]
----- --------------- ---------------
Class A-1
Class A-2
Class B
Class C
Class D
Class E
Class F
Class X
The ratings on the offered certificates address the likelihood of the
timely receipt by their holders of all payments of interest to which they are
entitled on each payment date and, except in the case of the class X
certificates, the ultimate receipt by their holders of all payments of principal
to which they are entitled on or before the rated final payment date. The
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the offered certificates, and the
extent
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to which the payment stream from the mortgage pool is adequate to make payments
of interest and/or principal required under the offered certificates.
The ratings on the respective classes of offered certificates do not
represent any assessment of--
o the tax attributes of the offered certificates or of the
trust,
o whether or to what extent prepayments of principal may be
received on the underlying mortgage loans,
o the likelihood or frequency of prepayments of principal on the
underlying mortgage loans,
o the degree to which the amount or frequency of prepayments of
principal on the underlying mortgage loans might differ from
those originally anticipated,
o whether or to what extent the interest payable on any class of
offered certificates may be reduced in connection with Net
Aggregate Prepayment Interest Shortfalls, and
o whether and to what extent prepayment premiums, yield
maintenance charges, Default Interest or Post-ARD Additional
Interest will be received.
Also, a security rating does not represent any assessment of the yield
to maturity that investors may experience or the possibility that the class X
certificateholders might not fully recover their investment in the event of
rapid prepayments and/or other liquidations of the mortgage loans.
In general, the ratings address credit risk and not prepayment risk. As
described in this prospectus supplement, the amounts payable with respect to the
class X certificates consist primarily of interest. Even if the entire mortgage
pool were to prepay in the initial month, with the result that the class X
certificateholders receive only a single month's interest payment and,
accordingly, suffer a nearly complete loss of their investment, all amounts due
to those certificateholders will nevertheless have been paid. This result would
be consistent with the respective ratings received on the class X certificates.
The total notional amount of the class X certificates is subject to reduction in
connection with each reduction in the total principal balance of any other
interest-bearing class of series ___ certificates, whether as a result of
payments of principal or in connection with Realized Losses and Additional Trust
Fund Expenses. The ratings of the class X certificates do not address the timing
or magnitude of reduction of the total notional amount of those certificates,
but only the obligation to pay interest timely on that total notional amount as
so reduced from time to time.
There can be no assurance as to whether any rating agency not requested
to rate the offered certificates will nonetheless issue a rating to any class of
offered certificates and, if so, what the rating would be. A rating assigned to
any class of offered certificates by a rating agency that has not been requested
by us to do so may be lower than the rating assigned thereto by ___________ or
____________.
The ratings on the offered certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. Each security
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rating should be evaluated independently of any other security rating. See
"Rating" in the accompanying prospectus.
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GLOSSARY
The following capitalized terms will have the respective meanings
assigned to them in this "Glossary" section whenever they are used in this
prospectus supplement, including in any of the annexes to this prospectus
supplement.
"ADDITIONAL TRUST FUND EXPENSE" means an expense of the trust that
o arises out of a default on a mortgage loan or an otherwise
unanticipated event,
o is not included in the calculation of a Realized Loss, and
o is not covered by a servicing advance or a corresponding
collection from the related borrower or another party other
than the trust, which other party has no recourse to the trust
for reimbursement.
We provide some examples of Additional Trust Fund Expenses under
"Description of the Offered Certificates--Reductions to Certificate Principal
Balances in Connection with Realized Losses and Additional Trust Expenses" in
this prospectus supplement.
"ARD LOAN" means any mortgage loan in the trust having the
characteristics described in the first paragraph under "Description of the
Mortgage Pool--Terms and Conditions of the Underlying Mortgage Loans--ARD Loan"
in this prospectus supplement.
"APPRAISAL REDUCTION AMOUNT" means, for any mortgage loan in the trust
as to which an Appraisal Trigger Event has occurred, an amount that:
o will be determined shortly following the later of the date on
which the relevant appraisal or other valuation is obtained or
performed and the date on which the relevant Appraisal Trigger
Event occurred, and
o will equal the excess, if any, of "x" over "y" where--
1. "x" is equal to the sum of:
o the unpaid principal balance of the mortgage
loan, net of any related unreimbursed
advances of principal;
o to the extent not previously advanced by or
on behalf of the master servicer or the
trustee, all unpaid interest, other than any
Default Interest and Post-ARD Additional
Interest, accrued on the mortgage loan
through the most recent due date prior to
the date of determination;
o all accrued but unpaid special servicing
fees with respect to the mortgage loan;
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o all related unreimbursed advances made by or
on behalf of the master servicer, the
special servicer or the trustee with respect
to the required appraisal loan, together
with interest on those advances; and
o all currently due and unpaid real estate
taxes and assessments, insurance premiums
and, if applicable, ground rents with
respect to the related mortgaged real
property, net of any escrow reserves held by
the master servicer or the special servicer
which covers the particular item and other
related reserves; and
2. "y" is equal to 90% of the resulting appraised or
estimated value of the related mortgaged real
property or REO Property, as the appraised or
estimated value may be reduced, to not less than
zero, by the amount of any obligations secured by
liens on the property that are prior to the lien of
the mortgage loan.
If, however, the appraisal or other valuation referred to in the first
bullet point of this definition is not obtained or performed within __ days of
the Appraisal Trigger Event referred to in the first bullet point of this
definition, and no comparable appraisal or other valuation had been obtained or
performed during the ______-month period prior to that Appraisal Trigger Event,
then until the required appraisal or other valuation is obtained or performed,
the Appraisal Reduction Amount for the subject mortgage loan will equal
approximately ____% of the unpaid principal balance of that mortgage loan, net
of any related unreimbursed advances of principal. After receipt of the required
appraisal or other valuation, the special servicer will determine the Appraisal
Reduction Amount, if any, for the subject mortgage loan as described in the
first sentence of this definition.
"APPRAISAL TRIGGER EVENT" means, with respect to any mortgage loan in
the trust, any of the following events:
o the mortgage loan has been modified by the special servicer in
a manner that--
1. affects the amount or timing of any monthly debt
service payment due on it, other than, or in addition
to, bringing current monthly debt service payments
with respect to the mortgage loan,
2. except as expressly contemplated by the related loan
documents, results in a release of the lien of the
mortgage on any material portion of the related
mortgaged real property without a corresponding
principal prepayment in an amount not less than the
fair market value, as is, of the property to be
released, or
3. in the judgment of the special servicer, otherwise
materially impairs the security for the mortgage loan
or reduces the likelihood of timely payment of
amounts due on the mortgage loan;
o the related borrower fails to make any monthly debt service
payment with respect to the mortgage loan and the failure
continues for _____ days;
o a receiver is appointed and continues in that capacity with
respect to the mortgaged real property securing the mortgage
loan;
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o the related borrower becomes the subject of bankruptcy,
insolvency or similar proceedings; or
o the mortgaged real property securing the mortgage loan becomes
an REO Property.
"AVAILABLE P&I FUNDS" means, with respect to any payment date, all
funds available in the trustee's payment account to pay principal and interest
on the series ______ certificates on that payment date.
"CPR" means an assumed constant rate of prepayment each month, which is
expressed on a per annum basis, relative to the then outstanding principal
balance of a pool of mortgage loans for the life of those loans.
"DEFAULT INTEREST" means any interest that--
o accrues on a defaulted mortgage loan solely by reason of the
subject default, and
o is in excess of all interest at the related mortgage interest
rate and any Post-ARD Additional Interest accrued on the
mortgage loan.
"ERISA PLAN" means any employee benefit plan, or other retirement plan,
arrangement or account, that is subject to the fiduciary responsibility
provisions of ERISA and Section 4975 of the Internal Revenue Code of 1986.
"EXEMPTION-FAVORED PARTY" means any of--
o the underwriter,
o any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common
control with the underwriter, and
o any member of the underwriting syndicate or selling group of
which a person described in the prior two bullet points is a
manager or co-manager with respect to those mortgage
pass-through certificates.
"IRS" means the Internal Revenue Service.
"MODELING ASSUMPTIONS" means, collectively, the following assumptions
regarding the series ___ certificates and the mortgage loans in the trust:
o the mortgage loans have the characteristics set forth on Annex
A and the initial mortgage pool balance is approximately
$______________;
o the initial total principal balance or notional amount, as the
case may be, of each class of series ___ certificates is as
described in this prospectus supplement;
o the pass-through rate for each class of series ___
certificates is as described in this prospectus supplement.
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o there are no delinquencies or losses with respect to the
mortgage loans;
o there are no modifications, extensions, waivers or amendments
affecting the monthly debt service payments by borrowers on
the mortgage loans;
o there are no Appraisal Reduction Amounts with respect to the
mortgage loans;
o there are no casualties or condemnations affecting the
corresponding mortgaged real properties;
o each of the mortgage loans provides monthly debt service
payments to be due on the __ day of each month and accrues
interest on the respective basis described in this prospectus
supplement, which is either a 30/360 basis or an actual/360
basis;
o all prepayments on the mortgage loans are assumed to be
accompanied by a full month's interest;
o there are no breaches of our representations and warranties
regarding the mortgage loans;
o monthly debt service payments on the mortgage loans are timely
received on the ___ day of each month;
o no voluntary or involuntary prepayments are received as to any
mortgage loan during that mortgage loan's lockout period,
yield maintenance period or declining premium period, in each
case if any;
o each ARD Loan is paid in full on its anticipated repayment
date;
o except as otherwise assumed in the immediately preceding two
bullet points, prepayments are made on each of the mortgage
loans at the indicated CPRs set forth in the subject tables,
without regard to any limitations in those mortgage loans on
partial voluntary principal prepayments;
o no person or entity entitled thereto exercises its right of
optional termination described in this prospectus supplement
under "Description of the Offered Certificates--Termination";
o no mortgage loan is required to be repurchased by us;
o no prepayment premiums or yield maintenance charges are
collected;
o there are no Additional Trust Fund Expenses;
o payments on the offered certificates are made on the _____ day
of each month, commencing in _____________; and
o the offered certificates are settled on ________________ .
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"NET AGGREGATE PREPAYMENT INTEREST SHORTFALL" means, with respect to
any payment date, the excess, if any, of--
o the Prepayment Interest Shortfalls incurred with respect to
the mortgage pool during the related collection period, over
o the total payments made by the master servicer to cover those
Prepayment Interest Shortfalls.
"PARTY IN INTEREST" means any person that is a "party in interest"
within the meaning of ERISA or a "disqualified person" within the meaning of the
Internal Revenue Code of 1986.
"PERMITTED ENCUMBRANCES" means, with respect to any mortgaged real
property securing a mortgage loan in the trust, any and all of the following:
o the lien of current real property taxes, ground rents, water
charges, sewer rents and assessments not yet due and payable,
o covenants, conditions and restrictions, rights of way,
easements and other matters that are of public record and/or
are referred to in the related lender's title insurance policy
or, if that policy has not yet been issued, referred to in a
pro forma title policy or a marked-up commitment, none of
which materially interferes with the security intended to be
provided by the related mortgage, deed of trust or other
similar security instrument, the current use of the property
or the current ability of the property to generate income
sufficient to service the related mortgage loan,
o exceptions and exclusions specifically referred to in the
related lender's title insurance policy or, if that policy has
not yet been issued, referred to in a pro forma title policy
or marked-up commitment, none of which materially interferes
with the security intended to be provided by the related
mortgage, deed of trust or similar security instrument, the
current use of the property or the current ability of the
property to generate income sufficient to service the related
mortgage loan,
o other matters to which like properties are commonly subject,
none of which materially interferes with the security intended
to be provided by the related mortgage, deed of trust or
similar security instrument, the current use of the property
or the current ability of the property to generate income
sufficient to service the related mortgage loan,
o the rights of tenants to remain, whether under ground leases
or space leases, at the property following a foreclosure or
similar proceeding, provided that those tenants are performing
under their leases, and
o if the related mortgage loan is cross-collateralized with any
other mortgage loan, the lien of the mortgage, deed of trust
or other security instrument for that other mortgage loan.
"PERMITTED INVESTMENTS" means of U.S. government securities and other
investment grade obligations specified in the pooling and servicing agreement.
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"POST-ARD ADDITIONAL INTEREST" means, with respect to any ARD Loan, the
additional interest accrued with respect to that mortgage loan as a result of
the marginal increase in the related mortgage interest rate upon passage of the
related anticipated repayment date, as that additional interest may compound in
accordance with the terms of that mortgage loan.
"PREPAYMENT INTEREST EXCESS" means, with respect to any full or partial
prepayment of a pooled mortgage loan made by the related borrower during any
collection period after the due date for that loan, the amount of any interest
collected on that prepayment for the period following that due date, less the
amount of related master servicing fees payable from that interest collection,
and exclusive of any Default Interest and Post-ARD Additional Interest included
in that interest collection.
"PREPAYMENT INTEREST SHORTFALL" means, with respect to any full or
partial prepayment of a pooled mortgage loan made by the related borrower during
any collection period prior to the due date for that loan, the amount of any
uncollected interest that would have accrued on that prepayment through that due
date, less the amount of related master servicing fees that would have been
payable from that uncollected interest, and exclusive of any portion of that
uncollected interest that represents Default Interest or Post-ARD Additional
Interest.
"REALIZED LOSSES" mean losses on or with respect of the pooled mortgage
loans arising from the inability of the master servicer and/or the special
servicer to collect all amounts due and owing under the mortgage loans,
including by reason of the fraud or bankruptcy of a borrower or, to the extent
not covered by insurance, a casualty of any nature at a mortgaged real property.
We discuss the calculation of Realized Losses under "Description of the Offered
Certificates--Reductions to Certificate Principal Balances in Connection with
Realized Losses and Additional Trust Fund Expenses" in this prospectus
supplement.
"REMIC" means a real estate mortgage investment conduit, within the
meaning of, and formed in accordance with, the Tax Reform Act of 1986 and
Sections 860A through 860G of the Internal Revenue Code of 1986.
"REO PROPERTY" means any mortgaged real property that is acquired by
the trust through foreclosure, deed-in-lieu of foreclosure or otherwise
following a default on the corresponding pooled mortgage loan.
"SEC" means the Securities and Exchange Commission.
"SERVICING STANDARD" means, with respect to either the master servicer
or the special servicer, to service and administer the pooled mortgage loans and
any real estate owned by the trust for which that party is responsible:
o with the same care, skill and diligence as is normal and usual
in its general mortgage servicing and asset management
activities with respect to comparable loans and real
properties that either are part of other third party
portfolios, giving due consideration to customary and usual
standards of practice of prudent institutional commercial
lenders, or are held as part of its own portfolio, whichever
servicing procedures are of a higher standard;
o with a view to--
S-130
<PAGE>
1. the timely collection of all monthly debt service
payments under those mortgage loans,
2. the full collection of all prepayment premiums and
yield maintenance charges that may become payable
under those mortgage loans, and
3. in the case of the special servicer, if a mortgage
loan comes into and continues in default and, in the
judgment of the special servicer, no satisfactory
arrangements can be made for the collection of the
delinquent payments, including payments of prepayment
premiums and yield maintenance charges, the
maximization of the recovery on that defaulted
mortgage loan to the series _____ certificateholders,
as a collective whole, on a present value basis; and
o without regard to--
1. any known relationship that the master servicer or
the special servicer, as the case may be, or any of
its affiliates may have with any of the underlying
borrowers or any other party to the pooling and
servicing agreement,
2. the ownership of any series _____ certificate by the
master servicer or the special servicer, as the case
may be, or by any of its affiliates,
3. the obligation of the master servicer or the special
servicer, as the case may be, to make advances,
4. the right of the master servicer or the special
servicer, as the case may be, or any of its
affiliates to receive reimbursement of costs, or the
sufficiency of any compensation payable to it under
the pooling and servicing agreement or with respect
to any particular transaction, and
5. the ownership, servicing or management by the master
servicer or the special servicer, as the case may be,
or any of its affiliates of any other loans or real
properties not included in or securing, as the case
may be, the mortgage pool, or the right to service or
manage for others any other loans or real properties.
"SERVICING TRANSFER EVENT" means, with respect to any mortgage loan in
the trust, any of the following events:
1. the related borrower fails to make when due any monthly debt
service payment, including a balloon payment, or any other
payment required under the related promissory note or the
related mortgage, and either the failure actually continues,
or the master servicer believes it will continue, unremedied
for _____ days;
2. the master servicer determines that a default in the making of
a monthly debt service payment, including a balloon payment,
or any other material payment required to be made under the
related promissory note or the related mortgage, is likely to
occur within _____ days and either--
S-131
<PAGE>
o the default is likely to remain unremedied for at least _____
days, or
o the related borrower has requested a material modification of
the related mortgage loan;
3. the master servicer determines that a non-payment default has
occurred under the mortgage loan that may materially impair
the value of the corresponding mortgaged real property as
security for the mortgage loan and the default continues
unremedied for the applicable cure period under the terms of
the mortgage loan or, if no cure period is specified, for
_____ days;
4. various events of bankruptcy, insolvency, readjustment of
debt, marshalling of assets and liabilities, or similar
proceedings occur with respect to the related borrower or the
corresponding mortgaged real property, or the related borrower
takes various actions indicating its bankruptcy, insolvency or
inability to pay its obligations; or
5. the master servicer receives notice of the commencement of
foreclosure or similar proceedings with respect to the
corresponding mortgaged real property.
A Servicing Transfer Event will cease to exist, if and when:
o with respect to the circumstances described in clause 1. of
this definition, the related borrower makes three consecutive
full and timely monthly debt service payments under the terms
of the mortgage loan, as those terms may be changed or
modified in connection with a bankruptcy or similar proceeding
involving the related borrower or by reason of a modification,
waiver or amendment granted or agreed to by the master
servicer or the special servicer;
o with respect to the circumstances described in clauses 2. and
4. of this definition, those circumstances cease to exist in
the good faith, reasonable judgment of the special servicer,
but, with respect to any bankruptcy or insolvency proceedings
contemplated by clause 4., no later than the entry of an order
or decree dismissing the proceeding;
o with respect to the circumstances described in clause 3. of
this definition, the default is cured in the judgment of the
special servicer; and
o with respect to the circumstances described in clause 5. of
this definition, the proceedings are terminated.
"STATED PRINCIPAL BALANCE" means, for each mortgage loan in the trust,
an amount that:
o will initially equal its cut-off date principal balance; and
o will be permanently reduced on each subsequent payment date,
to not less than zero, by--
1. that portion, if any, of the Total Principal Payment
Amount for that payment date that is attributable to
that mortgage loan, and
S-132
<PAGE>
2. the principal portion of any Realized Loss incurred
with respect to that mortgage loan during the related
collection period.
However, the "Stated Principal Balance" of a mortgage loan will, in all
cases, be zero as of the payment date following the collection period in which
it is determined that all amounts ultimately collectible with respect to the
mortgage loan or any related REO Property have been received.
"TOTAL PRINCIPAL PAYMENT AMOUNT" means, for any payment date, an amount
equal to the total, without duplication, of the following:
o all payments of principal, including voluntary principal
prepayments, received on the pooled mortgage loans during the
related collection period, exclusive of any of those payments
that represents a late collection of principal for which an
advance was previously made for a prior payment date or that
represents a monthly payment of principal due on or before the
cut-off date or on a due date subsequent to the end of the
related collection period;
o all monthly payments of principal received on the pooled
mortgage loans prior to, but that are due during, the related
collection period;
o all other collections, including liquidation proceeds,
condemnation proceeds, insurance proceeds and repurchase
proceeds, that were received on or with respect to any of the
pooled mortgage loans or any related REO Properties during the
related collection period and that were identified and applied
by the master servicer as recoveries of principal of the
subject mortgage loan or, in the case of an REO Property, of
the related mortgage loan, in each case net of any portion of
the particular collection that represents a late collection of
principal due on or before the cut-off date or for which an
advance of principal was previously made for a prior payment
date; and
o all advances of principal made with respect to the mortgage
loans for that payment date.
"WEIGHTED AVERAGE POOL PASS-THROUGH RATE" means, for each payment date,
the weighted average of the following annual rates with respect to all of the
mortgage loans in the trust, weighted on the basis of the mortgage loans'
respective Stated Principal Balances immediately prior to that payment date:
o in the case of each mortgage loan that accrues interest on a
30/360 basis, an annual rate equal to--
1. the mortgage interest rate in effect for that
mortgage loan as of the cut-off date, minus
2. the sum of the related master servicing fee rate,
plus ____% per annum; and
o in the case of each mortgage loan that accrues interest on an
actual/360 basis, an annual rate generally equal to--
S-133
<PAGE>
1. a fraction, expressed as a percentage, the numerator
of which is, subject to adjustment as described below
in this bullet point, the product 12 times the amount
of interest that accrued or would have accrued with
respect to that mortgage loan on an actual/360 basis
during the related interest accrual period, based on
its Stated Principal Balance immediately preceding
that payment date and its mortgage interest rate in
effect as of the cut-off date, and the denominator of
which is the Stated Principal Balance of the mortgage
loan immediately prior to that payment date, minus
2. the sum of the related master servicing fee rate,
plus ____% per annum.
Notwithstanding the foregoing, if the subject payment date occurs
during January, except during a leap year, or February, then, in the case of any
particular mortgage loan that accrues interest on an actual/360 basis, the
amount of interest referred to in the numerator of the fraction described in
clause 1. of the second bullet point above will be decreased to reflect any
interest reserve amount with respect to that mortgage loan that is transferred
from the trustee's payment account to the trustee's interest reserve account
during that month. Furthermore, if the subject payment date occurs during March,
then, in the case of any particular mortgage loan that accrues interest on an
actual/360 basis, the amount of interest referred to in the numerator of the
fraction described in clause 1. of the second bullet point above will be
increased to reflect any interest reserve amounts with respect to that mortgage
loan that are transferred from the trustee's interest reserve account to the
trustee's payment account during that month.
"USAP" means the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers of America.
[INCLUDE OTHER TERMS THAT ARE TO BE USED IN THE ANNEXES TO THIS
PROSPECTUS SUPPLEMENT.]
S-134
<PAGE>
The attached diskette contains one spreadsheet file that can be put on a
user-specified hard drive or network drive. This spreadsheet file is
"___________________". The spreadsheet file "__________________" is a Microsoft
Excel(1), Version 5.0 spreadsheet. The file provides, in electronic format, some
of the statistical information that appears under the caption "Description of
the Mortgage Pool" in, and on Annex A to, this prospectus supplement. Defined
terms used, but not otherwise defined, in the spreadsheet file will have the
respective meanings assigned to them in this prospectus supplement. All the
information contained in the spreadsheet file is subject to the same limitations
and qualifications contained in this prospectus supplement. Prospective
investors are strongly urged to read this prospectus supplement and accompanying
prospectus in its entirety prior to accessing the spreadsheet file.
----------------
(1) Microsoft Excel is a registered trademark of Microsoft Corporation.
<PAGE>
================================================================================
PROSPECTUS SUPPLEMENT
Important Notice About the Information Contained in this Prospectus
Supplement, The Accompanying Prospectus and The Related
Registration Statement.................................S-2
Summary of Prospectus Supplement..........................S-4
Risk Factors.............................................S-25
Forward-Looking Statements...............................S-35
Description of the Mortgage Pool.........................S-35
Servicing of the Underlying Mortgage Loans...............S-54
Description of the Offered Certificates..................S-82
Yield and Maturity Considerations.......................S-104
Use of Proceeds.........................................S-111
Federal Income Tax Consequences.........................S-111
ERISA Considerations....................................S-115
Legal Investment........................................S-120
Method of Distribution..................................S-121
Legal Matters...........................................S-122
Ratings.................................................S-122
Glossary................................................S-125
ANNEX A--Certain Characteristics of the
Underlying Mortgage Loans and the
Mortgaged Real Properties..............................A-1
ANNEX B--Term Sheet.......................................B-1
ANNEX C-1--Price/Yield Tables............................C-1-1
ANNEX C-2--Decrement Tables..............................C-2-1
ANNEX D--Form of Trustee Report............................D-1
PROSPECTUS
Important Notice About the Information Presented in
this Prospectus..........................................3
Available Information; Incorporation by Reference...........3
Summary of Prospectus.......................................4
Risk Factors...............................................14
Capitalized Terms Used in this Prospectus..................35
Description of the Trust Assets............................36
Yield and Maturity Considerations..........................65
Salomon Brothers Mortgage Securities VII, Inc..............72
Description of the Certificates............................72
Description of the Governing Documents.....................83
Description of Credit Support..............................94
Legal Aspects of Mortgage Loans............................96
Federal Income Tax Consequences...........................110
State and Other Tax Consequences..........................160
ERISA Considerations......................................160
Legal Investment..........................................164
Use of Proceeds...........................................166
Method of Distribution....................................167
Legal Matters.............................................168
Financial Information.....................................168
Rating....................................................168
Glossary..................................................169
UNTIL _______________, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
$__________
(APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
(DEPOSITOR)
CLASS A-1, CLASS A-2, CLASS B, CLASS C, CLASS D,
CLASS E, CLASS F AND CLASS X
SERIES _____ COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
SALOMON SMITH BARNEY
================================================================================
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, Dated September __, 2000
[Version 4]
Prospectus Supplement (to Prospectus dated , ____)
$_______________ (APPROXIMATE)
ASSET BACKED FLOATING RATE NOTES, SERIES ____-
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC. TRUST SERIES ____-__
ISSUER
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
MASTER SERVICER
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
This prospectus supplement, together with the accompanying prospectus will
constitute the complete prospectus.
--------------------------------------------------------------------------------
OFFERED NOTES The trust created for the Series _____-__ notes will hold
a pool of one- to four-family residential first mortgage
loans. The trust will issue ______ classes of offered
notes. You can find a list of these classes, together with
their note balances, interest rates and certain other
characteristics, on Page S-__ of this prospectus
supplement. Credit enhancement for the offered notes will
be provided by ______ classes of subordinated Class M
Notes. Each class of Class M Notes is subordinated to the
senior notes and any Class M Notes with a higher payment
priority.
UNDERWRITING _______________________, as underwriter, will offer to the
public the Class A Notes, the Class M-1 Notes, the Class
M-2 Notes and the Class M-3 Notes at varying prices to be
determined at the time of sale. The proceeds to the
depositor from the sale of the underwritten notes will be
approximately _____% of the principal balance of the
underwritten notes plus accrued interest, before deducting
expenses. See "Method of Distribution".
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED NOTES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------------
<PAGE>
Underwriter
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the offered notes in three separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of notes;
o this prospectus supplement, which describes the specific terms of this
series of notes; and
o the annex to this prospectus supplement, which is an integral part of
the prospectus supplement.
Salomon Brothers Mortgage Securities VII, Inc. maintains its principal office at
390 Greenwich Street, 4th Floor, New York, New York 10013. Its telephone number
is (212) 816-6000.
S-2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Prospectus Supplement................................................................................S-4
Risk Factors....................................................................................................S-8
The Issuer.....................................................................................................S-52
The Seller.....................................................................................................S-52
The [SPE]......................................................................................................S-52
The Owner Trustee..............................................................................................S-53
The Servicing Agreement........................................................................................S-54
The Indenture and Owner Trust Agreement........................................................................S-58
</TABLE>
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE NOTES OFFERED BY
THIS PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE
TERMS OF THE OFFERED NOTES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ENTIRE ACCOMPANYING PROSPECTUS.
Title of Series........................Salomon Brothers Mortgage Securities VII,
Inc., Asset- Backed Floating Rate Notes,
Series ____-_.
Cut-off Date...........................__________ __, ____.
Closing Date...........................On or about __________ __, ____.
Issuer.................................Salomon Trust Series ____-__.
Depositor..............................Salomon Brothers Mortgage Securities VII,
Inc, The depositor will deposit the
mortgage loans into the trust. SEE "THE
DEPOSITOR" IN THE PROSPECTUS.
Master Servicer........................__________________. SEE "THE SERVICING
AGREEMENTS--MASTER SERVICER" IN THIS
PROSPECTUS SUPPLEMENT.
Originators and Servicers..............______________, ______________ and
____________. SEE "THE MORTGAGE
POOL--UNDERWRITING STANDARDS OF ________
AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS" AND "THE SERVICING
AGREEMENTS--THE ORIGINATORS AND
SERVICERS" IN THIS PROSPECTUS SUPPLEMENT.
Seller................................._______________. SEE "THE SELLER" IN THIS
PROSPECTUS SUPPELEMENT.
________ SPE..........................._______________. SEE "THE [SPE]" IN THIS
PROSPECTUS SUPPLEMENT.
Owner Trustee..........................________________. SEE "THE OWNER TRUSTEE"
IN THIS PROSPECTUS SUPPLEMENT.
Indenture Trustee......................__________________. SEE "THE INDENTURE
TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT.
Payment Dates..........................Payments on the offered notes will be
made on the __th day of each month, or,
if that day is not a business day, on the
next succeeding business day, beginning
in ______ ____.
Offered Notes..........................The classes of offered notes and their
interest rates, note balances and final
maturity date are set forth in the
immediately following table.
S-4
<PAGE>
<TABLE>
<CAPTION>
CLASS INITIAL NOTE NOTE INTEREST FINAL MATURITY DATE
BALANCE RATE
-------------------------- ------------------ ------------------------------ ----------------------------------
<S> <C> <C> <C>
A......................... $_________ Variable ________ ____
M-1....................... $_________ Variable ________ ____
M-2....................... $_________ Variable _________ ____
M-3....................... $_________ Variable _______ ____
========================== ================== ============================== ==================================
</TABLE>
The initial note balances of each class of offered notes listed in the
immediately preceding table is approximate. The note interest rate on each class
of offered notes is variable and will be calculated as described in this
prospectus supplement under "Description of the Notes--Note Interest Rates."
THE ISSUER
The notes will be issued by the issuer, a Delaware business trust established
under a trust agreement between the depositor and the owner trustee. The issuer
will issue _____ classes of notes representing non- recourse debt obligations of
the issuer secured by the trust estate. SEE "DESCRIPTION OF THE NOTES" IN THIS
PROSPECTUS SUPPLEMENT.
Distributions of interest and principal on the offered notes will be made only
from payments received in connection with the mortgage loans described in this
summary under the heading "Mortgage Loans."
EQUITY CERTIFICATES
Trust Certificates, Series ____-__, will be issued under the owner trust
agreement and will represent the beneficial ownership interest in the issuer.
The equity certificates are not offered by this prospectus supplement.
THE MORTGAGE LOANS
The trust will contain approximately _____ [conventional] [sub-prime]
[nonconforming], one- to four-family, fixed-rate and adjustable-rate mortgage
loans secured by first liens on residential real properties. The mortgage loans
have an aggregate principal balance of approximately $__________ as of
_________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of __________ __, ____.
S-5
<PAGE>
Approximate range of _____% to
mortgage rates: _____%.
Approximate weighted ______%.
average mortgage rate:
Approximate weighted ___ years
average remaining term to and ___
stated maturity: months.
Approximate range of $______ to
principal balances: $_______.
Approximate average $_______.
principal balance:
Approximate range of loan- _____% to
to-value ratios: _____%.
Approximate weighted ______%.
average loan-to-value ratio:
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE NOTES
OFFERED NOTES. The offered notes will have the characteristics shown in the
table appearing on pages S-__ in this prospectus supplement. The interest rates
on each class of offered notes are variable and are calculated for each
distribution date as described in this prospectus supplement under "Description
of the Notes--Note Interest Rates."
The offered notes will be sold by the depositor to the underwriter on the
closing date.
The offered notes will initially be represented by one or more global notes
registered in the name of CEDE & Co., as nominee of DTC in minimum denominations
of $[10,000] and integral multiples of $[1.00] in excess of the minimum
denominations. SEE "DESCRIPTION OF THE NOTES --REGISTRATION" IN THIS PROSPECTUS
SUPPLEMENT.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
notes consists of subordination as described in this prospectus supplement under
"Description of the Notes--Allocation of Losses; Subordination" in this
prospectus supplement.
SUBORDINATION. The rights of the holders of the Class M-1 Notes, the Class M-2
Notes and the Class M-3 Notes to receive distributions will be subordinated, to
the extent described in this prospectus supplement, to the rights of the holders
of the Class A Notes. The Class M-1 Notes, the Class M-2 Notes and the Class M-3
Notes are referred to in the prospectus supplement as subordinate notes.
In addition, the rights of the holders of subordinate notes with higher
numerical class designations will be subordinated to the rights of holders of
subordinate notes with lower numerical class designations, to the extent
described in this prospectus supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior notes in respect of interest and principal and to afford the
more senior notes protection against realized losses on the mortgage loans as
described in the next section.
ALLOCATION OF LOSSES. If subordinate notes remain outstanding, losses on the
mortgage loans will be allocated first to the class of subordinate notes with
the lowest payment priority, and the other classes of notes will not bear any
portion of these losses. If none of the subordinate notes remain outstanding,
losses on mortgage loans will be allocated to the Class A Notes.
P&I ADVANCES
Each servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described under "P&I
Advances" in this prospectus supplement. These advances shall be referred to in
this prospectus supplement as P&I Advances. Each servicer is entitled to be
reimbursed for these advances,
S-6
<PAGE>
and therefore these advances are not a form of credit enhancement. SEE
"DESCRIPTION OF THE NOTES--P&I ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND
"DESCRIPTION OF THE SECURITIES--ADVANCES IN RESPECT OF DELINQUENCIES" IN THE
PROSPECTUS.
OPTIONAL REDEMPTION
At its option, the majority holder of the equity certificates may redeem the
notes and thereby effect termination and early retirement of the notes, after
the aggregate note balance has been reduced to less than [20%] of the aggregate
initial note balance. SEE "THE INDENTURE AND OWNER TRUST AGREEMENT-- OPTIONAL
REDEMPTION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--
TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the notes, Thacher Proffitt & Wood, counsel to the
depositor, will deliver its opinion to the effect that the notes will be
characterized as indebtedness and the issuer will not be classified as an
association taxable as a corporation or a publicly traded partnership. FOR
FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF INVESTING
IN THE OFFERED NOTES, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the notes that the offered notes receive
the following ratings from ______________ and ___________:
OFFERED NOTES [RA] [RA]
------------- ---- ----
Class A AAA AAA
Class M-1 AA AA
Class M-2 A A
Class M-3 BBB BBB
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 NOTES"
AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
LEGAL INVESTMENT
The offered notes, other than the Class ___ and Class ___ Notes, will constitute
mortgage related securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, 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 therefore will be legal investments for
entities to the extent provided in SMMEA and applicable state laws. The Class
___ Notes and the Class ___ Notes will not constitute mortgage related
securities for purposes of SMMEA. SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
ERISA CONSIDERATIONS
Subject to important considerations discussed in this prospectus supplement, the
notes may be eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. Plans should consult with their
legal advisors before investing. SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
S-7
<PAGE>
RISK FACTORS
The offered notes are not suitable investments for all investors. In
particular, you should not purchase the offered notes unless you understand and
are able to bear the prepayment, credit, liquidity and market risks associated
with these securities.
You should carefully consider the following factors in connection with the
purchase of the offered notes:
[APPROPRIATE RISK FACTORS AS NECESSARY]
[THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC WHICH MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS ALLOCATED TO YOUR NOTES.
The originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. The originator provides loans primarily to
borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac
guidelines but who do have equity in their property. While the originator's
primary consideration in underwriting a mortgage loan is the value of the
mortgaged property, the originator also considers, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the mortgaged property. The originator's
underwriting standards do not prohibit a mortgagor from obtaining secondary
financing at the time of origination of the originator's first lien, which
secondary financing would reduce the equity the mortgagor would otherwise have
in the related mortgaged property as indicated in the originator's loan-to-value
ratio determination.
As a result of the underwriting standards described in the immediately
preceding paragraph, the mortgage loans in the mortgage pool are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS OF ___________ AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT].
[THE PAYMENT PERFORMANCE OF YOUR NOTES WILL BE RELATED TO THE PAYMENT
PERFORMANCE OF THE MORTGAGE LOANS IN THE TRUST FUND; THE MORTGAGE LOANS IN THE
TRUST FUND WHICH ARE DISCUSSED IN THIS SECTION MAY EXPOSE YOUR NOTES TO GREATER
LOSSES.
The notes represent an interest in mortgage loans. In the event that the
mortgaged properties fail to provide adequate security for the mortgage loans
included in the trust fund, any resulting losses, to the extent not covered by
the credit enhancement, will be allocated to the notes as described in this
prospectus supplement, and consequently may adversely affect the yield to
maturity on your notes. 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 mortgage loans. Furthermore, particular mortgage
loans, including negative amortization mortgage loans, buydown mortgage loans
and mortgage loans requiring the mortgagor to make a balloon
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payment, may have a greater likelihood of delinquency and foreclosure, and a
greater likelihood of loss in the event of delinquency or foreclosure. You
should consider the following risks associated with the mortgage loans included
in the trust fund: [AS APPLICABLE]
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL MAY RESULT IN
OUTSTANDING PRINCIPAL BALANCES IN EXCESS OF THE VALUE OF THE UNDERLYING
MORTGAGED PROPERTY WHICH COULD RESULT IN LOSSES ON YOUR NOTES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _______________, are subject to negative amortization. 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 the
credit enhancement in the trust fund, holders of the notes 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.
[THE INABILITY OF A MORTGAGOR TO MAKE LARGER MONTHLY PAYMENTS FOLLOWING THE
BUYDOWN PERIOD OF A BUYDOWN MORTGAGE LOAN MAY RESULT IN LOSSES ON THOSE MORTGAGE
LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _________________ are buydown mortgage loans, subject to temporary buydown
plans under 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.
In most cases, 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 some
buydown mortgage loans, during the initial buydown period. The inability of a
mortgagor to make these larger monthly payments could lead to losses on the
mortgage loans, and to the extent not covered by the credit enhancement, may
adversely affect the yield to maturity on your notes.
[THE INABILITY OF A MORTGAGOR TO MAKE A BALLOON PAYMENT AT MATURITY, MAY EXPOSE
YOUR NOTES TO LOSSES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ may not be fully amortizing, or may not amortize at all,
over their terms to maturity and, thus, will require substantial payments of
principal and interest, that is, balloon payments, at their stated maturity.
Mortgage loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the balloon payment. The ability of a mortgagor to
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accomplish either of these goals will be affected by a number of factors,
including the value of the related mortgaged property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, prevailing economic conditions and the availability
of credit for loans secured by comparable real properties.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE LIMITED
RECOURSE TO THE RELATED BORROWER, WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS ALLOCATED TO YOUR NOTES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are 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. If the value of
the mortgaged property and other security has declined, the trust fund couuld
suffer losses on these mortgage loans that, to the extent not covered by [the
credit enhancement] may be allocated to your notes. However, even with respect
to those mortgage loans that provide for recourse against the mortgagor and its
assets, there can be no assurance that enforcement of the 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.
[THE INABILITY OF A MORTGAGOR TO MAKE VARYING MONTHLY PAYMENTS UNDER A HOME
EQUITY LINE OF CREDIT LOAN MAY RESULT IN LOSSES ON YOUR NOTES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans that provide the borrower with a line of
credit under which amounts may be advanced to the borrower by the lender from
time to time. Collection on these types of mortgage loans may vary because,
among other things:
o borrowers may make payments during any month as low as the minimum
monthly payment for that month, or just the interest and fees for that month
during any interest-only period, or
o borrowers may make payments as high as the entire outstanding charges
on the mortgage loan.
It is possible that borrowers may fail to make the required periodic
payment and, to the extent not covered by the credit enhancement, these losses
may adversely affect the yield to maturity on your motes.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE SECURED BY
JUNIOR LIENS, WHICH MAY EXPOSE THE OFFERED NOTES TO LOSSES IF THE TRUST FUND
DOES NOT RECEIVE ADEQUATE FUNDS IN CONNECTION WITH A FORECLOSURE OF THE RELATED
SENIOR LIEN TO SATISFY BOTH THE SENIOR AND JUNIOR LIEN.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans secured by junior liens and with respect
to approximately ___% of these junior liens, the related senior liens are not
included in the trust fund. 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 junior lien mortgage loan. 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
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mortgage loan. If the master servicer were to foreclose on any junior lien
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 this type of sale, a
bidder at the foreclosure sale of a junior lien mortgage loan would have to bid
an amount sufficient to pay off all sums due under the junior lien mortgage loan
and the senior liens or purchase the mortgaged property subject to the senior
liens. 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. A decline in the value of the mortgaged properties securing the
mortgage loans with junior liens may increase the likelihood that, in the event
of a default by the related mortgagor, liquidation or other proceeds will be
insufficient to satisfy the junior lien mortgage loan after satisfaction of any
senior liens and the payment of any liquidation expenses. In the event that the
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 the notes bear:
o the risk of delay in distributions while a deficiency judgment against
the borrower is obtained,
o the risk of loss if the deficiency judgment is not realized upon and
o the risk that deficiency judgments may not be available in all
jurisdictions.
Other factors may affect the prepayment rate of junior lien mortgage loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien mortgage loans
may experience a higher rate of prepayments than 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.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL WERE ORIGINATED
OUTSIDE THE UNITED STATES, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________, are mortgage loans secured by properties located in Puerto
Rico and Guam. 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 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.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE DELINQUENT
AS OF THE CUT-OFF DATE, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, were thirty days or more but less than sixty days
delinquent in their monthly payments as of ______ __, ____. Approximately ____%
of the mortgage loans, by aggregate principal balance as
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of _______ __, ____, were sixty days or more but less than ninety days
delinquent in their monthly payments as of the _______ __, ____. However,
investors in the mortgage loans should realize that approximately _____% of the
mortgage loans, by aggregate principal balance as of _______ __, ____, have a
first payment date occurring on or after _______ __, ____ and, therefore, these
mortgage loans could not have been delinquent as of _______ __, ____].
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE HIGH
LOAN-TO-VALUE RATIOS, SO THAT THE RELATED BORROWER HAS LITTLE OR NO EQUITY IN
THE RELATED MORTGAGED PROPERTY, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS ALLOCATED TO YOUR NOTES.
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, had a loan-to-value ratio or a combined loan-to-value
ratio, in the case of any second lien mortgage loan, at origination in excess of
80%. No mortgage loan in the mortgage pool with a loan- to-value ratio or a
combined loan-to-value ratio, in the case of any second lien mortgage loan, at
origination in excess of 80% will be covered by a primary mortgage insurance
policy. No first lien mortgage loan will have a loan-to-value ratio exceeding
__% at origination and no second lien mortgage loan will have a combined
loan-to-value ratio exceeding _____% at origination. Mortgage loans with higher
loan-to-value ratios may present a greater risk of loss in that an overall
decline in the residential real estate market, a rise in interest rates over a
period of time and the condition of a mortgaged property, as well as other
factors, may have the effect of reducing the value of the mortgaged property
from the appraised value at the time the mortgage loan was originated. If there
is a reduction in value of the mortgaged property, the loan-to-value ratio may
increase over what it was at the time the mortgage loan was originated. This
increase may reduce the likelihood of liquidation or other proceeds being
insufficient to satisfy the mortgage loan and any losses, to the extent not
covered by the credit enhancement, may affect the yield to maturity or your
notes. Furthermore, investors should note that the value of the mortgaged
property may be insufficient to cover the outstanding balance of the notes.
There can be no assurance that the loan-to-value ratio of any mortgage loan
determined at any time after origination is less than or equal to its original
loan-to-value ratio.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE CONCENTRATED
IN THE STATE OF [NAME OF STATE], WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
Approximately ___% of the mortgage loans are in the state of [Name of
State.] Investors should note that some geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets causing a decline in property values in those areas, and
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans located in other geographic regions. A region's
economic condition and housing market may be directly, or indirectly, adversely
affected by a number of factors including 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. A concentration
of mortgage loans in the trust fund in a region experiencing a deterioration in
economic conditions or a decline in real estate values may expose your notes to
losses in addition to those present for similar mortgage-backed securities
without this concentration. 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 mortgage loans. Any deterioriation of economic
conditions in [name of state] which adversely affects the ability of borrowers
to make payments on the mortgage loans may increase the likelihood of
delinquency and foreclosure of the mortgage loans that may result in losses
that, to the extent not covered by the [credit enhancement] will be allocated to
your notes.
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[THE CLASS M-1 NOTES, THE CLASS M-2 NOTES AND THE CLASS M-3 NOTES WILL BE
PARTICULARLY SENSITIVE TO LOSSES ON THE MORTGAGE LOANS.
The weighted average lives of, and the yields to maturity on, the Class M-1
Notes, the Class M-2 Nots and the Class M-3 Notes will be progressively more
sensitive, in increasing order of their numerical class designations, to the
rate and timing of mortgagor defaults and the severity of ensuing losses on the
mortgage loans. If the actual rate and severity of losses on the mortgage loans
is higher than those assumed by an investor in one of the Class M-1 Notes, the
Class M-2 Notes or the Class M-3 Notes, the actual yield to maturity of that
note may be lower than the yield anticipated by the holder based on that
assumption. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In most cases, the earlier a loss occurs, the greater the effect
on an investor's yield to maturity. Losses on the mortgage loans in any due
period, to the extent they exceed the overcollateralized amount following
payments of principal on the related payment date, will reduce the note balance
of the class of notes then outstanding with the highest numerical class
designation. As a result of these reductions, less interest will accrue on the
class of subordinate notes than would otherwise be the case].
[THE CLASS M-1 NOTES, THE CLASS M-2 NOTES AND THE CLASS M-3 NOTES WILL NOT BE
ENTITLED TO RECEIVE PRINCIPAL PAYMENTS UNTIL ALL PRINCIPAL PAYMENTS HAVE BEEN
MADE ON THE CLASS A NOTES WHICH MAY LEAD TO LOSSES WITH RESPECT TO THESE NOTES
Unless the note balance of the Class A Notes has been reduced to zero, the
Class M-1 Notes, the Class M-2 Notes and the Class M-3 Notes will not be
entitled to any principal payments until _________ ____ or a later period as
described in this prospectus supplement. As a result, the weighted average lives
of these notes will be longer than would otherwise be the case if payments of
principal were allocated among all of the notes at the same time. As a result of
the longer weighted average lives of these notes, the holders of these notes
have a greater risk of suffering a loss on their investments. Further, because
these notes might not receive any principal if certain delinquency levels occur,
it is possible for these notes to receive no principal payments even if no
losses have occurred on the mortgage pool].
[YOUR NOTES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT OF ANY
OTHER PARTY.
The notes will not represent an interest in or obligation of the depositor,
the master servicer, the seller, the [SPE], the indenture trustee, the owner
trustee or any of their respective affiliates. Neither the notes nor the
underlying mortgage loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the depositor, the master servicer, the
indenture trustee, the owner 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 notes, and there will be no recourse to the depositor, the master
servicer, the seller, the [SPE], the indenture trustee, the owner 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 notes].
[THE DIFFERENCE BETWEEN THE INTEREST RATES ON THE NOTES AND THE MORTGAGE LOANS
MAY RESULT IN INTEREST SHORTFALLS ALLOCATED TO YOUR NOTES.
The note interest rate for each class of notes adjusts monthly based on a
particular index, subject to limitations as described in this prospectus
supplement. However, the mortgage rates on the fixed rate mortgage loans are
fixed and will not vary with any index, and the mortgage rates on the adjustable
rate mortgage loans adjust semi-annually, after an initial fixed rate period in
the case of delayed first-adjustment adjustable rate mortgage loans, based on a
separate index which may
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not move in tandem with the index for the notes and which is subject to periodic
and lifetime limitations. As a result of the foregoing as well as other factors
such as the prepayment behavior of the mortgage pool, relative increases in the
index or relative decreases in the weighted average of the mortgage rates on the
mortgage loans could:
o cause the amount of interest generated by the mortgage pool to be
less than the aggregate of the amount of interest that would otherwise be
payable on the notes, leading one or more classes of notes to accept payments of
interest at a later date, or
o cause the maximum note interest rate to apply to one or more classes
of notes.
Because the mortgage rate for each adjustable rate mortgage loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
index and the related gross margin, these rates could be higher than prevailing
market interest rates, possibly resulting in an increase in the rate of
prepayments on the adjustable rate mortgage loans after their adjustments. In
particular, investors should note that approximately _____% of the adjustable
rate mortgage loans have their interest rates fixed for two years following
origination and approximately _____% of the adjustable rate mortgage loans have
their interest rates fixed for three years following origination, in each case
by aggregate principal balance as of _________ __, ___. The weighted average
next adjustment date for the adjustable rate mortgage loans whose interest rates
are fixed for two years is _______ ____, and the weighted average next
adjustment date for the adjustable rate mortgage loans whose interest rates are
fixed for three years is _______ ____].
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON YOUR NOTES WILL BE AFFECTED
BY THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The rate and timing of distributions allocable to principal on the offered
notes will depend, in most cases, on the rate and timing of principal payments,
including prepayments and collections upon defaults, liquidations and
repurchases, on the mortgage loans and the allocation of these payments to pay
principal on the offered notes. As is the case with mortgage-backed securities,
the offered notes are subject to substantial inherent cash-flow uncertainties
because the mortgage loans may be prepaid at any time. However, with respect to
approximately ____% of the mortgage loans, by aggregate principal balance as of
_______ __, ____, a prepayment may subject the related mortgagor to a prepayment
charge, which may act as a deterrent to prepayment of these mortgage loans. See
"The Mortgage Pool" in this prospectus supplement.
[THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS WHICH COULD IMPACT THE RATE AND TIMING OF PRINCIPAL
DISTRIBUTIONS ON YOUR NOTES.
In most cases, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease. This decrease in the prepayment rates
on the mortgage loans will result in a reduced rate of return of principal to
investors in the offered notes at a time when reinvestment at higher prevailing
rates would be desirable. Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans tend to increase. This increase in
the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the offered notes at a time when
reinvestment at comparable yields may not be possible.
Distributions of principal will be made to the subordinate notes according
to the priorities described in this prospectus supplement. The timing of
commencement of principal distributions and the weighted average life of each
class of notes will be affected by the rates of prepayment on the mortgage loans
experienced both before and after the commencement of principal distributions on
each class. For further information regarding the effect of principal
prepayments on the weighted
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average lives of the offered notes, see "Yield on the Notes" in this prospectus
supplement and the table entitled "Percent of initial note balance outstanding
at the following percentages of the prepayment assumption" in that section].
[THE YIELD ON YOUR NOTES WILL VARY DEPENDING ON THE RATE OF PREPAYMENTS.
The yield to maturity on the offered notes will depend on:
o the applicable note interest rate and note accrual rate on that
interest rate from time to time;
o the applicable purchase price; and
o the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the
mortgage loans and the allocation of these payments to reduce the note
balance of the notes, as well as other factors.
The yield to investors on any class of offered notes will be adversely
affected by any allocation to the class of interest shortfalls on the mortgage
loans.
In most cases, if the offered notes are purchased at a premium and
principal distributions on the offered notes occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if the
offered notes are purchased at a discount and principal distributions on the
offered notes occur at a rate slower than that anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
originally assumed.
The proceeds to the depositor from the sale of the offered notes were
determined based on a number of assumptions, including a prepayment assumption
of __% CPR and weighted average lives corresponding to that prepayment
assumption. No representation is made that the mortgage loans will prepay at
that rate or at any other rate. The yield assumptions for the offered notes will
vary as determined at the time of sale].
[VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND YOUR NOTES.
Applicable state laws regulate interest rates and other charges, require
disclosure, and require licensing of the originators. In addition, other state
laws, public policy and principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding
the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
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Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the
Originators to damages and administrative enforcement.
The seller will represent that as of the closing date, each mortgage loan
is in compliance with applicable federal and state laws and regulations. In the
event of a breach of this representation, the seller will be obligated to cure
the breach or repurchase or replace the affected mortgage loan in the manner
described in the prospectus].
[YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE SERVICERS TO PERFORM
THEIR DUTIES.
As is the case with most companies using computers in their operations,
each servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the servicers' computer programs that have
time- sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any occurrence of this kind could result in major computer
system failure or miscalculations. Each servicer is presently engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant. However, in the event that the related servicer or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of that servicer under the
indenture could be materially adversely affected].
All capitalized terms used in this prospectus supplement will have the
meanings assigned to them under "Description of the Notes--Glossary of Terms" or
in the prospectus under "Glossary."
THE MORTGAGE POOL
GENERAL DESCRIPTION OF THE MORTGAGE LOANS
The mortgage pool will consist of approximately _____ conventional, one- to
four-family, fixed- rate mortgage loans and approximately _____ conventional,
one-to four-family, adjustable-rate mortgage loans. In each case, the mortgage
loans will be secured by first liens on residential real properties and have an
aggregate principal balance as of ________ __, ____, which date will also be
referred to in this prospectus supplement as the cut-off date, of approximately
$___________ after application of scheduled payments due on or before the
cut-off date whether or not received, subject to a permitted variance of plus or
minus 5%. The mortgage loans have original terms to maturity of not greater than
[30] years. References to percentages of the mortgage loans, unless otherwise
noted, are calculated based on the aggregate principal balance of the mortgage
loans as of the cut-off date. The mortgage loans are secured by first mortgages
or deeds of trust or other similar security instruments creating first liens on
residential properties consisting of attached, detached or semi-detached, one-
to four-family dwelling units, townhouses, individual condominium units,
individual units in planned unit developments and manufactured housing.
The mortgage loans to be included in the mortgage pool will be acquired by
the depositor on the closing date from the [SPE], who will have acquired the
mortgage loans on the closing date from the seller. The seller in turn will have
acquired the mortgage loans on the closing date from ________________, an
affiliate of the depositor who will have acquired the mortgage loans directly or
indirectly from the originators. See "--Underwriting Standards of ___________
and
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Representations Concerning the Mortgage Loans", "[The SPE]" and "The Seller" in
this prospectus supplement.
Each adjustable rate mortgage loan provides for semi-annual adjustment to
its mortgage rate and for corresponding adjustments to the monthly payment
amount due on the mortgage loan, in each case on each adjustment date applicable
to the mortgage loan. However, in the case of approximately _____% and
approximately _____% of the adjustable rate mortgage loans by aggregate
principal balance as of the cut-off date which are referred to in this
prospectus supplement as delayed first adjustment mortgage loans, the first
adjustment date will occur after an initial period of approximately ____ years
and approximately __ years, respectively from the date of origination of those
mortgage loans. The weighted average month of origination of the ____ year
delayed first adjustment mortgage loans is _________ _____, and the weighted
average month of origination of the ____ year delayed first adjustment mortgage
loans is _________ _____.
On each adjustment date, the mortgage rate on each adjustable rate mortgage
loan will be adjusted to equal the sum, rounded as provided in the related
mortgage note, of the index applicable to the adjustable rate mortgage loans and
a fixed percentage amount, or gross margin. However, the mortgage rate on each
adjustable rate mortgage loan, including each delayed first adjustment mortgage
loan, will usually not increase or decrease by more than a specified periodic
adjustment limitation, or periodic rate cap, on any related adjustment date.
Furthermore, the mortgage rate on each adjustable rate mortgage loan will not
exceed a specified maximum mortgage rate over the life of the mortgage loan, or
be less than a specified minimum mortgage rate over the life of the mortgage
loan. For adjustment dates other than the first adjustment date after
origination, the periodic rate cap for the majority of the adjustable rate
mortgage loans is 1.00% per annum. With respect to substantially all of the
adjustable rate mortgage loans, for adjustment dates other than the first
adjustment date after origination, the periodic rate cap will not exceed ____%
per annum.
Effective with the first monthly payment due on each adjustable rate
mortgage loan after each related adjustment date, the monthly payment amount
will be adjusted to an amount that will amortize fully the outstanding principal
balance of the related adjustable rate mortgage loan over its remaining term and
pay interest at the mortgage rate as so adjusted. Due to the application of the
periodic rate caps and the maximum mortgage rates, the mortgage rate on each
mortgage loan, as adjusted on any related adjustment date, may be less than the
sum of the index applicable to the adjustable rate mortgage loans and gross
margin, calculated as described under "--The Index Applicable to the Adjustable
Rate Mortgage Loans" in this prospectus supplement. None of the adjustable rate
mortgage loans permits the related mortgagor to convert the adjustable mortgage
rate on the adjustable rate mortgage loan to a fixed mortgage rate.
In most cases, the mortgage loans have scheduled monthly payments due on
the first day of the month. Each mortgage loan will contain a customary
due-on-sale clause or will be assumable by a creditworthy purchaser of the
related mortgaged property.
Approximately ______% of the mortgage loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on voluntary
prepayments in full made within one to five years from the date of origination
of these mortgage loans. The amount of the prepayment charge is as provided in
the related mortgage note. In most cases, prepayment charge obligations expire
by their terms after a limited period specified in the related mortgage note.
The weighted average month of origination of the mortgage loans with prepayment
charges is _________ ____. The holders of the equity certificates will be
entitled to all prepayment charges received on the mortgage loans, and this
amount will not be available for distribution on the notes. Under certain
instances, as described in the related servicing agreement, the related servicer
may waive the
S-17
<PAGE>
payment of any otherwise applicable prepayment charge, and accordingly, there
can be no assurance that the prepayment charges will have any effect on the
prepayment performance of the mortgage loans.
None of the mortgage loans are buydown mortgage loans.
Approximately ____% of the mortgage loans are balloon loans. Each balloon
loan is a fixed rate mortgage loan that amortizes over ___ months, but the final
payment, or balloon payment, on each balloon loan is due and payable on the
___th month. The amount of the balloon payment on each balloon loan is
substantially in excess of the amount of the scheduled monthly payment on the
balloon loan for the period prior to the due date of the balloon payment.
The average principal balance of the mortgage loans at origination was
approximately $_______. No mortgage loan had a principal balance at origination
greater than approximately $________ or less than approximately $______. The
average principal balance of the mortgage loans as of the cut-off date was
approximately $_______.
The mortgage loans had mortgage rates as of the cut-off date ranging from
approximately ____% per annum to approximately _____% per annum, and the
weighted average mortgage rate was approximately ______% per annum. The weighted
average loan-to-value ratio of the mortgage loans at origination was
approximately _____%. At origination, no mortgage loan will have a loan-
to-value ratio greater than approximately _____% or less than approximately
____%.
The weighted average remaining term to maturity of the mortgage loans will
be approximately __ years and __ months as of the cut-off date. None of the
mortgage loans will have a first due date prior to _______ ____ or after
___________ ____, or will have a remaining term to maturity of less than __
years or greater than __ years as of the cut-off date. The latest maturity date
of any mortgage loan is __________ ____.
As of the cut-off date, the adjustable rate mortgage loans had gross
margins ranging from approximately ____% to approximately ____%, minimum
mortgage rates ranging from approximately ____% per annum to approximately
_____% per annum and maximum mortgage rates ranging from approximately _____%
per annum to approximately _____% per annum. As of the cut-off date, the
weighted average gross margin was approximately ______%, the weighted average
minimum mortgage rate was approximately _____% per annum and the weighted
average maximum mortgage rate was approximately _______% per annum. The latest
first adjustment date following the cut-off date on any adjustable rate mortgage
loan occurs in _______ ____ and the weighted average next adjustment date for
all of the mortgage loans following the cut-off date is _______ ____.
The mortgage loans are expected to have the following characteristics as of
the cut-off date (the sum in any column may not equal the total indicated due to
rounding):
S-18
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF
ORIGINAL AGGREGATE
NUMBER PRINCIPAL ORIGINAL
RANGE ($) OF LOANS BALANCE PRINCIPAL BALANCE
--------- -------- ------- ------------------
<S> <C> <C> <C>
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
Total.........................................
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- -------- ------------------ -----------------
<S> <C> <C> <C>
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
Total.......................................
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
S-20
<PAGE>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
Total..............................................
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------ -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------ -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE FIXED RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- -------- ------------------ -----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATES FOR THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total...................................................
</TABLE>
S-23
<PAGE>
THE INDEX APPLICABLE TO THE ADJUSTABLE RATE MORTGAGE LOANS
As of any adjustment date, the index applicable to the determination of the
mortgage rate on each adjustable rate mortgage loan will be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market as published in THE WALL STREET JOURNAL and as of a date as
specified in the related mortgage note. In the event that this index becomes
unavailable or otherwise unpublished, each servicer will select a comparable
alternative index over which it has no direct control and which is readily
verifiable.
The table immediately following this paragraph sets forth historical
average rates of six-month LIBOR for the months indicated as made available from
Fannie Mae, which rates may differ from the rates of the index applicable to the
determination of the mortgage rate on each adjustable rate mortgage loan, which
is six-month LIBOR as published in THE WALL STREET JOURNAL as described in the
preceding paragraph. The table does not purport to be representative of the
subsequent rates of the index which will be used to determine the Mortgage Rate
on each adjustable rate mortgage loan.
Year
----------------------------------------------------
Month
----- ----- ----- ----- ----- ----- ----- -----
UNDERWRITING STANDARDS OF __________ AND REPRESENTATIONS CONCERNING THE MORTGAGE
LOANS
The mortgage loans will be acquired by the depositor on the closing date
from the [SPE], who will have acquired the mortgage loans on the closing date
from the seller. The seller in turn will have acquired the mortgage loans on the
closing date from _______________, an affiliate of the depositor who will have
acquired the mortgage loans directly or indirectly from the originators.
The information set forth in this section with regard to each originator's
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by that originator. With respect to the
information regarding each originator's underwriting standards, none of the
issuer, the other originators, the depositor, the master servicer, the seller,
the [SPE], the owner trustee, the indenture trustee or any of their respective
affiliates has made or will make any representation as to the accuracy or
completeness of the information.
[Discussion of underwriting programs used by other originators to originate
mortgage loans such as those in the securitization].
REPRESENTATIONS
S-24
<PAGE>
The seller will make representations and warranties as of the closing date
with respect to the mortgage loans, and will be obligated to repurchase any
mortgage loan in respect of which a material breach of the representations and
warranties it has made has occurred, other than those breaches which have been
cured. For a discussion of the representations and warranties made and the
repurchase obligation, see "Mortgage Loan Program--Representations by or on
behalf of the Seller; Repurchases" in the prospectus.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
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 that date. Prior to the issuance of the notes,
mortgage loans may be removed from the mortgage pool as a result of incomplete
documentation or otherwise if the depositor deems 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 notes
unless including these mortgage loans would materially alter the characteristics
of the mortgage pool. The depositor believes that the information set forth
throughout this prospectus supplement will be representative of the
characteristics of the mortgage pool as it will be constituted at the time the
notes are issued, although the range of mortgage rates and maturities and other
characteristics of the mortgage loans may vary.
YIELD ON THE NOTES
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the notes, the aggregate amount of
payments on the notes and the yield to maturity of the notes will be related to
the rate and timing of payments of principal on the mortgage loans. The rate of
principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans 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 seller or the majority holder of the equity certificates. The
mortgage loans may be prepaid by the mortgagors at any time; however, as
described under "The Mortgage Pool" in this prospectus supplement, with respect
to approximately _____% of the mortgage loans, by aggregate principal balance as
of the cut-off date, a prepayment may subject the related mortgagor to a
prepayment charge. In most cases, prepayment charge obligations expire by their
terms after a limited period specified in the related mortgage note. The
weighted average month of origination of the mortgage loans with prepayment
charges is ________ ____.
Prepayments, liquidations and repurchases of the mortgage loans will result
in payments in respect of principal to the holders of the class or classes of
notes then entitled to receive these payments 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
notes may vary from the anticipated yield will depend upon the degree to which
the notes are purchased at a discount or premium and the degree to which the
timing of payments on the notes is sensitive to prepayments on the mortgage
loans. Further, an investor should consider, in the case of any note purchased
at a discount, the risk that a slower than anticipated rate of principal
payments on the mortgage loans could result in an actual yield to that investor
that is lower than the anticipated yield. In the case of any note purchased at a
S-25
<PAGE>
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to that investor that is lower than the
anticipated yield. 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
notes. As a result, the effect on an investor's yield of principal payments
occurring at a rate higher, or lower, than the rate anticipated by the investor
during the period immediately following the issuance of the notes would not be
fully offset by a subsequent like reduction, or increase, in the rate of
principal payments. See "Maturity and Prepayment Considerations" in the
prospectus.
It is highly unlikely that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the actual yield to maturity on the notes, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation. The rate of payments, including prepayments, on pools of
mortgage loans is influenced by a variety of economic, geographic, social and
other factors. If prevailing mortgage rates fall significantly below the
mortgage rates on the mortgage loans, the rate of prepayment and refinancing
would be expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the mortgage rates on the mortgage loans, the rate of
prepayment on the mortgage loans would be expected to decrease. Other factors
affecting prepayment of mortgage loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. In addition, in the case of the adjustable
rate mortgage loans in the mortgage pool, the existence of the applicable
periodic rate cap, maximum mortgage rate and minimum mortgage rate may affect
the likelihood of prepayments resulting from refinancings. There can be no
certainty as to the rate of prepayments on the mortgage loans during any period
or over the life of the notes. See "Yield Considerations" and "Maturity and
Prepayment Considerations" in the prospectus.
Because principal payments are paid to senior classes of notes before other
classes, holders of classes of notes having a later priority of payment bear a
greater risk of losses, because these notes will represent an increasing
percentage of the trust estate during the period prior to the commencement of
payments of principal on these notes, than holders of classes having earlier
priorities for payment of principal. As described in this prospectus supplement
under "Description of the Notes--Principal Payments on the Notes," prior to the
Stepdown Date, all principal payments on the mortgage loans will be allocated to
the Class A Notes. After that date, subject to delinquency triggers described in
this prospectus supplement, all principal payments on the mortgage loans will be
allocated among all classes of the notes then outstanding as described under
"Description of the Notes--Principal Payments on the Notes" in this prospectus
supplement.
Defaults on mortgage loans are expected to occur with greater frequency in
their early years. In addition, default rates may be higher for mortgage loans
used to refinance an existing mortgage loan. In the event of a mortgagor's
default on a mortgage loan, there can be no assurance that recourse will be
available beyond the specific mortgaged property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards of ___________ and
Representations Concerning the Mortgage Loans" in this prospectus supplement.
SPECIAL YIELD CONSIDERATIONS
The note interest rate for each class of notes adjusts monthly based on
one-month LIBOR as described under "Description of the Notes--Calculation of
One-Month LIBOR" in this prospectus supplement, subject to the maximum Note
Interest Rate and the Available Interest Rate. However, the mortgage rates on
the fixed rate mortgage loans are fixed and will not vary with any index. The
mortgage rates on the adjustable rate mortgage loans adjust semi-annually, after
an initial fixed rate period in the case of delayed first adjustment mortgage
loans, based on the index applicable to the
S-26
<PAGE>
adjustable rate mortgage loans, which may not move in tandem with one-month
LIBOR, subject to periodic and lifetime limitations. Investors should note that
approximately _____% of the mortgage loans are ____ year delayed first
adjustment mortgage loans, approximately ____% of the mortgage loans are _____
year delayed first adjustment loans and approximately _____% of the mortgage
loans are fixed rate mortgage loans, in each case by aggregate principal balance
as of the cut-off date. The weighted average month of origination of the ____
year delayed first adjustment mortgage loans is _____ ____, and the weighted
average month of origination of the ______ year delayed first adjustment
mortgage loans is ______ ____.
Because of the application of the maximum Note Interest Rate and the
Available Interest Rate, increases in the Note Interest Rate on the notes may be
limited for extended periods or indefinitely in a rising interest rate
environment. The interest due on the mortgage loans during any due period may
not equal the amount of interest that would accrue at one-month LIBOR plus the
applicable spread on the notes during the related Interest Accrual Period. In
addition, the index applicable to the adjustable rate mortgage loans and
one-month LIBOR may respond differently to economic and market factors. Thus, it
is possible, for example, that if both one-month LIBOR and the index applicable
to the adjustable rate mortgage loans rise during the same period, one-month
LIBOR may rise more rapidly than the index applicable to the adjustable rate
mortgage loans or may rise higher than the index applicable to the adjustable
rate mortgage loans. This could potentially result in Interest Carry Forward
Amounts with respect to one or more classes of notes. As a result of the
foregoing as well as other factors such as the prepayment behavior of the
mortgage pool, relative increases in one-month LIBOR or relative decreases in
the weighted average of the mortgage rates on the mortgage loans could:
o cause the Current Interest Payment Amount generated by the mortgage
pool to be less than the aggregate of the Interest Payment Amounts that
would otherwise be payable on the notes, leading one or more classes of
notes to incur Interest Carry Forward Amounts, or
o could cause the maximum Note Interest Rate to apply to one or more
classes of notes.
Because the mortgage rate for each adjustable rate mortgage loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
index applicable to the adjustable rate mortgage loans and the related gross
margin, the mortgage rates could be higher than prevailing market interest
rates, possibly resulting in an increase in the rate of prepayments on the
adjustable rate mortgage loans after their adjustments.
As described under "Description of the Notes--Allocation of Losses;
Subordination," amounts otherwise distributable to holders of the subordinate
notes may be made available to protect the holders of the Class A Notes against
interruptions in payments due to mortgagor delinquencies, to the extent not
covered by P&I Advances. These delinquencies may affect the yield to investors
on classes of subordinate notes and, even if subsequently cured, will affect the
timing of the receipt of payments by the holders of classes of subordinate
notes. In addition, a larger than expected rate of delinquencies or losses will
affect the rate of principal payments on each class of subordinate notes. See
"Description of the Notes--Principal Payments on the Notes" in this prospectus
supplement.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of each class
of notes will be influenced by the rate at which principal on the mortgage loans
is paid, which may be in the form of scheduled payments or prepayments,
including repurchases and prepayments of principal by the borrower as well as
amounts received by virtue of
S-27
<PAGE>
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 __% CPR. CPR assumes that
the outstanding principal balance of a pool of mortgage loans prepays at a
specified constant annual rate or CPR. In generating monthly cash flows, this
rate is converted to an equivalent constant monthly rate. To assume __% CPR or
any other CPR percentage is to assume that the stated percentage of the
outstanding principal balance of the pool is prepaid over the course of a year.
No representation is made that the mortgage loans will prepay at __% CPR or any
other rate.
The tables following the next paragraph indicate the percentage of the
initial Note Balance of the notes that would be outstanding after each of the
dates shown at various percentages of the prepayment assumption and the
corresponding weighted average lives of the notes. The tables are based on the
following assumptions:
o the mortgage pool consists of __ mortgage loans with the
characteristics set forth in the table in this prospectus supplement
entitled "Assumed Mortgage Loan Characteristics,"
o payments on the notes are received, in cash, on the 25th day of each
month, commencing in _______ ____,
o the mortgage loans prepay at the percentages of the prepayment
assumption indicated,
o no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the mortgage loans,
o none of the majority holder of the equity certificates, the seller,
the master servicer, the servicers or any other person purchases from
the trust estate any mortgage loan or redeems the notes under any
obligation or option under the indenture, the servicing agreements or
any other agreement except as otherwise indicated in the second
sentence following the table entitled "Percent of initial Note Balance
outstanding at the specified percentages of the prepayment assumption,"
and no partial early redemption of the notes occurs with respect to the
mortgage loans,
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in _______ ____, and are computed
prior to giving effect to any prepayments received in the prior month,
o prepayments representing payment in full of individual mortgage loans
are received on the last day of each month commencing in ________ ____,
and include 30 days' interest on the mortgage loan,
o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate, original term to stated
maturity and remaining term to stated maturity so 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 notes are purchased on ________ __, ____,
S-28
<PAGE>
o the index applicable to the adjustable rate mortgage loans remains
constant at _____% per annum and the mortgage rate on each adjustable
rate mortgage loan is adjusted on the next adjustment date, and on
subsequent adjustment dates, if necessary, to equal the index
applicable to the adjustable rate mortgage loans plus the applicable
gross margin, subject to the applicable periodic rate cap,
o one-month LIBOR remains constant at _____% per annum,
o the monthly payment on each adjustable rate mortgage loan is adjusted
on the due date immediately following the next adjustment date, and on
subsequent adjustment dates, if necessary, to equal a fully amortizing
monthly payment and
o the master servicing fee rate is as set forth in the table entitled
"Assumed Mortgage Loan Characteristics" and the master servicing fee is
payable monthly, the servicing fee rate for each servicer is equal to
____% per annum and the servicing fees are payable monthly, and the
indenture trustee fee rate is equal to ______% per annum and the
indenture trustee fee is paid monthly.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
REMAINING MASTER
PRINCIPAL ORIGINAL TERM MAXIMUM MINIMUM PERIODIC SERVICING
BALANCE TERM TO TO NEXT GROSS MORTGAGE MORTGAGE RATE FEE PREPAY
AS OF THE MORTGAGE MATURITY MATURITY ADJUSTMENT MARGIN RATE RATE CAP RATE PENALTY
CUT-OFF DATE RATE (%) (MONTHS) (MONTHS) DATE (%) (%) (%) (%) (%) (YES/NO)
------------ -------- -------- -------- ---- --- --- --- --- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
There will be discrepancies between the characteristics of the actual
mortgage loans and the characteristics assumed in preparing the tables in this
prospectus supplement. Any discrepancy of this kind may have an effect upon the
percentages of the initial Note Balance outstanding and the weighted average
lives of the notes set forth in the tables in this prospectus supplement. In
addition, since the actual mortgage loans included in the mortgage pool will
have characteristics that differ from those assumed in preparing the tables set
forth immediately following the next paragraph and since it is not likely the
level of the index applicable to the adjustable rate mortgage loans or one-month
LIBOR will remain constant as assumed, the notes may mature earlier or later
than indicated by the tables. In addition, as described under "Description of
the Notes--Principal Payments on the Notes" in this prospectus supplement, the
occurrence of the Stepdown Date or a Trigger Event will have the effect of
accelerating or decelerating the amortization of the notes, affecting the
weighted average lives of the notes.
Based on the foregoing assumptions, the tables following this paragraph
indicate the weighted average lives of the notes and set forth the percentages
of the initial Note Balance of the notes that would be outstanding after each of
the payment dates shown, at various percentages of
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the prepayment assumption. Neither the prepayment model used in this prospectus
supplement nor any other prepayment model or assumption purports to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans included in the mortgage pool. Variations in the prepayment
experience and the balance of the mortgage loans that prepay may increase or
decrease the percentages of initial Note Balances and weighted average lives
shown in the following tables. These variations may occur even if the average
prepayment experience of all the mortgage loans equals any of the specified
percentages of the prepayment assumption.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A NOTES CLASS M-1 NOTES CLASS M-2 NOTES
---------------------------------- ---------------------------------- -----------------------------------
PAYMENT DATE 0% 15% 28% 35% 45% 0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
------------ -- --- --- --- --- -- --- --- --- --- -- --- --- --- ---
<S> <C> <C> <C>
Closing Date..........
......................
......................
......................
......................
Weighted Average
Life in Years.........
Weighted Average
Life in Years.........
</TABLE>
CLASS M-3 NOTES
---------------------------------
PAYMENT DATE 0% 15% 28% 35% 45%
------------ -- --- --- --- ---
Closing Date..........
......................
......................
......................
......................
Weighted Average
Life in Years.........
Weighted Average
Life in Years.........
The weighted average life of a note is determined by (a) multiplying the
amount of each payment of principal by the number of years from the date of
issuance of the note to the related payment date, (b) adding the results and (c)
dividing the sum by the initial Note Balance of the notes. The weighted average
lives set forth in the bottom row of the table are calculated according to the
previous sentence but assumes the majority holder of the equity certificates
exercises its option to redeem the notes when the aggregate Note Balance has
been reduced to less than 20% of the initial aggregate Note Balance. See "The
Indenture and Owner Trust Agreement--Redemption" in this prospectus supplement.
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<PAGE>
There is no assurance that prepayments of the mortgage loans will conform
to any of the levels of the prepayment assumption indicated in the immediately
preceding tables, or to any other level, or that the actual weighted average
lives of the notes will conform to any of the weighted average lives set forth
in the immediately preceding tables. Furthermore, the information contained in
the tables with respect to the weighted average lives of the notes is not
necessarily indicative of the weighted average lives that might be calculated or
projected under different or varying prepayment or index level assumptions.
The characteristics of the mortgage loans will differ from those assumed in
preparing the 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 will prepay at the same rate or that the level of the index
applicable to the adjustable rate mortgage loans will remain constant or at any
level for any period of time. The timing of changes in the rate of prepayments
may significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments and the level of the index applicable to
the adjustable rate mortgage loans is consistent with the expectations of
investors.
YIELD SENSITIVITY OF THE SUBORDINATE NOTES
If on any payment date, the Overcollateralized Amount and the Note Balances
of the Class M-3 Notes and the Class M-2 Notes have been reduced to zero, the
yield to maturity on the Class M-1 Notes will become extremely sensitive to
losses on the mortgage loans and the timing of losses, that are covered by
subordination, because the entire amount of any Realized Losses, to the extent
not covered by Net Monthly Excess Cashflow, will be allocated to the Class M-1
Notes. If on any payment date, the Overcollateralized Amount and the Note
Balance of the Class M-3 Notes have been reduced to zero, the yield to maturity
on the Class M-2 Notes will become extremely sensitive to losses on the mortgage
loans and the timing of losses that are covered by subordination, because the
entire amount of any Realized Losses, to the extent not covered by Net Monthly
Excess Cashflow, will be allocated to the Class M-2 Notes. If on any payment
date, the Overcollateralized Amount has been reduced to zero, the yield to
maturity on the Class M-3 Notes will become extremely sensitive to losses on the
mortgage loans and the timing of losses that are covered by subordination,
because the entire amount of any Realized Losses, to the extent not covered by
Net Monthly Excess Cashflow, will be allocated to the Class M-3 Notes. Once
Realized Losses have been allocated to the subordinate notes, Realized Losses
will not be reinstated thereafter. However, Allocated Realized Loss Amounts may
be paid to the holders of the subordinate notes, after distributions to the
holders of the Class A Notes and subordinate notes with lower numerical class
designations, but before the equity certificates are entitled to any
distributions. See "Description of the Notes--Overcollateralization Provisions"
in this prospectus supplement.
Investors in the subordinate notes 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 notes, see "Yield Considerations" and
"Maturity and Prepayment Considerations" in the prospectus.
DESCRIPTION OF THE NOTES
GENERAL DESCRIPTION OF THE NOTES
_[Salomon] Trust Series ____-__, Asset-Backed Floating Rate Notes, Series
____-__ (the "Notes") will consist of ____ classes of notes, designated as:
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o the Class A Notes and
o the Class M-1 Notes, the Class M-2 Notes and the Class M-3 Notes
which will collectively be referred to in this prospectus supplement as the
subordinate notes.
The notes will be issued by [Salomon] Trust Series ____-__ , the
issuer, under the terms of an indenture, dated as of ________ __, ____, between
the issuer and the indenture trustee. Only the notes are offered by this
prospectus supplement. Trust certificates, Series ____-__, or the equity
certificates, will be issued under the terms of an owner trust agreement, dated
as of ________ __, ____, between the depositor and the owner trustee, and will
represent the beneficial ownership interest in the issuer. The equity
certificates are not being offered by this prospectus supplement and will be
delivered on the closing date to the ____________, as partial consideration for
the conveyance of the mortgage loans by ____________ to the depositor.
Distributions on the offered notes will be made on the 25th day of each
month, or, if that day is not a business day, on the next succeeding business
day, beginning in _______ ____.
The notes represent non-recourse debt obligations of the issuer secured by
a trust estate, which consists primarily of a segregated pool of conventional,
one- to four-family, adjustable-rate and fixed-rate first lien mortgage loans
having an aggregate principal balance as of the cut-off date of approximately
$___________, subject to a permitted variance as described in this prospectus
supplement under "The Mortgage Pool." Proceeds of the trust estate will be the
sole source of payments on the notes. The issuer is not expected to have any
significant assets other than the trust estate pledged as collateral to secure
the notes.
The Class A Notes, the Class M-1 Notes, the Class M-2 Notes and the Class
M-3 Notes will have an aggregate initial note balance of approximately
$___________, approximately $_________, approximately $__________ and
approximately $__________, respectively, in each case subject to a permitted
variance of plus or minus [5]%. The Note Interest Rates on the notes are
adjustable, subject to the maximum Note Interest Rate and the Available Interest
Rate, and will be calculated for each payment date as described under "--Note
Interest Rate" in this prospectus supplement. The final maturity date of the
notes is the payment date occurring in _______ ____.
The notes will be issued, maintained and transferred on the book-entry
records of DTC and its participants in minimum denominations of $[10,000] and
integral multiples of $[1.00] in excess of the minimum denominations.
The notes will initially be represented by one or more global notes
registered in the name of the nominee of DTC as clearing agency, except as
provided under "Definitive Notes" in this prospectus supplement. The depositor
has been informed by DTC that DTC's nominee will be CEDE & Co. No person
acquiring an interest in any class of the notes will be entitled to receive a
note representing that person's interest, except as set forth in this prospectus
supplement under "Definitive Notes". Unless and until definitive notes are
issued under the limited circumstances described in this prospectus supplement,
all references to actions by noteholders with respect to the notes shall refer
to actions taken by DTC upon instructions from its participants, and all
references in this prospectus supplement to payments, notices, reports and
statements to noteholders with respect to the notes shall refer to payments,
notices, reports and statements to DTC or CEDE & Co., as the registered holder
of the notes, for payment to note owners in accordance with DTC procedures. See
"--Registration of the Notes" and "--Definitive Notes" in this prospectus
supplement.
Any definitive notes will be transferable and exchangeable at the offices
of the indenture trustee. No service charge will be imposed for any registration
of transfer or exchange, but the indenture
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<PAGE>
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection with the registration of transfer or
exchange.
All payments to holders of the notes, other than the final payment on any
class of notes, will be made by or on behalf of the indenture trustee to the
persons in whose names the notes are registered at the close of business on each
record date. The record date for each payment date is:
o with respect to the notes, other than any definitive notes, the close
of business on the business day immediately preceding the payment date or
o with respect to the definitive notes will be the close of business on
the last business day of the month preceding the month in which the payment date
occurs.
Payments will be made either by check mailed to the address of each
noteholder as it appears in the note register or upon written request to the
indenture trustee at least five business days prior to the relevant record date
by any holder of notes having an aggregate initial Note Balance that is in
excess of the lesser of:
o $5,000,000 or
o two-thirds of the initial aggregate Note Balance of that class of
notes, by wire transfer in immediately available funds to the account
of the noteholder specified in the request.
The final payment on any class of notes will be made in like manner, but
only upon presentment and surrender of the notes at the corporate trust office
of the indenture trustee or other location specified in the notice to
noteholders of the final payment.
REGISTRATION OF THE NOTES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a clearing
corporation within the meaning of the New York Uniform Commercial Code, and a
clearing agency registered under the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations and to facilitate the clearance and settlement of
securities transactions between its participants through electronic book
entries, thereby eliminating the need for physical movement of notes.
Participants include securities brokers and dealers, including the underwriter
of the notes offered by this prospectus supplement, banks, trust companies and
clearing corporations. Indirect access to the DTC system is also available to
others such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Note owners that are not participants or indirect participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in, the
book-entry notes may do so only through participants and indirect participants.
In addition, note owners will receive all distributions of principal of and
interest on the book-entry notes from the indenture trustee through DTC and DTC
participants. The indenture trustee will forward payments to DTC in same day
funds and DTC will forward these payments to participants in next day funds
settled through the New York Clearing House. Each participant will be
responsible for disbursing these payments to indirect participants or to note
owners. Unless and until definitive notes are issued, it is anticipated that the
only noteholder of the book-entry notes will be CEDE & Co., as nominee of DTC.
Note owners will not be recognized by the indenture trustee as noteholders, as
the term is used in the indenture and note
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<PAGE>
owners will be permitted to exercise the rights of noteholders only indirectly
through DTC and its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the book-entry
notes among participants and to receive and transmit distributions of principal
of, and interest on, the book-entry notes. Participants and indirect
participants with which note owners have accounts with respect to the book-entry
notes similarly are required to make book-entry transfers and receive and
transmit payments on behalf of their respective note owners. Accordingly,
although note owners will not possess definitive notes, the rules, regulations
and procedures creating and affecting DTC and its operations provide a mechanism
by which note owners through their participants and indirect participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of banks, the ability of a note
owner to pledge book-entry notes to persons or entities that do not participate
in the DTC system, or to otherwise act with respect to these notes, may be
limited due to the absence of physical notes for the book-entry notes. In
addition, under a book-entry format, note owners may experience delays in their
receipt of payments since distributions will be made by the indenture trustee to
CEDE & Co., as nominee for DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations , DTC will take action permitted to be taken by a noteholder
under the indenture only at the direction of one or more participants to whose
DTC account the book-entry notes are credited. Additionally, under the rules,
regulations and procedures creating and affecting DTC and its operations, DTC
will take actions with respect to specified voting rights only at the direction
of and on behalf of participants whose holdings of book-entry notes evidence
these specified voting rights. DTC may take conflicting actions with respect to
voting rights, to the extent that participants whose holdings of book-entry
notes evidencing these voting rights, authorize divergent action.
DTC management is aware that computer applications, systems and similar
items for processing data that are dependent upon calendar dates, including
dates before, on and after January 1, 2000, may encounter Year 2000 problems.
DTC has informed its participants and other members of the financial community
that it has developed and is implementing a program so that its computer
applications, systems and similar items for processing data, as the same relate
to the timely payment of distributions, including principal and income payments,
to securityholders, book- entry deliveries and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting and will continue to contact third
party vendors from whom DTC acquires services to impress upon them the
importance of their services being Year 2000 compliant and determine the extent
of their efforts for Year 2000 remediation and, as appropriate, testing of their
services. In addition, DTC is in the process of developing contingency plans as
it deems appropriate.
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<PAGE>
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
The issuer, the originators, the depositor, the master servicer, the
seller, the [SPE], the owner trustee, the indenture trustee and their respective
affiliates will have no liability for any actions taken by DTC or its nominee or
Cedel or Euroclear, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the notes held by CEDE & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to beneficial
ownership interests.
DEFINITIVE NOTES
Definitive notes will be issued to note owners or their nominees, rather
than to DTC or its nominee, only if:
o the depositor advises the indenture trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
clearing agency with respect to the notes and the depositor is unable
to locate a qualified successor,
o the depositor, at its option, advises the indenture trustee in
writing that it elects to terminate the book-entry system through DTC,
or
o after the occurrence of an event of default, note owners representing
in the aggregate not less than 51% of the voting rights of the notes
advise the indenture trustee and DTC through participants, in writing,
that the continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the note owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the indenture trustee is required to notify all note owners through
participants of the availability of definitive notes. Upon surrender by DTC of
the definitive notes representing the notes and receipt of instructions for
re-registration, the indenture trustee will reissue the notes as definitive
notes issued in the respective principal amounts owned by individual note
owners, and thereafter the indenture trustee will recognize the holders of the
definitive notes as noteholders under the indenture. The definitive notes will
be issued in minimum denominations of $10,000, except that any beneficial
ownership represented by a note in an amount less than $10,000 immediately prior
to the issuance of a definitive note shall be issued in a minimum denomination
equal to the amount represented by that note.
BOOK-ENTRY FACILITIES
Note owners may elect to hold their interests in the notes through DTC in
the United States or through Cedel or Euroclear in Europe, if they are
participants of these systems, or indirectly through organizations which are
participants in these systems. The notes of each class will be issued in one or
more notes which equal the aggregate Note Balance of the class and will
initially be registered in the name of Cede & Co., the nominee of DTC. Cedel and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries which in turn will hold these positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear.
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<PAGE>
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. These credits or any transactions in these securities
settled during this processing will be reported to the relevant Euroclear
participants or Cedel participants on that business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
participant or Euroclear participant to a participant of DTC will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedel participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by Citibank or Chase, as applicable; however, these 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 Citibank
or Chase, as appicable, to take action to effect final settlement on its behalf
by delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel participants and Euroclear participants may not deliver instructions
directly to the European depositaries.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Cedel participants through electronic book-entry changes in accounts of Cedel
participants, eliminating the need for physical movement of notes. Transactions
may be settled in Cedel in any of 28 currencies, including United States
dollars. Cedel provides to its Cedel participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Cedel interfaces with
domestic markets in several countries. As a professional depository, Cedel is
subject to regulation by the Luxembourg Monetary Institute. Cedel participants
are recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations. Indirect access to Cedel is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Cedel participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, eliminating
the need for physical movement of notes and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries 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, or
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by Morgan, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with Morgan, not Euroclear Clearance Systems, S.C.. Euroclear Clearance Systems,
S.C. establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear
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participants include banks, including central banks, securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. 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 Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law. These 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 notes to specific securities clearance
accounts. Morgan acts under these terms and conditions only on behalf of
Euroclear participants, and has no record of or relationship with persons
holding through Euroclear participants.
Payments with respect to notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by Citibank or Chase, as applicable. These payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform these
procedures and these procedures may be discontinued at any time. See Annex I to
this prospectus supplement.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the notes:
ALLOCATED REALIZED LOSS AMOUNT: The Allocated Loss Amount with respect to
any class of subordinate notes and any payment date is the sum of:
o any Realized Loss allocated to that class of subordinate notes on the
payment date and
o any Allocated Realized Loss Amount for that class remaining unpaid
from previous payment dates plus accrued interest thereon at the Note
Accrual Rate for that class.
AVAILABLE INTEREST RATE: The Available Interest Rate for any payment date
is a rate per annum equal to the fraction, expressed as a percentage, the
numerator of which is:
o the Current Interest Payment Amount for the payment date,
and the denominator of which is
o the aggregate Note Balance of the notes immediately prior to the
payment date multiplied by the actual number of days elapsed in the
related Interest Accrual Period and divided by 360.
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AVAILABLE PAYMENT AMOUNT: The Available Payment Amount for any payment date
is equal to the sum, net of amounts reimbursable therefrom to the master
servicer, the servicers, the indenture trustee or the owner trustee, of:
o the aggregate amount of scheduled monthly payments on the mortgage
loans due on the related due date and received on or prior to the
related determination date, after deduction of the master servicing
fee, the servicing fees and the indenture trustee fee,
o 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
o all P&I Advances with respect to the mortgage loans received for the
payment date.
BANKRUPTCY LOSS: A Bankruptcy Loss is a Deficient Valuation or a Debt
Service Reduction.
CLASS A PRINCIPAL PAYMENT AMOUNT: The Class A Principal Payment Amount for
any payment date on or after the Stepdown Date and on which a Trigger Event is
not in effect, is an amount equal to the excess of:
o the Note Balance of the Class A Notes immediately prior to the
payment date OVER
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $_________.
CLASS M-1 PRINCIPAL PAYMENT AMOUNT: The Class M-1 Principal Payment Amount
for any payment date on or after the Stepdown Date and on which a Trigger Event
is not in effect, is an amount equal to the excess of:
o the sum of:
o the Note Balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
the payment date and
o the Note Balance of the Class M-1 Notes immediately prior to
the payment date over
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $_________.
CLASS M-2 PRINCIPAL PAYMENT AMOUNT: The Class M-2 Principal Payment Amount
for any payment date on or after the Stepdown Date and on which a Trigger Event
is not in effect, is an amount equal to the excess of:
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o the sum of:
o the Note Balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
the payment date,
o the Note Balance of the Class M-1 Notes, after taking into
account the payment of the Class M-1 Principal Payment Amount
on the payment date and
o the Note Balance of the Class M-2 Notes immediately prior to
the payment date over
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $__________.
CLASS M-3 PRINCIPAL PAYMENT AMOUNT: The Class M-3 Principal Payment Amount
for any payment date on or after the Stepdown Date and on which a Trigger Event
is not in effect, is an amount equal to the excess of:
o the sum of:
o the Note Balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
the payment date,
o the Note Balance of the Class M-1 Notes, after taking into
account the payment of the Class M-1 Principal Payment Amount
on the payment date,
o the Note Balance of the Class M-2 Notes, after taking into
account the payment of the Class M-2 Principal Payment Amount
on the payment date and (d) the Note Balance of the Class M-3
Notes immediately prior to the payment date OVER
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $__________.
COMPENSATING INTEREST: With respect to any principal prepayments, any
payments made by the master servicer from its own funds to cover Prepayment
Interest Shortfalls.
CREDIT ENHANCEMENT PERCENTAGE: The Credit Enhancement Percentage for any
payment date is the percentage obtained by dividing:
o the sum of the Overcollateralized Amount and the aggregate Note
Balance of the subordinate notes by
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o the aggregate principal balance of the mortgage loans, calculated
after taking into account payments of principal on the mortgage loans
and payment of the Principal Payment Amount to the notes on the payment
date.
CURRENT INTEREST PAYMENT AMOUNT: The Current Interest Payment Amount for
any payment date is an amount equal to interest collections or advances on the
mortgage loans during the related due period, net of the master servicing fee,
the servicing fees and the indenture trustee fee.
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.
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.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for any payment date
is the period commencing on the payment date of the month immediately preceding
the month in which the payment date occurs, or, in the case of the first period,
commencing on the closing date, and ending on the day preceding the payment
date. All payments of interest on the notes will be based on a 360-day year and
the actual number of days in the applicable Interest Accrual Period.
INTEREST CARRY FORWARD AMOUNT: The Interest Carry Forward Amount with
respect to any class of notes and any payment date, is any shortfall in payment
of interest represented by the excess, if any, of the Interest Payment Amount
that would be payable on that class at the applicable Note Accrual Rate over the
Interest Payment Amount actually paid on the class at the Available Interest
Rate, together with any shortfall in payment of interest remaining unpaid from
previous payment dates plus interest accrued on those classes at the related
Note Accrual Rate.
INTEREST PAYMENT AMOUNT: The Interest Payment Amount for the notes of any
class on any payment date is equal to interest accrued during the related
Interest Accrual Period on the Note Balance of the notes immediately prior to
the payment date at the then-applicable Note Interest Rate for the class.
NET MONTHLY EXCESS CASHFLOW: The Net Monthly Excess Cashflow for any
payment date is equal to the sum of:
o any Overcollateralization Reduction Amount and
o the excess of:
o the Available Payment Amount for the payment date OVER
o the sum for the payment date of the aggregate of the Interest
Payment Amounts payable to the holders of the notes and the sum of
the amounts described in clauses (b)(i) through (iii) of the
definition of Principal Payment Amount.
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NOTE ACCRUAL RATE: The Note Accrual Rate with respect to any class of notes
and any payment date is the lesser of the rate described for that class in the
first bullet point under the definition of Note Interest Rate and the maximum
Note Interest Rate.
NOTE BALANCE: The Note Balance of a note outstanding at any time represents
the then maximum amount that the holder of that note is entitled to receive as
payments allocable to principal from the cash flow on the mortgage loans and the
other assets in the trust estate. The Note Balance of any class of notes as of
any date of determination is equal to the initial Note Balance of that class
reduced by the aggregate of:
o all amounts allocable to principal previously distributed with
respect to the note and
o any reductions in the Note Balance deemed to have occurred in
connection with allocations of Realized Losses.
NOTE INTEREST RATE:
o The Note Interest Rate on the Class A Notes will be a rate per annum
equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate
Note Balance is reduced to less than __% of the aggregate
initial Note Balance, or one-month LIBOR plus ____%, in the
case of any payment date thereafter,
o the Available Interest Rate for the payment date and
o _____% per annum, which is also referred to as the maximum
Note Interest Rate.
o The Note Interest Rate on the Class M-1 Notes will be a rate per
annum equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note
Balance, or one-month LIBOR plus ____%, in the case of any payment
date thereafter,
o the Available Interest Rate for the payment date and
o the maximum Note Interest Rate.
o The Note Interest Rate on the Class M-2 Notes will be a rate per
annum equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note
Balance, or one-month LIBOR plus ____%, in the case of any payment
date thereafter,
o the Available Interest Rate for the payment date and
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o the maximum Note Interest Rate.
o The Note Interest Rate on the Class M-3 Notes will be a rate per
annum equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note
Balance, or one-month LIBOR plus _____%, in the case of any
payment date thereafter,
o the Available Interest Rate for the payment date and
o the maximum Note Interest Rate.
OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount with respect to
any payment date is the excess, if any, of the aggregate principal balance of
the mortgage loans immediately following the payment date OVER the Note Balance
of the notes, after taking into account the payment of the amounts described in
clauses (b)(i) through (iv) of the definition of Principal Payment Amount on the
payment date.
OVERCOLLATERALIZATION INCREASE AMOUNT: With respect to the notes and any
payment date, any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal to the extent the Required Overcollateralized
Amount exceeds the Overcollateralized Amount as of the Payment Date.
OVERCOLLATERALIZATION REDUCTION AMOUNT: The Overcollateralization Reduction
Amount is the amount by which the Overcollateralized Amount exceeds the Required
Overcollateralized Amount.
PREPAYMENT INTEREST SHORTFALL: With respect to any principal prepayments on
the mortgage loans, any resulting shortfall.
PRINCIPAL PAYMENT AMOUNT: The Principal Payment Amount for any payment
date, other than the final maturity date and the payment date immediately
following the acceleration of the notes due to an event of default, will be the
lesser of:
(a) the excess of the Available Payment Amount over the aggregate of
the Interest Payment Amounts for the notes; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the mortgage loans due during the related due period, whether or
not received on or prior to the related determination date;
(ii) the principal portion of all proceeds received during the
related prepayment period in respect of the repurchase of a
mortgage loan, or, in the case of a substitution, amounts
representing a principal adjustment, as contemplated in the
servicing agreements;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received
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during the related prepayment period, to the extent applied as
recoveries of principal on the mortgage loans;
(iv) the principal portion of any Realized Losses incurred or
deemed to have been incurred on any mortgage loans in the calendar
month preceding the payment date to the extent covered by Net
Monthly Excess Cashflow for the payment date; and
(v) the amount of any Overcollateralization Increase Amount
for the payment date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
for the payment date.
REALIZED LOSS: A Realized Loss is any Bankruptcy Loss and any amount of
loss realized 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 noteholders 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 on the remaining
unpaid principal balance through the last day of the month in which the mortgage
loan was finally liquidated, after application of all amounts recovered, net of
amounts reimbursable to the servicers for P&I Advances, servicing advances and
other related expenses, including attorney's fees, towards interest and
principal owing on the mortgage loan.
REQUIRED OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount required
to be
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.
STEPDOWN DATE: The Stepdown Date for any payment date is the later to occur
of:
o the payment date occurring in _______ ____ and
o the first payment date on which the Credit Enhancement Percentage,
calculated for this purpose only after taking into account payments of
principal on the mortgage loans, but prior to any payment of the
Principal Payment Amount to the notes then entitled to payments of
principal on the payment date, is greater than or equal to _____%.
TRIGGER EVENT: With respect to any payment date, a Trigger Event is in
effect if the percentage obtained by dividing:
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o the principal amount of mortgage loans delinquent 60 days or more by
o the aggregate principal balance of the mortgage loans, in each case,
as of the last day of the previous calendar month,
exceeds the lesser of:
o _____% of the Credit Enhancement Percentage and
o ______%.
INTEREST PAYMENTS ON THE NOTES
The Note Interest Rate and the Note Accrual Rate for the notes for the
current related Interest Accrual Period, to the extent it has been determined,
and for the immediately preceding Interest Accrual Period may be obtained by
telephoning the indenture trustee at __________.
To the extent of the Current Interest Payment Amount, in the priorities set
forth immediately following this paragraph, the holders of each class of notes
will be entitled to receive on each payment date interest payments in an amount
equal to the Interest Payment Amount for that class. On each payment date, the
Current Interest Payment Amount will be distributed in the following order of
priority:
FIRST, to the holders of the Class A Notes, the Interest Payment Amount for
the Class A Notes;
SECOND, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amount for the Class A Notes, to the
holders of the Class M-1 Notes, the Interest Payment Amount for the Class
M-1 Notes;
THIRD, to the extent of the Current Interest Payment Amount remaining after
payment of the Interest Payment Amounts for the Class A Notes and the Class
M-1 Notes, to the holders of the Class M-2 Notes, the Interest Payment
Amount for the Class M-2 Notes; and
FOURTH, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amounts for the Class A Notes, the
Class M-1 Notes and the Class M-2 Notes, to the holders of the Class M-3
Notes, the Interest Payment Amount for the Class M-3 Notes.
With respect to any payment date, to the extent that the aggregate of the
Interest Payment Amounts for the notes is limited by the Current Interest
Payment Amount for the related due period, the holders of some classes of notes
may receive an Interest Payment Amount calculated at the Available Interest Rate
rather than at the applicable Note Accrual Rate for those classes and the
payment date. The Interest Carry Forward Amount, if any, for any class of the
notes for any payment date is payable to the extent of available funds remaining
after other payments on the notes on the payment date, but before any payments
on the equity certificates on the payment date.
See "--Overcollateralization Provisions" in this prospectus supplement.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period, on the second business
day preceding the Interest Accrual Period, or the interest determination date,
the indenture trustee will determine one- month LIBOR for the next Interest
Accrual Period. One-month LIBOR means, as of any interest
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determination date, the London interbank offered rate for one-month U.S. dollar
deposits which appears on telerate page 3750 as of 11:00 a.m. London time on
that date. If the rate does not appear on telerate page 3750, the rate for that
day will be determined on the basis of the offered rates of the reference banks
for one-month U.S. dollar deposits, as of 11:00 a.m., London time, on the
interest determination date. The indenture trustee will request the principal
London office of each of the reference banks to provide a quotation of its rate.
If on the interest determination date two or more reference banks provide
offered quotations, one-month LIBOR for the related Interest Accrual Period
shall be the arithmetic mean of the offered quotations, rounded upwards if
necessary to the nearest whole multiple of 0.0625%. If on the interest
determination date fewer than two reference banks provide offered quotations,
one-month LIBOR for the related Interest Accrual Period shall be the higher of:
o one-month LIBOR as determined on the previous interest determination
date and
o the reserve interest rate.
As used in this section, business day means a day on which banks are open
for dealing in foreign currency and exchange in London and New York City;
telerate page 3750 means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report, or other page as may replace that page on
that service for the purpose of displaying comparable rates or prices);
reference banks means leading banks selected by the indenture trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market:
o with an established place of business in London,
o which have been designated by the indenture trustee and
o not controlling, controlled by, or under common control with, the
depositor or the issuer; and
Reserve interest rate shall be the rate per annum that the indenture
trustee determines to be either:
o the arithmetic mean, rounded upwards if necessary to the nearest
whole multiple of 0.0625%, of the one-month U.S. dollar lending rates
which New York City banks selected by the indenture trustee are quoting
on the relevant interest determination date to the principal London
offices of leading banks in the London interbank market or,
o in the event that the indenture trustee can determine no arithmetic
mean, the lowest one-month U.S. dollar lending rate which New York City
banks selected by the indenture trustee are quoting on the interest
determination date to leading European banks.
The establishment of one-month LIBOR on each interest determination date by
the indenture trustee and the indenture trustee's calculation of the rate of
interest applicable to the notes for the related Interest Accrual Period shall,
in the absence of manifest error, be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each payment date, the Principal Payment Amount will be distributed to
the holders of the notes then entitled to payments of principal.
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The Principal Payment Amount for the final maturity date or the payment
date immediately following the acceleration of the notes due to an event of
default will equal the amount necessary to reduce the Note Balance of any notes
outstanding to zero. In no event will the Principal Payment Amount with respect
to any Payment Date be:
o less than zero or
o greater than the then-outstanding aggregate Note Balance of the
notes.
The Principal Payment Amount for the first payment date will include
approximately $_________ collected by the servicers in respect of prepayments on
the mortgage loans during the _________ ____ prepayment period.
On each Payment Date prior to the Stepdown Date or on which a Trigger Event
is in effect, the Principal Payment Amount shall be distributed:
o first, to the Class A Notes, until the Note Balance of the Class A
Notes has been reduced to zero;
o second, to the Class M-1 Notes, until the Note Balance of the Class
M-1 Notes has been reduced to zero;
o third, to the Class M-2 Notes, until the Note Balance of the Class
M-2 Notes has been reduced to zero; and
o fourth, to the Class M-3 Notes, until the Note Balance of the Class
M-3 Notes has been reduced to zero.
On each payment date on or after the Stepdown Date and on which a Trigger
Event is not in effect, the holders of the Class A Notes and the subordinate
notes shall be entitled to receive payments in respect of principal to the
extent of the Principal Payment Amount in the following amounts and order of
priority:
o FIRST, the lesser of:
o the Principal Payment Amount and
o the Class A Principal Payment Amount, shall be distributed to
the holders of the Class A Notes, until the Note Balance of the
Class A Notes has been reduced to zero;
o SECOND, the lesser of the excess of
o the Principal Payment Amount over
o the amount distributed to the holders of the Class A Notes under
clause first above and the Class M-1 Principal Payment Amount,
shall be distributed to the holders of the Class M-1 Notes, until
the Note Balance of the Class M-1 Notes has been reduced to zero;
o THIRD, the lesser of the excess of
o the Principal Payment Amount over
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o the sum of the amounts distributed to the holders of the Class A
Notes under clause FIRST above and to the holders of the Class M-1
Notes under clause second above and the Class M-2 Principal
Payment Amount, shall be distributed to the holders of the Class
M-2 Notes, until the Note Balance Class M-2 Notes has been reduced
to zero; and
o FOURTH, the lesser of the excess of
o the Principal Payment Amount over
o the sum of the amounts distributed to the holders of the Class A
Notes under clause FIRST above, to the holders of the Class M-1
Notes under clause second above and to the holders of the Class
M-2 Notes under clause third above and the Class M-3 Principal
Payment Amount, shall be distributed to the holders of the Class
M-3 Notes, until the Note Balance of the Class M-3 Notes has been
reduced to zero.
On the final maturity date or the payment date immediately following the
acceleration of the notes due to any event of default principal will be payable
on each class of notes in an amount equal to the Note Balance of that class on
the payment date. On the final maturity date or the payment date immediately
following the acceleration of the notes due to any event of default, amounts in
respect of accrued interest, Interest Carry Forward Amounts and Allocated
Realized Loss Amounts will also be payable on each class of notes in the
priorities set forth in the indenture. There can be no assurance, however, that
sufficient funds will be available on any date to retire the Note Balances and
pay any other amounts.
The allocation of payments in respect of principal to the Class A Notes on
each payment date prior to the Stepdown Date or on which a Trigger Event has
occurred, will have the effect of accelerating the amortization of the Class A
Notes while, in the absence of Realized Losses, increasing the respective
percentage interest in the principal balance of the mortgage loans evidenced by
the subordinate notes and the Overcollateralized Amount. Increasing the
respective percentage interest in the trust estate of the subordinate notes and
the Overcollateralized Amount relative to that of the Class A Notes is intended
to preserve the availability of the subordination provided by the subordinate
notes and the Overcollateralized Amount.
The holders of the equity certificates will be entitled to all prepayment
charges received on the mortgage loans and these amounts will not be available
for distribution on the notes.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the notes
consists of subordination in this section, and overcollateralization, as
described under "--Overcollateralization Provisions" in the next section.
The rights of the holders of the subordinate notes and the equity
certificates to receive payments will be subordinated, to the extent described
in this prospectus supplement, to the rights of the holders of the Class A
Notes. This subordination is intended to enhance the likelihood of regular
receipt by the holders of the Class A Notes of the full amount of interest and
principal to which they are entitled and to afford these holders protection
against Realized Losses.
The protection afforded to the holders of the Class A Notes by means of the
subordination of the subordinate notes and the equity certificates will be
accomplished by:
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o the preferential right of the holders of the Class A Notes to receive on
any payment date, prior to payment on the subordinate notes and the equity
certificates, payments in respect of interest and principal, subject to
available funds, and
o if necessary, the right of the holders of the Class A Notes to receive
future payments of amounts that would otherwise be payable to the holders of the
subordinate notes and the equity certificates.
In addition, the rights of the holders of subordinate notes with lower
numerical class designations will be senior to the rights of holders of
subordinate notes with higher numerical class designations, and the rights of
the holders of all of the subordinate notes to receive payments in respect of
the mortgage loans will be senior to the rights of the holders of the equity
certificates, in each case to the extent described in this prospectus
supplement. This subordination is intended to enhance the likelihood of regular
receipt by the holders of subordinate notes with lower numerical class
designations relative to the holders of subordinate notes with higher numerical
class designations, and by the holders of all of the subordinate notes relative
to the holders of the equity certificates, of the full amount of interest and
principal to which they are entitled and to afford these holders protection
against Realized Losses, as described under "--Allocation of Realized Losses" in
this prospectus supplement.
OVERCOLLATERALIZATION PROVISIONS
The weighted average mortgage rate for the mortgage loans, adjusted to
reflect the master servicing fee, the servicing fees and the indenture trustee
fee payable from interest received or advanced on the mortgage loans, is
expected to be higher than the weighted average of the Note Interest Rates on
the notes, thus generating excess interest collections which, in the absence of
Realized Losses, will not be necessary to fund interest payments on the notes.
The indenture requires that, on each payment date, the Net Monthly Excess
Cashflow, if any, be applied on each payment date as an accelerated payment of
principal on class or classes of notes then entitled to receive payments in
respect of principal, but only to the limited extent hereafter described.
With respect to any payment date, any Net Monthly Excess Cashflow, or, in
the case of clause first below, the Net Monthly Excess Cashflow exclusive of any
Overcollateralization Reduction Amount, shall be paid as follows:
o FIRST, to the holders of the class or classes of notes then entitled to
receive payments in respect of principal, in an amount equal to the
principal portion of any Realized Losses incurred or deemed to have been
incurred on the mortgage loans;
o SECOND, to the holders of the class or classes of notes then entitled to
receive payments in respect of principal, in an amount equal to the
Overcollateralization Increase Amount;
o THIRD, to the holders of the Class A Notes, in an amount equal to the
Interest Carry Forward Amount for the Class A Notes;
o FOURTH, to the holders of the Class M-1 Notes, in an amount equal to the
Interest Carry Forward Amount for the Class M-1 Notes;
o FIFTH, to the holders of the Class M-1 Notes, in an amount equal to the
Allocated Realized Loss Amount for the Class M-1 Notes;
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o SIXTH, to the holders of the Class M-2 Notes, in an amount equal to the
Interest Carry Forward Amount for the Class M-2 Notes;
o SEVENTH, to the holders of the Class M-2 Notes, in an amount equal to the
Allocated Realized Loss Amount for the Class M-2 Notes;
o EIGHTH, to the holders of the Class M-3 Notes, in an amount equal to the
Interest Carry Forward Amount for the Class M-3 Notes;
o NINTH, to the holders of the Class M-3 Notes, in an amount equal to the
Allocated Realized Loss Amount for the Class M-3 Notes; and
o TENTH, to the holders of the equity certificates as provided in the
indenture.
As of the closing date, the aggregate principal balance of the mortgage
loans as of the cut-off date will exceed the aggregate Note Balance of the notes
by an amount equal to approximately $_________. This amount represents
approximately ____% of the aggregate principal balance of the mortgage loans as
of the cut-off date, which is the initial amount of overcollateralization
required to be provided by the mortgage pool under the indenture. Under the
indenture, the Overcollateralized Amount is required to be maintained at the
Required Overcollateralized Amount. In the event that Realized Losses are
incurred on the mortgage loans, these Realized Losses may result in an
overcollateralization deficiency since these Realized Losses will reduce the
principal balance of the mortgage loans without a corresponding reduction to the
aggregate Note Balance of the notes. In the event of an occurrence of this kind,
the indenture requires the payment from Net Monthly Excess Cashflow, subject to
available funds, of an amount equal to any overcollateralization deficiency,
which shall constitute a principal payment on the notes in reduction of the Note
Balances of those notes. This has the effect of accelerating the amortization of
the notes relative to the amortization of the mortgage loans, and of increasing
the Overcollateralized Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease, or
step down, below the initial $_________ level to a level equal to approximately
____% of the then current aggregate outstanding principal balance of the
mortgage loans, after giving effect to principal payments to be distributed on
the payment date, subject to a floor of $_________. In the event that the
Required Overcollateralized Amount is permitted to step down on any payment
date, the indenture provides that a portion of the principal which would
otherwise be distributed to the holders of the notes on the payment date shall
be distributed to the holders of the equity certificates, subject to the
priorities set forth in this section. With respect to each of these payment
dates, the Principal Payment Amount will be reduced by the Overcollateralization
Reduction Amount after taking into account all other payments to be made on the
payment date, which amount shall be distributed as Net Monthly Excess Cashflow
according to the priorities set forth in this section. This has the effect of
decelerating the amortization of the notes relative to the amortization of the
mortgage loans, and of reducing the Overcollateralized Amount. However, if on
any payment date a Trigger Event is in effect, the Required Overcollateralized
Amount will not be permitted to step down on the payment date.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Loss on the mortgage loans will be allocated on any payment
date:
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o first, to Net Monthly Excess Cashflow,
o second, to the Overcollateralized Amount,
o third, to the Class M-3 Notes,
o fourth, to the Class M-2 Notes, and
o fifth, to the Class M-1 Notes.
The indenture does not permit the allocation of Realized Losses to the
Class A Notes. Investors in the Class A Notes should note that although Realized
Losses cannot be allocated to the these notes, under certain loss scenarios
there will not be enough principal and interest collected on the mortgage loans
to pay the Class A Notes all interest and principal amounts to which they are
then entitled.
Once Realized Losses have been allocated to the subordinate notes, these
Realized Losses will not be reinstated thereafter. However, Allocated Realized
Loss Amounts may be paid to the holders of these classes of notes, after
distributions to the holders of the Class A Notes and subordinate notes with
lower numerical class designations, but before the equity certificates are
entitled to any distributions.
Any allocation of a Realized Loss to a note will be made by reducing the
Note Balance of that note by the amount so allocated on the payment date in the
month following the calendar month in which the Realized Loss was incurred.
Notwithstanding anything to the contrary described in this prospectus
supplement, in no event will the Note Balance of any note be reduced more than
once in respect of any particular amount both:
o allocable to the notes in respect of Realized Losses and
o payable as principal to the holder of the notes from Net Monthly Excess
Cashflow.
P&I ADVANCES
Subject to the limitations described in the following paragraph, each
servicer will be obligated to advance or cause to be advanced on or before each
payment date its own funds, or funds in the note account that are not included
in the Available Payment Amount for the payment date. The amount of each
servicer's advance will be equal to the aggregate of all payments of principal
and interest, net of the related servicing fee, that were due during the related
due period on the mortgage loans serviced by that servicer 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.
P&I Advances are required to be made only to the extent they are deemed by
the related servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making P&I Advances is to
maintain a regular cash flow to the noteholders, rather than to guarantee or
insure against losses. The servicers will not be required to make any P&I
Advances with respect to reductions in the amount of the monthly payments on the
mortgage loans due to bankruptcy proceedings or the application of the Relief
Act.
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All P&I Advances will be reimbursable to the related servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which 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 related
servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the related servicer out of any
funds in the note account prior to the payments on the notes. In the event that
any servicer fails in its obligation to make any required advance, the master
servicer will be obligated to make this advance, and in the event that the
master servicer fails in its obligation to make this advance, the indenture
trustee will be obligated to make the advance, in each case to the extent
required in the related servicing agreement.
THE ISSUER
[Salomon] Trust Series ____-__ is a business trust formed under the laws of
the State of Delaware under an owner trust agreement, dated as of ________ __,
____, between the depositor and the owner trustee for the transactions described
in this prospectus supplement. The owner trust agreement constitutes the
governing instrument under the laws of the State of Delaware relating to
business trusts. After its formation, the issuer will not engage in any activity
other than:
o acquiring and holding the mortgage loans and the proceeds from the
mortgage loans,
o issuing the notes and the equity certificates,
o making payments on the notes and the equity certificates and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The issuer is not expected to have any significant assets other than the
trust estate pledged as collateral to secure the notes. The assets of the issuer
will consist of the mortgage loans pledged to secure the notes. The issuer's
principal offices are in __________, ________, in care of ________________, as
owner trustee.
THE SELLER
__________________, or the seller, in its capacity as mortgage loan seller,
will sell the mortgage loans to the ___________ under a mortgage loan purchase
agreement, dated as of _________ __, ____, between the seller and the [SPE].
THE [SPE]
_______________, the [SPE], a special purpose entity that is an affiliate
of the issuer and the seller, will convey the mortgage loans to the depositor
under an ownership transfer agreement, dated as of ________ __, ____, between
the [SPE] and the depositor.
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<PAGE>
THE OWNER TRUSTEE
_________________ is the owner trustee under the owner trust agreement. The
owner trustee is a _________ banking corporation and its principal offices are
located in _____________.
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the issuer or the noteholders under
the owner trust agreement under any circumstances, except for the owner
trustee's own misconduct, gross negligence, bad faith or grossly negligent
failure to act or in the case of the inaccuracy of the representations made by
the owner trustee in the owner trust agreement. All persons into which the owner
trustee may be merged or with which it may be consolidated or any person
resulting from a merger or consolidation shall be the successor of the owner
trustee under the owner trust agreement.
The principal compensation to be paid to the owner trustee in respect of
its obligations under the owner trust agreement will have been paid by or on
behalf of the issuer on or prior to the closing date.
THE INDENTURE TRUSTEE
____________________, a ____________ banking association, will act as
indenture trustee for the notes under the indenture. The indenture trustee's
offices for notices under the tndenture are located at
______________________________ and its telephone number is ______________.
The principal compensation to be paid to the indenture trustee in respect
of its obligations under the indenture, or the indenture trustee fee, will be
equal to:
o accrued interest at ________% per annum, or the indenture trustee fee
rate, on the Scheduled Principal Balance of each mortgage loan, payable
monthly, and
o any interest or other income earned on funds held in the note
account, to the extent not payable as compensation to the related
servicer, as provided in the indenture.
The indenture will provide that the indenture trustee may withdraw funds
from the note account:
o to reimburse itself for all reasonable out-of-pocket expenses incurred or
made by it, including costs of collection and including reasonable compensation
and expenses, disbursements and advances of its agents, counsel, accountants and
experts and
o to reimburse the owner trustee for all reasonable out-of pocket expenses
incurred or made by the owner trustee for all services rendered by the owner
trustee it in the owner trustee's execution of the trust created under the owner
trust agreement and in the exercise and performance of any of the owner
trustee's powers and duties under the owner trust agreement.
Under the indenture, the issuer, from the assets of the trust estate, shall
indemnify the indenture trustee against any and all loss, liability or expense,
including reasonable attorneys' fees, incurred by the indenture trustee in
connection with the administration of the trust estate and the performance of
the indenture trustee's duties hereunder. The issuer is not required, however,
to reimburse any
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<PAGE>
expense or indemnify against any loss, liability or expense incurred by the
indenture trustee through the indenture trustee's own willful misconduct,
negligence or bad faith.
THE SERVICING AGREEMENT
The following summary describes the basic terms of the servicing
agreements, dated as of __________ __, ____, among the issuer, the indenture
trustee, the master servicer and the related servicer. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the servicing agreements. Whenever particular
sections or defined terms of the servicing agreements are referred to, these
sections or defined terms are incorporated in this prospectus supplement by
reference. The depositor will provide to a prospective or actual noteholder
without charge, on written request, a copy, without exhibits, of the servicing
agreements. Requests should be addressed toSecretary, Salomon Brothers Mortgage
Securities VII, Inc., Seven World Trade Center, New York, New York 10048.
THE ORIGINATORS AND SERVICERS
[ORIGINATOR]
The information set forth in the following paragraphs has been provided by
_______________. None of the issuer, the other originators, the depositor, the
master servicer, the seller, the _________ SPE, the owner trustee, the indenture
trustee or any of their respective affiliates has made or will make any
representation as to the accuracy or completeness of such information. The
following table summarizes ____________'s one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by __________ from other
loan originators.
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
-----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations.........
Sales................
</TABLE>
The following table sets forth the delinquency and loss experience at the
dates indicated for residential (one- to four-family and multifamily) loans
serviced by ___________ that were originated or purchased by __________:
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<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
--------------------------------------------------------------------------------
1996 1997 1998 1999 2000
--------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance...............................
Number of Loans.........................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal
Balance.......................
Delinquency as a Percentage
of Number of Loans............
61-90 Days
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
91 Days or More
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
Total Delinquencies:
Principal Balance...............
Number of Loans.................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.............
Delinquency as a Percentage
of Number of Loans............
FORECLOSURES PENDING(1)
Principal Balance...............
Number of Loans.................
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.......................
Foreclosures Pending as
a Percentage of Number of
Loans...........................
NET LOAN LOSSES for the
Period(2).............................
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance.....................
</TABLE>
S-55
<PAGE>
---------------
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net loan losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during the
period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of residential loans serviced by ________ have been
conveyed to REMIC trust funds.
[ORIGINATOR]
The information set forth in the following paragraphs has been provided by
______________. None of the issuer, the other originators, the depositor, the
master servicer, the seller, the _________ SPE, the owner trustee, the indenture
trustee or any of their respective affiliates has made or will make any
representation as to the accuracy or completeness of such information.
[ORIGINATOR]
The information set forth in the following paragraphs has been provided by
________________ ("____________"). None of the issuer, the other originators,
the depositor, the master servicer, the seller, the __________ SPE, the owner
trustee, the indenture trustee or any of their respective affiliates has made or
will make any representation as to the accuracy or completeness of such
information. Pursuant to the related servicing agreement, ____________ will
serve as servicer for the mortgage loans sold indirectly by it to the depositor
(in such capacity, with respect to such mortgage loans, the "servicer").
Notwithstanding the foregoing, the master servicer and ___________ have advised
the depositor that with respect to a portion of the mortgage loans initially to
be serviced by _____________, the servicing thereof is expected to be
transferred to the master servicer, whereupon the master servicer will act in
the capacity as servicer under the applicable servicing agreement to the extent
of such mortgage loans. Such portion of the mortgage loans that is expected to
be subject to such servicing transfer represents approximately _____% of the
mortgage loans, by aggregate principal balance as of the cut-off date.
The table below sets forth the overall delinquency experience on
residential one-to-four-family mortgage loans for non-conforming credits which
are currently serviced by ____________. No mortgage loan is considered
delinquent for purposes of the table until a payment is 30 days past due on a
contractual basis. It should be noted that ______________ commenced its
servicing activities for these types of non-conforming mortgage loans in ____
and that its portfolio consists of mortgage loans that were originated during
the periods from ____ to ____ in accordance with the underwriting standards it
had established or other underwriting guidelines that it determined were
substantially similar. The information in the table below is not intended to
indicate or predict the expected delinquency experience on past, current or
future pools of mortgage loans for which __________ _ is the primary servicer.
S-56
<PAGE>
<TABLE>
<CAPTION>
----------------
NON-CONFORMING MORTGAGE LOAN PORTFOLIO EXPERIENCE
Year Ended December 31, Six Months Ended
------------------------- ----------------
1997 1998 1999 June 30, 2000
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Total principal balance (at period end).........
Average portfolio principal balance(1)..........
DELINQUENCIES (at period end)(2) 30-59 Days:
Principal balance.............................
Percent(3)....................................
60-89 Days:
Principal balance.............................
Percent(3)....................................
90 Days or More:
Principal balance.............................
Percent(3)....................................
Total Delinquencies:
Principal balance.............................
Percent(3)....................................
FORECLOSURES
Principal balance.............................
Percent(3)....................................
REO (at period end).............................
Net gains/(losses) on liquidated loans..........
Percentage of net gains/(losses) on
liquidated loans (based on average
portfolio principal balance)..................
</TABLE>
--------------------
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Delinquency information does not include loans in foreclosure or REO.
(3) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
(4) Annualized.
It is unlikely that the delinquency experience of the mortgage loans
comprising the mortgage pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios only for the periods presented, whereas the aggregate delinquency
experience on the mortgage loans comprising the mortgage pool will depend on the
results obtained over the life of the mortgage pool. The mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the mortgage loans
comprising the mortgage pool. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by ______________. In addition, adverse economic
conditions may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the mortgage loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the mortgage pool.
S-57
<PAGE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation, or servicing fee, to be paid to each servicer
in respect of its servicing activities for the notes will be equal to accrued
interest at the servicing fee rate of ____% per annum with respect to each
mortgage loan serviced by it for each calendar month on the same principal
balance on which interest on the mortgage loan accrues for the calendar month.
As additional servicing compensation, each servicer is entitled to retain all
assumption fees and late payment charges in respect of mortgage loans serviced
by it, to the extent collected from mortgagors, together with any interest or
other income earned on funds held in the note account, to the extent not payable
as compensation to the indenture trustee, and any escrow accounts in respect of
mortgage loans serviced by it.
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the due date of the
preceding monthly payment up to the date of 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. Each servicer is obligated to pay from its own
funds Compensating Interest for any Prepayment Interest Shortfall, but only to
the extent of its aggregate servicing fee for the related due period. Each
servicer is obligated to pay insurance premiums and other ongoing expenses
associated with the mortgage pool in respect of mortgage loans serviced by it
and incurred by each servicer in connection with its responsibilities under the
related servicing agreement and is entitled to reimbursement therefor as
provided in the servicing agreement. See "Description of the
Securities--Retained Interest; Servicing Compensation and Payment of Expenses"
in the prospectus for information regarding expenses payable by the servicers.
SERVICER EVENTS OF DEFAULT
In addition to those events of default, as defined in the prospectus,
pertaining to the servicing of the mortgage loans and described under
"Description of the Securities--Events of Default" in the prospectus, upon the
occurrence of certain loss triggers with respect to the mortgage loans, the
servicer may be removed as servicer of the mortgage loans serviced by it in
accordance with the terms of the related servicing agreement. If any servicer is
removed in connection with an event of default applicable to that servicer under
the terms of the related servicing agreement, the master servicer will become
the successor servicer of the mortgage loans serviced by the terminated
servicer.
THE INDENTURE AND OWNER TRUST AGREEMENT
The following summary describes basic terms of the indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the owner trust agreement and indenture.
Whenever particular defined terms of the indenture are referred to, these
defined terms are incorporated in this prospectus supplement by reference. The
depositor will provide to a prospective or actual noteholder without charge, on
written request, a copy, without exhibits, of the indenture and the owner trust
agreement. Requests should be addressed to the Secretary, 390 Greenwich Street,
4th Floor, New York, New York 10013. Its telephone number is (212) 816-6000.
GENERAL DESCRIPTION OF THE INDENTURE
The notes will be issued under the Indenture, a form of which is filed as
an exhibit to the registration statement. A Current Report on Form 8-K relating
to the notes containing a copy of the indenture and the owner trust agreement as
executed will be filed by the depositor with the Securities and Exchange
Commission within fifteen days of the initial issuance of the notes.
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<PAGE>
Reference is made to the prospectus for important information in addition to
that set forth in this prospectus supplement regarding the trust estate, the
terms and conditions of the indenture and the owner trust agreement and the
notes. The notes will be transferable and exchangeable at the corporate trust
offices of the indenture trustee, located in _______________.
ASSIGNMENT OF MORTGAGE LOANS
On or prior to the date the notes are issued, the seller will convey each
mortgage loan to the [SPE], who in turn will convey each mortgage loan to the
depositor, who in turn will convey each mortgage loan to the issuer.
At the time of issuance of the notes, the issuer will pledge all of its
right, title and interest in and to the mortgage loans, including all principal
and interest due on each mortgage loan after the cut- off dates, without
recourse, to the indenture trustee under the indenture as collateral for the
notes; provided, however, that the seller will reserve and retain all its right,
title and interest in and to principal and interest due on the mortgage loan on
or prior to the cut-off date, whether or not received on or prior to the cut-off
date, and to prepayments received prior to the cut-off date. The indenture
trustee, concurrently with this assignment, will authenticate and deliver the
notes at the direction of the issuer in exchange for, among other things, the
mortgage loans.
The indenture will require the issuer to deliver to the indenture trustee
or to a custodian with respect to each mortgage loan:
o the mortgage note endorsed without recourse to the indenture trustee,
o the original mortgage with evidence of recording indicated on the
mortgage and
o an assignment of the mortgage in recordable form to the indenture
trustee. These assignments of mortgage loans are required to be
recorded by or on behalf of the seller, at the expense of the seller,
in the appropriate offices for real property records.
EVENTS OF DEFAULT
Notwithstanding the prospectus, an event of default under the indenture
with respect to the notes is as follows:
o the failure of the issuer to pay the Interest Payment Amount, the
Principal Payment Amount or any Overcollateralization Increase Amount
on any payment date, in each case to the extent that funds are
available on the payment date to make these payments, which continues
unremedied for a period of five days;
o the failure by the issuer on the final maturity date to reduce the
Note Balances of any notes then outstanding to zero;
o a default in the observance or performance of any covenant or
agreement of the issuer in the indenture and the continuation of any
default of this kind for a period of thirty days after notice to the
issuer by the indenture trustee or by the holders of at least 25% of
the voting rights of the notes;
o any representation or warranty made by the issuer in the indenture or
in any certificate or other writing delivered under the indenture
having been incorrect in any material respect as of the time made, and
the circumstance in respect of which the representation or warranty
being incorrect not having been cured within thirty days after notice
is given to the issuer by the indenture trustee or by the holders of at
least 25% of the voting rights of the notes; or
o events of bankruptcy, insolvency, receivership or reorganization of
the issuer.
S-59
<PAGE>
Notwithstanding, the Prospectus, if an Event of Default occurs and is
continuing, the Indenture Trustee or the holders of a majority of the Voting
Rights may declare the Note Balance of all the Notes to be due and payable
immediately. This declaration may be rescinded and annulled by the holders of a
majority in aggregate outstanding Voting Rights.
If, following an Event of Default, the notes have been declared to be due
and payable, the indenture trustee may, in its discretion, notwithstanding this
acceleration, elect to maintain possession of the collateral securing the notes
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 as they would
have become due if there had not been a declaration of acceleration. In
addition, the indenture trustee may not sell or otherwise liquidate the
collateral securing the notes following an event of default, unless:
o the holders of 100% of the then aggregate outstanding voting rights
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 at their
respective Note Accrual Rates, on the outstanding notes at the date of
the sale or
o the indenture 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 indenture trustee obtains the consent of the
holders of 66 2/3% of the then aggregate outstanding voting rights.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a 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 indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the noteholders after the occurrence of an event of default.
In the event the principal of the notes is declared due and payable, the
holders of any 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 will have any right under the indenture to institute any
proceeding with respect to the indenture unless:
o the holder previously has given to the indenture trustee written
notice of default and the continuance of this default,
o the holders of notes of any class evidencing not less than 25% of the
aggregate outstanding Note Balance constituting that class have made
written request upon the indenture trustee to institute a proceeding in
its own name as indenture trustee thereunder and have offered to the
indenture trustee reasonable indemnity,
o the indenture trustee has neglected or refused to institute any
proceeding for 60 days after receipt of a request and indemnity and
o no direction inconsistent with the written request has been given to
the indenture trustee during the 60 day period by the holders of a
majority of the Note Balance of that class.
However, the indenture trustee will be under no obligation to exercise any
of the trusts or powers vested in it by the indenture or to institute, conduct
or defend any litigation under the indenture or in relation to the indenture at
the request, order or direction of any of the holders of notes covered by the
indenture, unless those holders have offered to the indenture trustee
S-60
<PAGE>
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
VOTING RIGHTS
At all times, 100% of all voting rights will be allocated among the holders
of the Class A Notes, or, after the Class A Notes have been paid in full, the
class of subordinate notes then outstanding with the lowest numerical class
designation, in proportion to the then outstanding Note Balances of their
respective notes.
OPTIONAL REDEMPTION
The circumstances under which the obligations created by the indenture will
terminate in respect of the notes are described in "Description of the
Securities--Termination" in the prospectus.
At its option, the majority holder of the equity certificates may redeem
the notes, in whole but not in part, on any payment date on or after the payment
date on which the aggregate Note Balance is reduced to less than 20% of the
aggregate initial Note Balance. Any redemption of this kind will be paid in cash
at a price equal to the sum of:
o 100% of the aggregate Note Balance then outstanding,
o the aggregate of any Allocated Realized Loss Amounts on the notes
remaining unpaid immediately prior to the payment date,
o the aggregate of the Interest Payment Amounts on the notes for the
payment date and
o the aggregate of any Interest Carry Forward Amounts for the payment
date.
Upon any redemption of this kind, the remaining assets in the trust estate
shall be released from the lien of the indenture.
In no event will the trust created by the indenture continue beyond the
expiration of 21 years from the death of the survivor of the persons named in
the indenture. See "Description of the Securities--Termination" in the
Prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Prior to the sale of the certificates, Thacher Proffitt & Wood, counsel to
the depositor, will deliver its opinion to the effect that based on the
application of existing law and assuming compliance with the owner trust
agreement, for federal income tax purposes:
o the notes will be characterized as indebtedness and not as
representing an ownership interest in the trust estate or an equity
interest in the issuer or the depositor and
o the issuer will not be classified as an association taxable as a
corporation for federal income tax purposes or a publicly traded
partnership as defined in Treasury Regulation Section 1.7704.
The notes will not be treated as having been issued with original issue
discount, as defined in the prospectus. The prepayment assumption that will be
used in determining the rate of amortization of market discount and premium, if
any, for federal income tax purposes will be based on the assumption that the
mortgage loans will prepay at a rate equal to __% CPR. No representation is made
that the mortgage loans will prepay at that rate or at any other rate. See
"Federal Income Tax Consequences" in the prospectus.
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<PAGE>
Taxable mortgage pool, or TMP, rules enacted as part of the Tax Reform Act
of 1986 treat certain arrangements in which debt obligations are secured or
backed by real estate mortgage loans as taxable corporations. An entity, or a
portion of an entity, will be characterized as a TMP if:
o substantially all of its assets are debt obligations and more than
50% of these debt obligations consist of real estate mortgage
loans or interests in real estate mortgage loans,
o the entity is the obligor under debt obligations with two or more
maturities, and
o payments on the debt obligations referred to in clause (ii) bear a
relationship to payments on the debt obligations referred to in
clause (i).
Furthermore, a group of assets held by an entity can be treated as a
separate TMP if the assets are expected to produce significant cashflow that
will support one or more of the entity's issues of debt obligation.
It is anticipated that the issuer will be characterized as a TMP for
federal income tax purposes. In most cases, a TMP is treated as a separate
corporation not includible with any other corporation in a consolidated income
tax return, and is subject to corporate income taxation.
The notes will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or real estate assets under Section 856(c)(4)(A) of the Code. In
addition, interest on the notes will not be treated as interest on obligations
secured by mortgages on real property under Section 856(c)(3)(B) of the Code.
The notes will also not be treated as qualified mortgages under Section
860G(a)(3)(C) of the Code.
Prospective investors in the notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the prospectus for a
discussion of the application of federal income and state and local tax laws to
the issuer and purchasers of the notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated ________ __, ____, the depositor has agreed to sell, and
________________, as underwriter, has agreed to purchase the notes. The
underwriter is obligated to purchase all notes of the respective classes offered
by this prospectus supplement if it purchases any.
The notes will be purchased from the depositor by the underwriter and will
be offered by the underwriter to the public from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the depositor from the sale of the notes, before deducting
expenses payable by the depositor, will be approximately ___% of the aggregate
initial Note Balance of the notes. In connection with the purchase and sale of
the notes, the underwriter may be deemed to have received compensation from the
depositor in the form of underwriting discounts.
The offered notes are offered subject to receipt and acceptance by the
underwriter, to prior sale and to the underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the offered notes will be made through the
facilities of DTC on or about the closing date.
The underwriting agreement provides that the depositor will indemnify the
underwriter against those civil liabilities set forth in the underwriting
agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the underwriter may be required to make in
respect of these liabilities.
S-62
<PAGE>
SECONDARY MARKET
There can be no assurance that a secondary market for the notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the notes will be the monthly
statements discussed in the prospectus under "Description of the
Securities--Reports to Securityholders", which will include information as to
the outstanding Note Balance of the notes and the status of the applicable form
of credit enhancement. There can be no assurance that any additional information
regarding the notes will be available through any other source. In addition, the
depositor is not aware of any source through which price information about the
notes will be available on an ongoing basis. The limited nature of the
information regarding the notes may adversely affect the liquidity of the notes,
even if a secondary market for the notes becomes available.
LEGAL OPINIONS
Legal matters relating to the notes will be passed upon for the depositor
by Thacher Proffitt & Wood, New York, New York.
RATINGS
It is a condition of the issuance of the notes that the Class A Notes be
rated "AAA" by _____________ and "AAA" by _______________, that the Class M-1
Notes be rated at least "AA" by ____ and at least "AA" by ____, that the Class
M-2 Notes be rated at least "A" by ____ and at least "A" by _____ and that the
Class M-3 Notes be rated at least "BBB" by _____.
The ratings of _____ and _____ assigned to the notes address the likelihood
of the receipt by noteholders of all payments to which the noteholders are
entitled, other than payments of interest to the extent of any Interest Carry
Forward Amounts. The rating process addresses structural and legal aspects
associated with the notes, including the nature of the underlying mortgage
loans. The ratings assigned to the notes do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which the rate of these prepayments will differ from that originally
anticipated. The ratings do not address the possibility that noteholders might
suffer a lower than anticipated yield due to non-credit events.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
notes are subsequently lowered for any reason, no person or entity is obligated
to provide any additional credit support or credit enhancement with respect to
the notes.
The depositor has not requested that any rating agency rate the notes other
than as stated in the first paragraph of this section. However, there can be no
assurance as to whether any other rating agency will rate the notes, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
notes by another rating agency, if assigned at all, may be lower than the
ratings assigned to the notes as stated in the first paragraph of this section.
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LEGAL INVESTMENT
The Class A Notes and the Class M-1 Notes 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 will be legal investments for entities to the extent provided in
SMMEA. SMMEA, however, provides for state limitation on the authority of these
entities to invest in mortgage related securities, provided that the restricting
legislation was enacted prior to October 3, 1991. Ten states have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Notes and the Class M-3 Notes will not constitute mortgage related securities
for purposes of SMMEA.
The depositor makes no representations as to the proper characterization of
the notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
ERISA and the Code impose requirements on employee benefit plans and other
retirement plans and arrangements, including, but not limited to, individual
retirement accounts and annuities, as well as on collective investment funds and
certain separate and general accounts of insurance companies in which these
plans or arrangements are invested, all of which are referred to as a Plan, and
on persons who are fiduciaries with respect to these Plans. ERISA and the Code
prohibit certain transactions involving the assets of a Plan and disqualified
persons and parties in interest who have certain specified relationships to the
Plan. Accordingly, prior to making an investment in the notes, investing Plans
should determine whether the issuer, the depositor, the seller, the trust
estate, the underwriter, any other underwriter, the owner trustee, the indenture
trustee, the master servicer, the servicers, any other servicer, any
administrator, any provider of credit support, or any insurer or any of their
affiliates is a party in interest or disqualified person with respect to a Plan
and, if so, whether this transaction is subject to one or more statutory or
administrative exemptions. Additionally, an investment of the assets of a Plan
in securities may cause the assets included in the trust estate to be deemed
plan assets of the Plan, and any person with certain specified relationships to
the trust estate to be deemed a party in interest or disqualified person. The
U.S. Department of Labor, or DOL, has promulgated regulations at 29 C.F.R.
Section 2510.3-101 defining the term plan assets for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Code. Under these
regulations, when a Plan acquires an equity interest in another entity, such as
the trust estate, the underlying assets of that entity may be considered to be
plan assets. These regulations provide that the term equity interest means any
interest in an entity other than an instrument which is treated as indebtedness
under applicable local law and which has no substantial equity features.
Although not entirely free from doubt, it is believed that, as of the date of
this prospectus supplement, the notes will be treated as debt obligations
without significant equity features for the purposes of the regulations. Because
of the factual nature of certain of the above-described provisions of ERISA, the
Code and the regulations, Plans or persons investing plan assets should
carefully consider whether an investment of this kind might constitute or give
rise to a prohibited transaction under ERISA or the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the notes
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should consult with its counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the notes.
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<PAGE>
$___________ (APPROXIMATE)
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
DEPOSITOR
ASSET-BACKED FLOATING RATE NOTES, SERIES ____-___
PROSPECTUS SUPPLEMENT
DATED _______ __, ____
MASTER SERVICER
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 NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT 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 notes offered by this prospectus supplement and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the offered notes, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until _______ __, ____.
<PAGE>
ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in limited circumstances described in this prospectus supplement
under "Description of the Notes--Definitive Notes", the globally offered Salomon
Brothers Mortgage Securities VII, Inc., Trust Series ____-__, Asset-Backed
Floating Rate Notes, Series ____-__, Class A, Class M-1, Class M-2 and Class M-3
Notes will be available only in book-entry form. Investors in the global
securities may hold the global securities through any of DTC, Cedel or
Euroclear. The global securities will be traceable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice, 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 Cedel or Euroclear and DTC
participants holding notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear, in such capacity,
and as DTC participants.
Non-U.S. holders 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 as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their relevant depositary
which in turn will hold 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 Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no lock-up or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior mortgage
loan asset-backed notes issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel participants or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Cedel participant or a Euroclear participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel participant or
Euroclear participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the relevant depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in 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 Cedel participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date, which would be the preceding day
when settlement occurred in New York. If settlement is not completed on the
intended value date--the trade fails--the Cedel or Euroclear cash debt will be
valued instead as of the actual settlement date.
Cedel participants and Euroclear participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel participants or
Euroclear participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
participants or Euroclear participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although the
result will depend on each Cedel participant's or Euroclear participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC participants can employ their usual procedures for crediting
Global Securities to the respective European depositary for the benefit of Cedel
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel participants and Euroclear participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective depositary, to a DTC participant. The seller will send instructions
to Cedel or Euroclear through a Cedel participant or Euroclear participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective depositary, as appropriate, to credit the Global
Securities to the DTC participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in the accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel participant or Euroclear
participant the following day, and receipt of the cash proceeds in the Cedel
participant's or Euroclear participant's account would be
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back-valued to the value date, which would be the preceding day, when settlement
occurred in New York. Should the Cedel participant or Euroclear participant have
a line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date--the trade fails--receipt of the
cash proceeds in the Cedel participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC participants for delivery to Cedel participants or Euroclear
participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
o borrowing through Cedel or Euroclear for one day, until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts, in
accordance with the clearing system's customary procedures
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 Cedel 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 Cedel
participant or Euroclear participant.
MATERIAL U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear, or through DTC if the holder has an address outside the U.S., will be
subject to the 30% U.S. withholding tax that applies to payments of interest,
including original issue discount, on registered debt issued by United States
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 the beneficial owner and the
U.S. entity required to withhold tax complies with applicable
certification requirements and
o the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
o EXEMPTION FOR NON-UNITED STATES PERSONS (FORM W-8). Beneficial
holders of Global Securities that are non-United States Persons
can obtain a complete exemption from the withholding tax by filing
a signed Form W-8 (Certificate of Foreign Status). If the
information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of the change.
o EXEMPTION FOR NON-UNITED STATES PERSONS WITH EFFECTIVELY CONNECTED
INCOME (FORM 4224). A non-United States Person, including a
non-U.S. corporation or bank with a U.S. branch, for which the
interest income is effectively connected with its conduct of a
trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
o EXEMPTION OR REDUCED RATE FOR NON-UNITED STATES PERSONS RESIDENT
IN TREATY COUNTRIES (FORM 1001). Non-United States Persons
residing in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the
treaty terms, by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the
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treaty provides only for a reduced rate, withholding tax will be
imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by noteholders or their agent.
o EXEMPTION FOR UNITED STATES PERSONS (FORM W-9). United States
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 holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security--the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. 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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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Mortgage Pass-Through Certificates [Version 1]
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 .
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
RISK FACTORS ............................................................................................................4
THE TRUST FUNDS..........................................................................................................16
The Mortgage Loans..................................................................................................16
Revolving Credit Loans..............................................................................................22
Agency Securities...................................................................................................26
Private Mortgage-Backed Securities..................................................................................32
Funding Agreements..................................................................................................35
USE OF PROCEEDS..........................................................................................................36
YIELD CONSIDERATIONS.....................................................................................................36
MATURITY AND PREPAYMENT
CONSIDERATIONS...........................................................................................................38
THE DEPOSITOR............................................................................................................40
MORTGAGE LOAN PROGRAM....................................................................................................40
Underwriting Standards..............................................................................................40
Qualifications of Originators and Mortgage Loan
Sellers...........................................................................................................42
Representations by or on Behalf of Mortgage
Loan Sellers; Repurchases.........................................................................................42
DESCRIPTION OF THE SECURITIES............................................................................................45
General ...........................................................................................................45
Assignment of Trust Fund Assets.....................................................................................48
Deposits to Certificate Account.....................................................................................52
Payments on Mortgage Loans..........................................................................................52
Payments on Agency Securities and Private
Mortgage-Backed Securities........................................................................................54
Distributions.......................................................................................................55
Interest on the Securities..........................................................................................56
Principal of the Securities.........................................................................................56
Pre-Funding Account.................................................................................................57
Allocation of Losses................................................................................................58
Advances in Respect of Delinquencies................................................................................58
Reports to Securityholders..........................................................................................59
Collection and Other Servicing Procedures...........................................................................60
Sub-Servicing.......................................................................................................61
Realization Upon Defaulted Mortgage Loans...........................................................................62
Retained Interest; Servicing or Administration
Compensation and Payment of Expenses..............................................................................64
Evidence as to Compliance...........................................................................................65
Certain Matters Regarding the Master Servicer
and the Depositor.................................................................................................65
Events of Default and Rights Upon Events of
Default...........................................................................................................66
Amendment...........................................................................................................70
Termination.........................................................................................................71
Duties of the Trustee...............................................................................................72
Description of the Trustee..........................................................................................72
DESCRIPTION OF CREDIT SUPPORT............................................................................................72
Subordination.......................................................................................................73
Letter of Credit....................................................................................................74
Mortgage Pool Insurance Policy......................................................................................76
Special Hazard Insurance Policy.....................................................................................78
Bankruptcy Bond.....................................................................................................80
Financial Guarantee Insurance.......................................................................................80
Reserve Fund........................................................................................................80
Overcollateralization...............................................................................................81
Cross-Support Features..............................................................................................81
Cash Flow Agreements................................................................................................81
DESCRIPTION OF PRIMARY INSURANCE POLICIES................................................................................81
Primary Mortgage Insurance Policies.................................................................................81
Primary Hazard Insurance Policies...................................................................................82
FHA Insurance.......................................................................................................83
VA Guarantees.......................................................................................................84
LEGAL ASPECTS OF MORTGAGE LOANS..........................................................................................84
General ...........................................................................................................85
Single-Family Loans and Multifamily Loans...........................................................................85
Leases and Rents....................................................................................................86
Cooperative Loans...................................................................................................86
Contracts...........................................................................................................87
Foreclosure on Mortgages............................................................................................89
Foreclosure on Mortgaged Properties Located in
the Commonwealth of Puerto Rico...................................................................................91
Foreclosure on Cooperative Shares...................................................................................91
Repossession with respect to Contracts..............................................................................92
Notice of Sale; Redemption Rights with respect to
Manufactured Homes................................................................................................93
Louisiana Law.......................................................................................................93
Rights of Redemption with respect to Single-Family
Properties and Multifamily Properties.............................................................................94
Notice of Sale; Redemption Rights with respect to
Manufactured Homes................................................................................................94
Anti-Deficiency Legislation and Other Limitations on
Lenders...........................................................................................................94
Junior Mortgages....................................................................................................96
Consumer Protection Laws with respect to
Contracts.........................................................................................................97
Other Limitations...................................................................................................98
Enforceability of Provisions........................................................................................98
Subordinate Financing..............................................................................................100
Applicability of Usury Laws........................................................................................100
Alternative Mortgage Instruments...................................................................................101
Formaldehyde Litigation with respect to Contracts..................................................................102
Soldiers' and Sailors' Civil Relief Act of 1940....................................................................103
Environmental Legislation..........................................................................................103
Forfeitures in Drug and RICO Proceedings...........................................................................104
Negative Amortization Loans........................................................................................104
FEDERAL INCOME TAX CONSEQUENCES.........................................................................................104
General ..........................................................................................................105
REMICs ..........................................................................................................106
Taxation of Owners of REMIC Regular
Certificates.....................................................................................................107
Taxation of Owners of REMIC Residual
Certificates.....................................................................................................112
Sales of REMIC Certificates........................................................................................118
Notes ..........................................................................................................123
Grantor Trust Funds................................................................................................124
Characterization of Investments in Grantor Trust
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Certificates.....................................................................................................124
Taxation of Owners of Grantor Trust Strip
Certificates.....................................................................................................130
Sales of Grantor Trust Certificates................................................................................132
Partnership Trust Funds............................................................................................133
Taxation of Owners of Partnership Certificates.....................................................................134
STATE AND OTHER TAX CONSEQUENCES........................................................................................139
CONSIDERATIONS FOR BENEFIT PLAN
INVESTORS.............................................................................................................139
Investors Affected.................................................................................................139
Fiduciary Standards for ERISA Plans and
Related Investment Vehicles......................................................................................139
Prohibited Transaction Issues for ERISA Plans,
Keogh Plans, IRAs and Related Investment
Vehicles.........................................................................................................140
Possible Exemptive Relief..........................................................................................141
Consultation with Counsel..........................................................................................145
Government Plans...................................................................................................145
Representation from Plans Investing in Notes with
Substantial Equity Features or Certain
Securities.......................................................................................................146
Tax Exempt Investors...............................................................................................146
Required Deemed Representations of
Investors........................................................................................................147
LEGAL INVESTMENT........................................................................................................147
METHODS OF DISTRIBUTION.................................................................................................148
LEGAL MATTERS...........................................................................................................149
FINANCIAL INFORMATION...................................................................................................149
RATING..................................................................................................................150
AVAILABLE INFORMATION...................................................................................................150
REPORTS TO SECURITYHOLDERS..............................................................................................151
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE.............................................................................................................151
GLOSSARY................................................................................................................152
</TABLE>
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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.
4
<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.
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
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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.
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
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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,
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,
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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 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.
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DECLINING PROPERTY VALUES AND GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
MAY PRESENT A GREATER RISK OF LOSS
An investment in securities such as the securities which represent, in
general, interests in mortgage loans and/or manufactured housing, conditional
sales contracts and installment loan agreements may be affected by, among other
things, a decline in real estate values and changes in the borrowers' financial
condition. The depositor cannot assure you that values of the mortgaged
properties have remained or will remain at the appraised values on the dates of
origination of the related mortgage loans. If the residential real estate market
should experience an overall decline in property values such that the
outstanding balances of the mortgage loans, and any secondary financing on the
mortgaged properties, in a particular trust fund become equal to or greater than
the value of the mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. Mortgaged properties subject to high
loan-to-value ratios are at greater risk since 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 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.
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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.
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
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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.
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
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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.
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 securities have been surrendered
and paid in
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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.
CONSDIDERATIONS 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 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,
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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 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.
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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
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.
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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
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
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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 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-
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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, the
aggregate principal balance on the cut-off date of mortgage loans secured by
condominium units will not exceed 30% of the aggregate principal balance of the
mortgage loans in the related mortgage pool. A mortgage loan secured by a
condominium unit will not be included in a mortgage pool unless, at the time of
sale of the mortgage loan by the mortgage loan seller, certain representations
and warranties as to the condominium project are made by the mortgage loan
seller or an affiliate or by such other person acceptable to the depositor
having knowledge regarding the subject matter of the representations and
warranties. Unless otherwise specified in the related prospectus supplement, the
mortgage loan seller, or another party on its behalf, will have made the
following representations and warranties. If a condominium project is subject to
developer control or to incomplete phasing or add-ons, at least 70% of the units
have been sold to bona fide purchasers and are occupied as primary residences or
vacation or second homes. If a condominium project has been controlled by the
unit owners (other than the developer) for less than two years and is not
subject to incomplete phasing or add-ons, at least 70% of the units have been
sold to bona fide purchasers and at least 60% of the units are occupied as
primary residences or vacation or second homes. The foregoing percentages may be
modified in the case of a particular project upon proof of demonstrated market
acceptance but in no event will any such percentage be reduced below 51%. If a
condominium project has been controlled by the unit owners (other than the
developer) for at least two years, has all common elements completed and is not
subject to phasing or add-ons, the mortgage loan seller, or another party on its
behalf, must represent and warrant, unless otherwise specified in the related
prospectus supplement, that the marketability of the project has been proven and
that at least 90% of the units have been sold to bona fide purchasers. See
"Mortgage Loan Program--Representations by or on behalf of Mortgage Loan
Sellers; Repurchases" 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
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amount contributed by the borrower, the seller of the mortgaged property, or
another source and placed in a 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,
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o the number and aggregate principal balance of buydown mortgage loans,
if any,
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
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by the master servicer through a sub-servicer, the master servicer will remain
liable for its servicing obligations under the related pooling and servicing
agreement or servicing agreement as if the master servicer alone were servicing
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
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teaser loans with an introductory rate that is lower than the rate that would be
in effect if the applicable index 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
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monthly payments, collections and other recoveries under the credit line
agreement related to the revolving 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 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 asets.
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.
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
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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 mortgaged property. Thus, the rate of prepayments on FHA Loans, VA Loans and
other mortgage loans underlying GNMA certificates may be lower than that of
conventional mortgage loans bearing comparable interest rates.
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With respect to a series of securities evidencing interests in the trust
fund including mortgage loans, unless otherwise provided in the related
prospectus supplement, the master servicer generally will enforce any
due-on-sale clause or due-on-encumbrance clause, to the extent it has knowledge
of the conveyance or encumbrance or the proposed conveyance or encumbrance of
the underlying mortgaged property and reasonably believes that it is entitled to
do so under applicable law; provided, however, that the master servicer will not
take any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "Description of the
Securities--Collection and Other Servicing Procedures" and "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.
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
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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.
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
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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 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.
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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:
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
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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.
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
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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".
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
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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 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:
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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.
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.
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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
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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 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,
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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:
(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.
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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 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 pivate
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
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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:
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;
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(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 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
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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 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
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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 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;
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(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.
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
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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 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
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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.
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
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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;
(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
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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 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.
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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 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.
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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.
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
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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.
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
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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 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
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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.
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
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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.
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,
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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
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
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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.
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,
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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 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
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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,
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.
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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.
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
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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 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,
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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 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.
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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 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.
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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
(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
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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%;
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
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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,
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
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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.
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.
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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 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
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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 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.
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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.
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
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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 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
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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 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
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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.
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.
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GENERAL
All of the mortgage loans, except as described below, are loans to
homeowners and all of the Single- Family Loans and Multifamily Loans are
evidenced by notes or bonds and secured by instruments which may be mortgages,
deeds of trust, security deeds or deeds to secure debt, depending upon the type
of security instrument customary to grant a security interest in real property
in the state in which the single- family property or multifamily property, as
the case may be, is located. If specified in the prospectus supplement relating
to a series of securities, a trust fund may also contain (i) cooperative loans
evidenced by promissory notes secured by security interests in shares issued by
private cooperative housing corporations and in the related proprietary leases
or occupancy agreements granting exclusive rights to occupy specific dwelling
units in the related buildings or (ii) contracts evidencing both (a) the
obligation of the obligor to repay the loan evidenced thereby and (b) the grant
of a security interest in the related Manufactured Home to secure repayment of
such loan. Any of the foregoing types of encumbrance will create a lien upon, or
grant a title interest in, the subject property, the priority of which will
depend on the terms of the particular security instrument as well as the order
of recordation or filing of the instrument in the appropriate public office.
Such a lien is not prior to the lien for real estate taxes and assessments.
SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS
The single-family loans and multifamily loans will be secured by either
mortgages, deeds of trust, security deeds or deeds to secure debt depending upon
the type of security instrument customary to grant a security interest according
to the prevailing practice in the state in which the property subject to a
single- family loan or multifamily loan is located. The filing of a mortgage or
a deed of trust creates a lien upon or conveys title to the real property
encumbered by such instrument and represents the security for the repayment of
an obligation that is customarily evidenced by a promissory note. It is not
prior to the lien for real estate taxes and assessments. Priority with respect
to mortgages and deeds of trust depends on their terms and generally on the
order of recording with the applicable state, county or municipal office. There
are two parties to a mortgage, the mortgagor, who is the borrower/homeowner or
the land trustee, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, title to the property is held by a land
trustee under a land trust agreement, while the borrower/homeowner is the
beneficiary of the land trust; at origination of a mortgage loan, the borrower
executes a separate undertaking to make payments on the mortgage note. Although
a deed of trust is similar to a mortgage, a deed of trust normally has three
parties, the trustor, similar to a mortgagor, who may or may not be the
borrower, the beneficiary, similar to a mortgagee, who is the lender, and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A security deed and
a deed to secure debt are special types of deeds which indicate on their face
that they are granted to secure an underlying debt. By executing a security deed
or deed to secure debt, the grantor conveys title to, as opposed to merely
creating a lien upon, the subject property to the grantee until such time as the
underlying debt is repaid. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust, security deed or deed to secure debt
are governed by the law of the state in which the real property is located, the
express provisions of the mortgage, deed of trust, security deed or deed to
secure debt and, in some cases, the directions of the beneficiary.
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LEASES AND RENTS
Mortgages and deeds of trust which encumber multifamily property often
contain an assignment of rents and leases, pursuant to which the borrower
assigns its right, title and interest as landlord under each lease and the
income derived therefrom to the lender, while retaining a license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and appoint a receiver
before becoming entitled to collect the rents.
Even after a foreclosure or the enforcement of an assignment of rents and
leases, the potential rent payments from the property may not be sufficient to
service the mortgage debt. For instance, the net income that would otherwise be
generated from the property may be insufficient to service the mortgage debt if
the leases on the property are at below-market rents, or as the result of
excessive maintenance, repair or other obligations inherited by the lender as
landlord. In the event of a borrower's default, the amount of rent the lender is
able to collect from the tenants can significantly affect the value of the
lender's security interest.
COOPERATIVE LOANS
The cooperative owns or has a leasehold interest in all the real property
and owns in fee or leases the building and all separate dwelling units therein.
The cooperative is directly responsible for project management and, in most
cases, payment of real estate taxes, other governmental impositions and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and 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.
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
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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 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
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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.
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
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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 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
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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 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
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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,
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
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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:
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
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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
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reduce the amounts otherwise distributable to the holders of the related series
of securities. Moreover, 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.
FEDERAL INCOME TAX CONSEQUENCES
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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 minimisamount 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
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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 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
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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.
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
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described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
REMIC Certificates will be evidences of indebtedness within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which 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
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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.
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
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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
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.
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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 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.
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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 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).
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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 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
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material consult their tax advisors regarding whether the Grantor Trust Strip
Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans, including amounts used to
pay reasonable servicing fees and other expenses, and will be entitled to deduct
their shares of any 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.
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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 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
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Prepayment Assumption would increase or decrease the yield, and thus accelerate
or decelerate, respectively, the reporting of income.
If a Prepayment Assumption is not used, then when a mortgage loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the mortgage loan that is allocable to 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.
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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 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.
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In addition to its regular reports, the master servicer or the trustee,
except as provided in the related prospectus supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
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
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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.
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
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with respect to the mortgage loans. See "Characterization of Investments in
Grantor Trust Certificates--Stripped Bond Rules Apply" above.
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
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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.
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
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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 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
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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.
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
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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.
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
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Partnership trust fund should not have original issue discount income. However,
the purchase price paid by the Partnership trust fund for the mortgage loans may
be greater or less than the remaining principal balance of the mortgage loans at
the time of purchase. If so, the mortgage loans will have been acquired at a
premium or discount, as the case may be. See "--Grantor trust funds -- Taxation
of Owners of Grantor Trust Fractional Interest Certificates -- Market Discount"
and "Premium." As 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
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apportioned among the certificateholders in proportion to the principal amount
of Partnership Certificates owned by them as of the close of the last day of
such due period. As a result, a holder purchasing Partnership Certificates may
be allocated tax items which will affect its tax liability and tax basis
attributable to periods before the actual transaction.
The use of 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
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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, 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.
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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.
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
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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.
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
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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.
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
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o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts.
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 Structured Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA,
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.
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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.
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.
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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.
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
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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.
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
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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 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
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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 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
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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
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
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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 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
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will be provided by the depositor on request with a copy of the most recent
financial statements of the depositor.
RATING
It is a condition to the issuance of any class of securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by at least one rating agency.
Any such ratings on the securities address the likelihood of receipt by the
holders thereof of all collections on the underlying mortgage assets to which
such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with such securities, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any. Such
ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might differ
from those originally anticipated. As a result, securityholders might suffer a
lower than anticipated yield, and, in addition, holders of Strip Securities in
extreme cases might fail to recoup their initial investments.
AVAILABLE INFORMATION
The depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the 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
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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.
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.
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
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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.
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.
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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.
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.
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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
minimus 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.
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.
155
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THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, ISSUABLE IN SERIES
Our name is Salomon Brothers Mortgage Securities VII, Inc. We intend to
offer from time to time mortgage pass-through certificates. These offers may be
made through one or more different methods, including offerings through
underwriters. We do not currently intend to list the offered certificates of any
series on any national securities exchange or the NASDAQ stock market. See
"Method of Distribution."
--------------------------------------------------------------------------------
THE OFFERED CERTIFICATES:
The offered certificates will be issuable in series. Each series of offered
certificates will--
have its own series designation,
consist of one or more classes with various payment characteristics,
evidence beneficial ownership interests in a trust established by us,
and
be payable solely out of the related trust assets.
No governmental agency or instrumentality will insure or guarantee payment on
the offered certificates. Neither we nor any of our affiliates are responsible
for making payments on the offered certificates if collections on the related
trust assets are insufficient.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE TRUST ASSETS:
The assets of each of our trusts will include--
mortgage loans secured by first and junior liens on, or security
interests in, various interests in commercial and multifamily real
properties,
mortgage-backed securities that directly or indirectly evidence
interests in, or are directly or indirectly secured by, those types of
mortgage loans, or
some combination of those types of mortgage loans and mortgage-backed
securities.
Trust assets may also include letters of credit, surety bonds, insurance
policies, guarantees, credit derivatives, reserve funds, guaranteed investment
contracts, interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, or other similar instruments and
agreements.
--------------------------------------------------------------------------------
In connection with each offering, we will prepare a supplement to this
prospectus in order to describe in more detail the particular certificates being
offered and the related trust assets. In that document, we will also state the
price to public for each class of offered certificates or explain the method for
determining that price. In that document, we will also identify the applicable
lead or managing underwriter(s), if any, and provide information regarding the
relevant underwriting arrangements and the underwriters' compensation. You may
not purchase the offered certificates of any series unless you have also
received the prospectus supplement for that series. YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 14 IN THIS PROSPECTUS, AS WELL AS
THOSE SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT, PRIOR TO INVESTING.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
The date of this prospectus is
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Important Notice About the Information Presented in This Prospectus.......................................................3
Available Information; Incorporation by Reference.........................................................................3
Summary of Prospectus.....................................................................................................4
Risk Factors.............................................................................................................14
Capitalized Terms Used in this Prospectus................................................................................35
Description of the Trust Assets..........................................................................................36
Yield and Maturity Considerations........................................................................................65
Salomon Brothers Mortgage Securities VII, Inc............................................................................72
Description of the Certificates..........................................................................................72
Description Of The Governing Documents...................................................................................83
Description of Credit Support............................................................................................94
Legal Aspects of Mortgage Loans..........................................................................................96
Federal Income Tax Consequences.........................................................................................110
State and Other Tax Consequences........................................................................................160
ERISA Considerations....................................................................................................160
Legal Investment........................................................................................................164
Use of Proceeds.........................................................................................................166
Method of Distribution..................................................................................................167
Legal Matters...........................................................................................................168
Financial Information...................................................................................................168
Rating..................................................................................................................168
Glossary................................................................................................................169
</TABLE>
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IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
When deciding whether to invest in any of the offered certificates, you
should only rely on the information contained in this prospectus and the related
prospectus supplement. We have not authorized any dealer, salesman or other
person to give any information or to make any representation that is different.
In addition, information in this prospectus or any related prospectus supplement
is current only as of the date on its cover. By delivery of this prospectus and
any related prospectus supplement, we are not offering to sell any securities,
and are not soliciting an offer to buy any securities, in any state where the
offer and sale is not permitted.
AVAILABLE INFORMATION; INCORPORATION BY REFERENCE
We have filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the certificates offered by
this prospectus. This prospectus forms a part of the registration statement.
This prospectus and the related prospectus supplement do not contain all of the
information with respect to an offering that is contained in the registration
statement. For further information regarding the documents referred to in this
prospectus and the related prospectus supplement, you should refer to the
registration statement and its exhibits. You can inspect the registration
statement and its exhibits, and make copies of these documents at prescribed
rates, at the public reference facilities maintained by the SEC at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, New York, New York 10048. You can also obtain copies of these
materials electronically through the SEC's Web site (http://www.sec.gov).
In connection with each series of offered certificates, we will file or
arrange to have filed with the SEC with respect to the related trust any
periodic reports that are required under the Securities Exchange Act of 1934, as
amended. All documents and reports that are so filed for the related trust prior
to the termination of an offering of certificates are incorporated by reference
into, and should be considered a part of, this prospectus. Upon request, we will
provide without charge to each person receiving this prospectus in connection
with an offering, a copy of any or all documents or reports that are so
incorporated by reference. All requests should be directed to us in writing at
388 Greenwich Street, New York, New York 10013, attention: Secretary, or by
telephone at 212-816-6000.
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<PAGE>
SUMMARY OF PROSPECTUS
This summary contains selected information from this prospectus. It
does not contain all of the information you need to consider in making your
investment decision. TO UNDERSTAND ALL OF THE TERMS OF A PARTICULAR OFFERING OF
CERTIFICATES, YOU SHOULD READ CAREFULLY THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT IN FULL.
WHO WE ARE.............................Salomon Brothers Mortgage Securities VII,
Inc. is a Delaware corporation. Our
principal offices are located at 388
Greenwich Street, New York, New York
10013. Our main telephone number is
212-816-6000. We are an indirect,
wholly-owned subsidiary of Salomon Smith
Barney Holdings Inc. and an affiliate of
Salomon Smith Barney Inc. See "Salomon
Brothers Mortgage Securities VII, Inc."
THE SECURITIES BEING OFFERED...........The securities that will be offered by
this prospectus and the related
prospectus supplements consist of
mortgage pass-through certificates. These
certificates will be issued in series,
and each series will, in turn, consist of
one or more classes. Each class of
offered certificates must, at the time of
issuance, be assigned an investment grade
rating by at least one nationally
recognized statistical rating
organization. Typically, the four highest
rating categories, within which there may
be sub-categories or gradations to
indicate relative standing, signify
investment grade. See "Rating."
Each series of offered certificates will
evidence beneficial ownership interests
in a trust established by us and
containing the assets described in this
prospectus and the related prospectus
supplement.
THE OFFERED CERTIFICATES MAY BE
ISSUED WITH OTHER CERTIFICATES....We may not publicly offer all the
mortgage pass-through certificates
evidencing interests in one of our
trusts. We may elect to retain some of
those certificates, to place some
privately with institutional investors or
to deliver some to the applicable seller
as partial consideration for the related
mortgage assets. In addition, some of
those certificates may not satisfy the
rating requirement for offered
certificates described under "--The
Securities Being Offered" above.
THE GOVERNING DOCUMENTS................In general, a pooling and servicing
agreement or other similar agreement or
collection of agreements will govern,
among other things--
o the issuance of each series of
offered certificates,
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<PAGE>
o the creation of and transfer of
assets to the related trust, and
o the servicing and administration
of those assets.
The parties to the governing document(s)
for a series of offered certificates will
always include us and a trustee. We will
be responsible for establishing the trust
relating to each series of offered
certificates. In addition, we will
transfer or arrange for the transfer of
the initial trust assets to that trust.
In general, the trustee for a series of
offered certificates will be responsible
for, among other things, making payments
and preparing and disseminating various
reports to the holders of those offered
certificates.
If the trust assets for a series of
offered certificates include mortgage
loans, the parties to the governing
document(s) will also include--
o a master servicer that will
generally be responsible for
performing customary servicing
duties with respect to those
mortgage loans that are not
defaulted, nonperforming or
otherwise problematic in any
material respect, and
o a special servicer that will
generally be responsible for
servicing and administering
those mortgage loans that are
defaulted, nonperforming or
otherwise problematic in any
material respect and real estate
assets acquired as part of the
related trust with respect to
defaulted mortgage loans.
The same person or entity, or affiliated
entities, may act as both master servicer
and special servicer for any trust.
If the trust assets for a series of
offered certificates include
mortgage-backed securities, the parties
to the governing document(s) may also
include a manager that will be
responsible for performing various
administrative duties with respect to
those mortgage-backed securities. If the
related trustee assumes those duties,
however, there will be no manager.
In the related prospectus supplement, we
will identify the trustee and any master
servicer, special servicer or manager for
each series of offered certificates and
will describe their respective duties in
further detail. See "Description of the
Governing Documents."
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<PAGE>
CHARACTERISTICS OF THE
MORTGAGE ASSETS...................The trust assets with respect to any
series of offered certificates will, in
general, include mortgage loans. Each of
those mortgage loans will constitute the
obligation of one or more persons to
repay a debt. The performance of that
obligation will be secured by a first or
junior lien on, or security interest in,
the ownership, leasehold or other
interest(s) of the related borrower or
another person in or with respect to one
or more commercial or multifamily real
properties. In particular, those
properties may include:
o rental or cooperatively-owned
buildings with multiple dwelling
units;
o retail properties related to the
sale of consumer goods and other
products, or related to
providing entertainment,
recreational or personal
services, to the general public;
o office buildings;
o hospitality properties;
o casino properties;
o health care-related facilities;
o industrial facilities;
o warehouse facilities,
mini-warehouse facilities and
self-storage facilities;
o restaurants, taverns and other
establishments involved in the
food and beverage industry;
o manufactured housing
communities, mobile home parks
and recreational vehicle parks;
o recreational and resort
properties;
o arenas and stadiums;
o churches and other religious
facilities;
o parking lots and garages;
o mixed use properties;
o other income-producing
properties; and
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<PAGE>
o unimproved land.
The mortgage loans underlying a series of
offered certificates may have a variety
of payment terms. For example, any of
those mortgage loans--
o may provide for the accrual of
interest at a mortgage interest
rate that is fixed over its
term, that resets on one or more
specified dates or that
otherwise adjusts from time to
time;
o may provide for the accrual of
interest at a mortgage interest
rate that may be converted at
the borrower's election from an
adjustable to a fixed interest
rate or from a fixed to an
adjustable interest rate;
o may provide for no accrual of
interest;
o may provide for level payments
to stated maturity, for payments
that reset in amount on one or
more specified dates or for
payments that otherwise adjust
from time to time to accommodate
changes in the mortgage interest
rate or to reflect the
occurrence of specified events;
o may be fully amortizing or,
alternatively, may be partially
amortizing or nonamortizing,
with a substantial payment of
principal due on its stated
maturity date;
o may permit the negative
amortization or deferral of
accrued interest;
o may prohibit some or all
voluntary prepayments or require
payment of a premium, fee or
charge in connection with those
prepayments;
o may permit defeasance and the
release of real property
collateral in connection with
that defeasance;
o may provide for payments of
principal, interest or both, on
due dates that occur monthly,
bi-monthly, quarterly,
semi-annually, annually or at
some other interval; and/or
o may have two or more component
parts, each having
characteristics that are
otherwise described in this
prospectus as being attributable
to separate and distinct
mortgage loans.
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<PAGE>
Most, if not all, of the mortgage loans
underlying a series of offered
certificates will be secured by liens on
real properties located in the United
States, its territories and possessions.
However, some of those mortgage loans may
be secured by liens on real properties
located outside the United States, its
territories and possessions, provided
that foreign mortgage loans do not
represent more than 10% of the related
mortgage asset pool, by balance.
We do not originate mortgage loans.
However, some or all of the mortgage
loans included in one of our trusts may
be originated by our affiliates.
Neither we nor any of our affiliates will
guarantee or insure repayment of any of
the mortgage loans underlying a series of
offered certificates. Unless we expressly
state otherwise in the related prospectus
supplement, no governmental agency or
instrumentality will guarantee or insure
repayment of any of the mortgage loans
underlying a series of offered
certificates. See "Description of the
Trust Assets--Mortgage Loans."
The trust assets with respect to any
series of offered certificates may also
include mortgage participations, mortgage
pass-through certificates, collateralized
mortgage obligations and other
mortgage-backed securities, that evidence
an interest in, or are secured by a
pledge of, one or more mortgage loans of
the type described above. We will not
include a mortgage-backed security among
the trust assets with respect to any
series of offered certificates unless--
o the security has been registered
under the Securities Act of
1933, as amended, or
o we would be free to publicly
resell the security without
registration.
See "Description of the Trust
Assets--Mortgage-Backed Securities."
We will describe the specific
characteristics of the mortgage assets
underlying a series of offered
certificates in the related prospectus
supplement.
In general, the total outstanding
principal balance of the mortgage assets
transferred by us to any particular trust
will equal or exceed the initial total
outstanding principal balance of the
related series of certificates. In the
event that the total outstanding
principal balance of the related mortgage
assets initially delivered by us to the
related trustee is less than the
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<PAGE>
initial total outstanding principal
balance of any series of certificates, we
may deposit or arrange for the deposit of
cash or liquid investments on an interim
basis with the related trustee to cover
the shortfall. For 90 days following the
date of initial issuance of that series
of certificates, we will be entitled to
obtain a release of the deposited cash or
investments if we deliver or arrange for
delivery of a corresponding amount of
mortgage assets. If we fail, however, to
deliver mortgage assets sufficient to
make up the entire shortfall, any of the
cash or, following liquidation,
investments remaining on deposit with the
related trustee will be used by the
related trustee to pay down the total
principal balance of the related series
of certificates, as described in the
related prospectus supplement.
SUBSTITUTION, ACQUISITION AND
REMOVAL OF MORTGAGE ASSETS........If so specified in the related prospectus
supplement, we or another specified
person or entity may be permitted, at our
or its option, but subject to the
conditions specified in that prospectus
supplement, to acquire from the related
trust particular mortgage assets
underlying a series of certificates in
exchange for:
o cash that would be applied to
pay down the principal balances
of certificates of that series;
and/or
o other mortgage loans or
mortgage-backed securities
that--
1. conform to the
description of mortgage
assets in this
prospectus, and
2. satisfy the criteria set
forth in the related
prospectus supplement.
In addition, if so specified in the
related prospectus supplement, the
related trustee may be authorized or
required, to apply collections on the
mortgage assets underlying a series of
offered certificates to acquire new
mortgage loans or mortgage-backed
securities that--
1. conform to the
description of mortgage
assets in this
prospectus, and
2. satisfy the criteria set
forth in the related
prospectus supplement.
No replacement of mortgage assets or
acquisition of new mortgage assets will
be permitted if it would result in a
qualification, downgrade or withdrawal of
the then-current
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<PAGE>
rating assigned by any rating agency to
any class of affected offered
certificates.
CHARACTERISTICS OF
THE OFFERED CERTIFICATES..........An offered certificate may entitle the
holder to receive:
o a stated principal amount;
o interest on a principal balance
or notional amount, at a fixed,
variable or adjustable
pass-through rate;
o specified, fixed or variable
portions of the interest,
principal or other amounts
received on the related mortgage
assets;
o payments of principal, with
disproportionate, nominal or no
payments of interest;
o payments of interest, with
disproportionate, nominal or no
payments of principal;
o payments of interest or
principal that commence only as
of a specified date or only
after the occurrence of
specified events, such as the
payment in full of the interest
and principal outstanding on one
or more other classes of
certificates of the same series;
o payments of principal to be
made, from time to time or for
designated periods, at a rate
that is--
1. faster and, in some
cases, substantially
faster, or
2. slower and, in some
cases, substantially
slower,
than the rate at which payments
or other collections of
principal are received on the
related mortgage assets;
o payments of principal to be
made, subject to available
funds, based on a specified
principal payment schedule or
other methodology; or
o payments of all or part of the
prepayment or repayment
premiums, fees and charges,
equity participations payments
or other similar items received
on the related mortgage assets.
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Any class of offered
certificates may be senior or
subordinate to one or more
other classes of certificates
of the same series, including a
non-offered class of
certificates of that series,
for purposes of some or all
payments and/or allocations of
losses.
A class of offered certificates
may have two or more component
parts, each having
characteristics that are
otherwise described in this
prospectus as being
attributable to separate and
distinct classes.
We will describe the specific
characteristics of each class
of offered certificates in the
related prospectus supplement.
See "Description of the
Certificates."
CREDIT SUPPORT AND REINVESTMENT,
INTEREST RATE AND CURRENCY
RELATED PROTECTION FOR
THE OFFERED CERTIFICATES..........Some classes of offered certificates may
be protected in full or in part against
defaults and losses, or select types of
defaults and losses, on the related
mortgage assets through the subordination
of one or more other classes of
certificates of the same series or by
other types of credit support. The other
types of credit support may include a
letter of credit, a surety bond, an
insurance policy, a guarantee, a credit
derivative or a reserve fund. We will
describe the credit support, if any, for
each class of offered certificates in the
related prospectus supplement.
The trust assets with respect to any
series of offered certificates may also
include any of the following agreements:
o guaranteed investment contracts
in accordance with which moneys
held in the funds and accounts
established with respect to
those offered certificates will
be invested at a specified rate;
o interest rate exchange
agreements, interest rate cap or
floor agreements, or other
agreements and arrangements
designed to reduce the effects
of interest rate fluctuations on
the related mortgage assets or
on one or more classes of those
offered certificates; or
o currency exchange agreements or
other agreements and
arrangements designed to reduce
the effects of currency exchange
rate fluctuations with respect
to the related mortgage assets
and one or more classes of those
offered certificates.
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<PAGE>
We will describe the types of
reinvestment, interest rate and currency
related protection, if any, for each
class of offered certificates in the
related prospectus supplement.
See "Risk Factors," "Description of the
Trust Assets" and "Description of Credit
Support."
ADVANCES WITH RESPECT
TO THE MORTGAGE ASSETS............If the trust assets for a series of
offered certificates include mortgage
loans, then, as and to the extent
described in the related prospectus
supplement, the related master servicer,
the related special servicer, the related
trustee, any related provider of credit
support and/or any other specified person
may be obligated to make, or may have the
option of making, advances with respect
to those mortgage loans to cover--
o delinquent scheduled payments of
principal and/or interest, other
than balloon payments,
o property protection expenses,
o other servicing expenses, or
o any other items specified in the
related prospectus supplement.
Any party making advances will be
entitled to reimbursement from subsequent
recoveries on the related mortgage loan
and as otherwise described in this
prospectus or the related prospectus
supplement. That party may also be
entitled to receive interest on its
advances for a specified period. See
"Description of the
Certificates--Advances."
If the trust assets for a series of
offered certificates include
mortgage-backed securities, we will
describe in the related prospectus
supplement any comparable advancing
obligations with respect to those
mortgage-backed securities or the
underlying mortgage loans.
OPTIONAL TERMINATION...................We will describe in the related
prospectus supplement any circumstances
in which a specified party is permitted
or obligated to purchase or sell any of
the mortgage assets underlying a series
of offered certificates. In particular, a
master servicer, special servicer or
other designated party may be permitted
or obligated to purchase or sell--
o all the mortgage assets in any
particular trust, thereby
resulting in a termination of
the trust, or
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o that portion of the mortgage
assets in any particular trust
as is necessary or sufficient to
retire one or more classes of
offered certificates of the
related series.
See "Description of the
Certificates--Termination."
FEDERAL INCOME
TAX CONSEQUENCES....................Any class of offered certificates will
constitute or evidence ownership of:
o regular interests or residual
interests in a real estate
mortgage investment conduit
under Sections 860A through 860G
of the Internal Revenue Code of
1986; or
o regular interests in a financial
asset securitization investment
trust within the meaning of
Section 860L(a) of the Internal
Revenue Code of 1986; or
o interests in a grantor trust
under Subpart E of Part I of
Subchapter J of the Internal
Revenue Code of 1986.
See "Federal Income Tax Consequences."
ERISA CONSIDERATIONS...................If you are a fiduciary of an employee
benefit plan or other retirement plan or
arrangement, you should review with your
legal advisor whether the purchase or
holding of offered certificates could
give rise to a transaction that is
prohibited or is not otherwise
permissible under applicable law. See
"ERISA Considerations."
LEGAL INVESTMENT.......................If your investment authority is subject
to legal restrictions, you should consult
your legal advisor to determine whether
and to what extent the offered
certificates constitute a legal
investment for you. We will specify in
the related prospectus supplement which
classes of the offered certificates will
constitute mortgage related securities
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended. See "Legal Investment."
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RISK FACTORS
You should consider the following factors, as well as the factors set
forth under "Risk Factors" in the related prospectus supplement, in deciding
whether to purchase offered certificates.
LACK OF LIQUIDITY WILL IMPAIR YOUR ABILITY TO SELL YOUR OFFERED CERTIFICATES AND
MAY HAVE AN ADVERSE EFFECT ON THE MARKET VALUE OF YOUR OFFERED CERTIFICATES
The offered certificates may have limited or no liquidity. We cannot
assure you that a secondary market for your offered certificates will develop.
There will be no obligation on the part of anyone to establish a secondary
market. Even if a secondary market does develop for your offered certificates,
it may provide you with less liquidity than you anticipated and it may not
continue for the life of your offered certificates.
We will describe in the related prospectus supplement the information
that will be available to you with respect to your offered certificates. The
limited nature of the information may adversely affect the liquidity of your
offered certificates.
We do not currently intend to list the offered certificates on any
national securities exchange or the NASDAQ stock market.
Lack of liquidity will impair your ability to sell your offered
certificates and may prevent you from doing so at a time when you may want or
need to. Lack of liquidity could adversely affect the market value of your
offered certificates. We do not expect that you will have any redemption rights
with respect to your offered certificates.
If you decide to sell your offered certificates, you may have to sell
them at a discount from the price you paid for reasons unrelated to the
performance of your offered certificates or the related mortgage assets. Pricing
information regarding your offered certificates may not be generally available
on an ongoing basis.
THE MARKET VALUE OF YOUR OFFERED CERTIFICATES MAY BE ADVERSELY AFFECTED BY TO
FACTORS UNRELATED TO THE PERFORMANCE OF YOUR OFFERED CERTIFICATES AND THE
UNDERLYING MORTGAGE ASSETS, SUCH AS FLUCTUATIONS IN INTEREST RATES AND THE
SUPPLY AND DEMAND OF CMBS GENERALLY
The market value of your offered certificates can decline even if those
certificates and the underlying mortgage assets are performing at or above your
expectations.
The market value of your offered certificates will be sensitive to
fluctuations in current interest rates. However, a change in the market value of
your offered certificates as a result of an upward or downward movement in
current interest rates may not equal the change in the market value of your
offered certificates as a result of an equal but opposite movement in interest
rates.
The market value of your offered certificates will also be influenced
by the supply of and demand for commercial mortgage-backed securities generally.
The supply of commercial mortgage-backed securities will depend on, among other
things, the amount of commercial and multifamily mortgage loans, whether newly
originated or held in portfolio, that are available for securitization. A number
of factors will affect investors' demand for commercial mortgage-backed
securities, including--
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o the availability of alternative investments that offer higher
yields or are perceived as being a better credit risk, having
a less volatile market value or being more liquid,
o legal and other restrictions that prohibit a particular entity
from investing in commercial mortgage-backed securities or
limit the amount or types of commercial mortgage-backed
securities that it may acquire,
o investors' perceptions regarding the commercial and
multifamily real estate markets, which may be adversely
affected by, among other things, a decline in real estate
values or an increase in defaults and foreclosures on mortgage
loans secured by income-producing properties, and
o investors' perceptions regarding the capital markets in
general, which may be adversely affected by political, social
and economic events completely unrelated to the commercial and
multifamily real estate markets.
If you decide to sell your offered certificates, you may have to sell
at discount from the price you paid for reasons unrelated to the performance of
your offered certificates or the related mortgage assets. Pricing information
regarding your offered certificates may not be generally available on an ongoing
basis.
PAYMENTS ON THE OFFERED CERTIFICATES WILL BE MADE SOLELY FROM THE LIMITED ASSETS
OF THE RELATED TRUST, AND THOSE ASSETS MAY BE INSUFFICIENT TO MAKE ALL REQUIRED
PAYMENTS ON THOSE CERTIFICATES
The offered certificates do not represent obligations of any person or
entity and do not represent a claim against any assets other than those of the
related trust. No governmental agency or instrumentality will guarantee or
insure payment on the offered certificates. In addition, neither we nor our
affiliates are responsible for making payments on the offered certificates if
collections on the related trust assets are insufficient. If the related trust
assets are insufficient to make payments on your offered certificates, no other
assets will be available to you for payment of the deficiency, and you will bear
the resulting loss. Any advances made by a master servicer or other party with
respect to the mortgage assets underlying your offered certificates are intended
solely to provide liquidity and not credit support. The party making those
advances will have a right to reimbursement, probably with interest, which is
senior to your right to receive payment on your offered certificates.
ANY CREDIT SUPPORT FOR YOUR OFFERED CERTIFICATES MAY BE INSUFFICIENT TO PROTECT
YOU AGAINST ALL POTENTIAL LOSSES
THE AMOUNT OF CREDIT SUPPORT WILL BE LIMITED. The rating agencies that
assign ratings to your offered certificates will establish the amount of credit
support, if any, for your offered certificates based on, among other things, an
assumed level of defaults, delinquencies and losses with respect to the related
mortgage assets. Actual losses may, however, exceed the assumed levels. See
"Description of the Certificates--Allocation of Losses and Shortfalls" and
"Description of Credit Support." If actual losses on the related mortgage assets
exceed the assumed levels, you may be required to bear the additional losses.
CREDIT SUPPORT MAY NOT COVER ALL TYPES OF LOSSES. The credit support,
if any, for your offered certificates may not cover all of your potential
losses. For example, some forms of credit support may not cover or may provide
limited protection against losses that you may suffer by reason of fraud or
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negligence or as a result of uninsured casualties at the real properties
securing the underlying mortgage loans. You may be required to bear any losses
which are not covered by the credit support.
DISPROPORTIONATE BENEFITS MAY BE GIVEN TO SOME CLASSES AND SERIES TO
THE DETRIMENT OF OTHERS. If a form of credit support covers multiple classes or
series and losses exceed the amount of that credit support, it is possible that
the holders of offered certificates of another series or class will be
disproportionately benefited by that credit support to your detriment.
THE INVESTMENT PERFORMANCE OF YOUR OFFERED CERTIFICATES WILL DEPEND UPON
PAYMENTS, DEFAULTS AND LOSSES ON THE UNDERLYING MORTGAGE LOANS; AND THOSE
PAYMENTS, DEFAULTS AND LOSSES MAY BE HIGHLY UNPREDICTABLE
THE TERMS OF THE UNDERLYING MORTGAGE LOANS WILL AFFECT PAYMENTS ON YOUR
OFFERED CERTIFICATES. Each of the mortgage loans underlying the offered
certificates will specify the terms on which the related borrower must repay the
outstanding principal amount of the loan. The rate, timing and amount of
scheduled payments of principal may vary, and may vary significantly, from
mortgage loan to mortgage loan. The rate at which the underlying mortgage loans
amortize will directly affect the rate at which the principal balance or
notional amount of your offered certificates is paid down or otherwise reduced.
In addition, any mortgage loan underlying the offered certificates may
permit the related borrower during some or all of the loan term to prepay the
loan. In general, a borrower will be more likely to prepay its mortgage loan
when it has an economic incentive to do so, such as obtaining a larger loan on
the same underlying real property or a lower or otherwise more advantageous
interest rate through refinancing. If a mortgage loan includes some form of
prepayment restriction, the likelihood of prepayment should decline. These
restrictions may include--
o an absolute or partial prohibition against voluntary
prepayments during some or all of the loan term, or
o a requirement that voluntary prepayments be accompanied by
some form of prepayment premium, fee or charge during some or
all of the loan term.
In many cases, however, there will be no restriction associated with the
application of insurance proceeds or condemnation proceeds as a prepayment of
principal.
THE TERMS OF THE UNDERLYING MORTGAGE LOANS DO NOT PROVIDE ABSOLUTE
CERTAINTY AS REGARDS THE RATE, TIMING AND AMOUNT OF PAYMENTS ON YOUR OFFERED
CERTIFICATES. Notwithstanding the terms of the mortgage loans backing your
offered certificates, the amount, rate and timing of payments and other
collections on those mortgage loans will, to some degree, be unpredictable
because of borrower defaults and because of casualties and condemnations with
respect to the underlying real properties.
The investment performance of your offered certificates may vary
materially and adversely from your expectations due to--
o the rate of prepayments and other unscheduled collections of
principal on the underlying mortgage loans being faster or
slower than you anticipated, or
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o the rate of defaults on the underlying mortgage loans being
faster, or the severity of losses on the underlying mortgage
loans being greater, than you anticipated.
The actual yield to you, as a holder of an offered certificate, may not
equal the yield you anticipated at the time of your purchase, and the total
return on investment that you expected may not be realized. In deciding whether
to purchase any offered certificates, you should make an independent decision as
to the appropriate prepayment, default and loss assumptions to be used. If the
trust assets underlying your offered certificates include mortgage-backed
securities, the terms of those securities may soften or enhance the effects to
you that may result from prepayments, defaults and losses on the mortgage loans
that ultimately back those securities.
PREPAYMENTS ON THE UNDERLYING MORTGAGE LOANS WILL AFFECT THE AVERAGE
LIFE OF YOUR OFFERED CERTIFICATES; AND THE RATE AND TIMING OF THOSE PREPAYMENTS
MAY BE HIGHLY UNPREDICTABLE. Payments of principal and/or interest on your
offered certificates will depend upon, among other things, the rate and timing
of payments on the related mortgage assets. Prepayments on the underlying
mortgage loans may result in a faster rate of principal payments on your offered
certificates, thereby resulting in a shorter average life for your offered
certificates than if those prepayments had not occurred. The rate and timing of
principal prepayments on pools of mortgage loans varies among pools and is
influenced by a variety of economic, demographic, geographic, social, tax and
legal factors. Accordingly, neither you nor we can predict the rate and timing
of principal prepayments on the mortgage loans underlying your offered
certificates. As a result, repayment of your offered certificates could occur
significantly earlier or later, and the average life of your offered
certificates could be significantly shorter or longer, than you expected.
The extent to which prepayments on the underlying mortgage loans
ultimately affect the average life of your offered certificates depends on the
terms and provisions of your offered certificates. A class of offered
certificates may entitle the holders to a PRO RATA share of any prepayments on
the underlying mortgage loans, to all or a disproportionately large share of
those prepayments, or to none or a disproportionately small share of those
prepayments. If you are entitled to a disproportionately large share of any
prepayments on the underlying mortgage loans, your offered certificates may be
retired at an earlier date. If, however, you are only entitled to a small share
of the prepayments on the underlying mortgage loans, the average life of your
offered certificates may be extended. Your entitlement to receive payments,
including prepayments, of principal of the underlying mortgage loans may--
o vary based on the occurrence of specified events, such as the
retirement of one or more other classes of certificates of the
same series, or
o be subject to various contingencies, such as prepayment and
default rates with respect to the underlying mortgage loans.
We will describe the terms and provisions of your offered certificates
more fully in the related prospectus supplement.
PREPAYMENTS ON THE UNDERLYING MORTGAGE LOANS WILL AFFECT THE YIELD ON
YOUR OFFERED CERTIFICATES; AND THE RATE AND TIMING OF THOSE PREPAYMENTS MAY BE
HIGHLY UNPREDICTABLE. If you purchase your offered certificates at a discount or
premium, the yield on your offered certificates will be sensitive to prepayments
on the underlying mortgage loans. If you purchase your offered certificates at a
discount, you should consider the risk that a slower than anticipated rate of
principal payments on the underlying mortgage loans could result in your actual
yield being lower than your anticipated yield.
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Alternatively, if you purchase your offered certificates at a premium, you
should consider the risk that a faster than anticipated rate of principal
payments on the underlying mortgage loans could result in your actual yield
being lower than your anticipated yield. The potential effect that prepayments
may have on the yield of your offered certificates will increase as the discount
deepens or the premium increases. If the amount of interest payable on your
offered certificates is disproportionately large, as compared to the amount of
principal payable on your offered certificates, you may fail to recover your
original investment under some prepayment scenarios. The rate and timing of
principal prepayments on pools of mortgage loans varies among pools and is
influenced by a variety of economic, demographic, geographic, social, tax and
legal factors. Accordingly, neither you nor we can predict the rate and timing
of principal prepayments on the mortgage loans underlying your offered
certificates.
DELINQUENCIES, DEFAULTS AND LOSSES ON THE UNDERLYING MORTGAGE LOANS MAY
AFFECT THE AMOUNT AND TIMING OF PAYMENTS ON YOUR OFFERED CERTIFICATES; AND THE
RATE AND TIMING OF THOSE DELINQUENCIES AND DEFAULTS, AND THE SEVERITY OF THOSE
LOSSES, ARE HIGHLY UNPREDICTABLE. The rate and timing of delinquencies and
defaults, and the severity of losses, on the underlying mortgage loans will
impact the amount and timing of payments on a series of offered certificates to
the extent that their effects are not offset by delinquency advances or some
form of credit support.
Unless otherwise covered by delinquency advances or some form of credit
support, defaults on the underlying mortgage loans may delay payments on a
series of offered certificates while the defaulted mortgage loans are worked-out
or liquidated. However, liquidations of defaulted mortgage loans prior to
maturity could affect the yield and average life of an offered certificate in a
manner similar to a voluntary prepayment.
If you calculate your anticipated yield to maturity based on an assumed
rate of default and amount of losses on the underlying mortgage loans that is
lower than the default rate and amount of losses actually experienced, then, to
the extent that you are required to bear the additional losses, your actual
yield to maturity will be lower than you calculated and could, under some
scenarios, be negative. Furthermore, the timing of losses on the underlying
mortgage loans can affect your yield. In general, the earlier you bear any loss
on an underlying mortgage loan, the greater the negative effect on your yield.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property, Which May
Decline Over Time, and the Related Borrower's Ability to Refinance the Property,
of Which There is no Assurance" below.
THERE IS AN INCREASED RISK OF DEFAULT ASSOCIATED WITH BALLOON PAYMENTS.
Any of the mortgage loans underlying your offered certificates may be
nonamortizing or only partially amortizing. The borrower under a mortgage loan
of that type is required to make substantial payments of principal and interest,
which are commonly called balloon payments, on the maturity date of the loan.
The ability of the borrower to make a balloon payment depends upon the
borrower's ability to refinance or sell the real property securing the loan. The
ability of the borrower to refinance or sell the property will be affected by a
number of factors, including:
o the fair market value and condition of the underlying real
property;
o the level of interest rates;
o the borrower's equity in the underlying real property;
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o the borrower's financial condition;
o the operating history of the underlying real property;
o changes in zoning and tax laws;
o changes in competition in the relevant area;
o changes in rental rates in the relevant area;
o changes in governmental regulation and fiscal policy;
o prevailing general and regional economic conditions;
o the state of the fixed income and mortgage markets; and
o the availability of credit for multifamily rental or
commercial properties.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property, Which May
Decline Over Time, and the Related Borrower's Ability to Refinance the Property,
of Which There is no Assurance" below.
Neither we nor any of our affiliates will be obligated to refinance any
mortgage loan underlying your offered certificates.
The related master servicer or special servicer may, within prescribed
limits, extend and modify mortgage loans underlying your offered certificates
that are in default or as to which a payment default is imminent in order to
maximize recoveries on the defaulted loans. The related master servicer or
special servicer is only required to determine that any extension or
modification is reasonably likely to produce a greater recovery than a
liquidation of the real property securing the defaulted loan. There is a risk
that the decision of the master servicer or special servicer to extend or modify
a mortgage loan may not in fact produce a greater recovery.
REPAYMENT OF A COMMERCIAL OR MULTIFAMILY MORTGAGE LOAN DEPENDS UPON THE
PERFORMANCE AND VALUE OF THE UNDERLYING REAL PROPERTY, WHICH MAY DECLINE OVER
TIME, AND THE RELATED BORROWER'S ABILITY TO REFINANCE THE PROPERTY, OF WHICH
THERE IS NO ASSURANCE
MOST OF THE MORTGAGE LOANS UNDERLYING YOUR OFFERED CERTIFICATES WILL BE
NONRECOURSE. You should consider all of the mortgage loans underlying your
offered certificates to be nonrecourse loans. This means that, in the event of a
default, recourse will be limited to the related real property or properties
securing the defaulted mortgage loan. In those cases where recourse to a
borrower or guarantor is permitted by the loan documents, we generally will not
undertake any evaluation of the financial condition of that borrower or
guarantor. Consequently, full and timely payment on each mortgage loan
underlying your offered certificates will depend on one or more of the
following:
o the sufficiency of the net operating income of the applicable
real property;
o the market value of the applicable real property at or prior
to maturity; and
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o the ability of the related borrower to refinance or sell the
applicable real property.
In general, the value of a multifamily or commercial property will
depend on its ability to generate net operating income. The ability of an owner
to finance a multifamily or commercial property will depend, in large part, on
the property's value and ability to generate net operating income.
Unless we state otherwise in the related prospectus supplement, none of
the mortgage loans underlying your offered certificates will be insured or
guaranteed by any governmental entity or private mortgage insurer.
The risks associated with lending on multifamily and commercial
properties are inherently different from those associated with lending on the
security of single-family residential properties. This is because multifamily
rental and commercial real estate lending involves larger loans and, as
described above, repayment is dependent upon the successful operation and value
of the related real estate project.
MANY RISK FACTORS ARE COMMON TO MOST OR ALL MULTIFAMILY AND COMMERCIAL
PROPERTIES. The following factors, among others, will affect the ability of a
multifamily or commercial property to generate net operating income and,
accordingly, its value:
o the age, design and construction quality of the property;
o perceptions regarding the safety, convenience and
attractiveness of the property;
o the characteristics of the neighborhood where the property is
located;
o the proximity and attractiveness of competing properties;
o the existence and construction of competing properties;
o the adequacy of the property's management and maintenance;
o national, regional or local economic conditions, including
plant closings, industry slowdowns and unemployment rates;
o local real estate conditions, including an increase in or
oversupply of comparable commercial or residential space;
o demographic factors;
o customer tastes and preferences;
o retroactive changes in building codes; and
o changes in governmental rules, regulations and fiscal
policies, including environmental legislation.
Particular factors that may adversely affect the ability of a
multifamily or commercial property to generate net operating income include:
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o an increase in interest rates, real estate taxes and other
operating expenses;
o an increase in the capital expenditures needed to maintain the
property or make improvements;
o a decline in the financial condition of a major tenant and, in
particular, a sole tenant or anchor tenant;
o an increase in vacancy rates;
o a decline in rental rates as leases are renewed or replaced;
and
o natural disasters and civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots.
The volatility of net operating income generated by a multifamily or
commercial property over time will be influenced by many of the foregoing
factors, as well as by:
o the length of tenant leases;
o the creditworthiness of tenants;
o the rental rates at which leases are renewed or replaced;
o the percentage of total property expenses in relation to
revenue;
o the ratio of fixed operating expenses to those that vary with
revenues; and
o the level of capital expenditures required to maintain the
property and to maintain or replace tenants.
Therefore, commercial and multifamily properties with short-term or less
creditworthy sources of revenue and/or relatively high operating costs, such as
those operated as hospitality and self-storage properties, can be expected to
have more volatile cash flows than commercial and multifamily properties with
medium- to long-term leases from creditworthy tenants and/or relatively low
operating costs. A decline in the real estate market will tend to have a more
immediate effect on the net operating income of commercial and multifamily
properties with short-term revenue sources and may lead to higher rates of
delinquency or defaults on the mortgage loans secured by those properties.
THE SUCCESSFUL OPERATION OF A MULTIFAMILY OR COMMERCIAL PROPERTY
DEPENDS ON TENANTS. Generally, multifamily and commercial properties are subject
to leases. The owner of a multifamily or commercial property typically uses
lease or rental payments for the following purposes:
o to pay for maintenance and other operating expenses associated
with the property;
o to fund repairs, replacements and capital improvements at the
property; and
o to service mortgage loans secured by, and any other debt
obligations associated with operating, the property.
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Factors that may adversely affect the ability of a multifamily or
commercial property to generate net operating income from lease and rental
payments include:
o an increase in vacancy rates, which may result from tenants
deciding not to renew an existing lease or discontinuing
operations;
o an increase in tenant payment defaults;
o a decline in rental rates as leases are entered into, renewed
or extended at lower rates;
o an increase in the capital expenditures needed to maintain the
property or to make improvements; and
o a decline in the financial condition of a major or sole
tenant.
Various factors that will affect the operation and value of a
commercial property include:
o the business operated by the tenants;
o the creditworthiness of the tenants; and
o the number of tenants.
DEPENDENCE ON A SINGLE TENANT OR A SMALL NUMBER OF TENANTS MAKES A
PROPERTY RISKIER COLLATERAL. In those cases where an income-producing property
is leased to a single tenant or is primarily leased to one or a small number of
major tenants, a deterioration in the financial condition or a change in the
plan of operations of any of those tenants can have particularly significant
effects on the net operating income generated by the property. If any of those
tenants defaults under or fails to renew its lease, the resulting adverse
financial effect on the operation of the property will be substantially more
severe than would be the case with respect to a property occupied by a large
number of less significant tenants.
An income-producing property operated for retail, office or industrial
purposes also may be adversely affected by a decline in a particular business or
industry if a concentration of tenants at the property is engaged in that
business or industry.
TENANT BANKRUPTCY ADVERSELY AFFECTS PROPERTY PERFORMANCE. The
bankruptcy or insolvency of a major tenant, or a number of smaller tenants, at a
commercial property may adversely affect the income produced by the property.
Under the U.S. Bankruptcy Code, a tenant has the option of assuming or rejecting
any unexpired lease. If the tenant rejects the lease, the landlord's claim for
breach of the lease would be a general unsecured claim against the tenant unless
there is collateral securing the claim. The claim would be limited to:
o the unpaid rent reserved under the lease for the periods prior
to the bankruptcy petition or any earlier surrender of the
leased premises, plus
o an amount, not to exceed three years' rent, equal to the
greater of one year's rent and 15% of the remaining reserved
rent.
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THE SUCCESS OF AN INCOME-PRODUCING PROPERTY DEPENDS ON RELETTING VACANT
SPACES. The operations at an income-producing property will be adversely
affected if the owner or property manager is unable to renew leases or relet
space on comparable terms when existing leases expire and/or become defaulted.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions in the case of
income-producing properties operated for retail, office or industrial purposes,
can be substantial and could reduce cash flow from the income-producing
properties. Moreover, if a tenant at a income-producing property defaults in its
lease obligations, the landlord may incur substantial costs and experience
significant delays associated with enforcing its rights and protecting its
investment, including costs incurred in renovating and reletting the property.
If an income-producing property has multiple tenants, re-leasing
expenditures may be more frequent than in the case of a property with fewer
tenants, thereby reducing the cash flow generated by the multi-tenanted
property. Multi-tenanted properties may also experience higher continuing
vacancy rates and greater volatility in rental income and expenses.
PROPERTY VALUE MAY BE ADVERSELY AFFECTED EVEN WHEN CURRENT OPERATING
INCOME IS NOT. Various factors may affect the value of multifamily and
commercial properties without affecting their current net operating income,
including:
o changes in interest rates;
o the availability of refinancing sources;
o changes in governmental regulations, licensing or fiscal
policy;
o changes in zoning or tax laws; and
o potential environmental or other legal liabilities.
PROPERTY MANAGEMENT MAY AFFECT PROPERTY OPERATIONS AND VALUE. The
operation of an income-producing property will depend upon the property
manager's performance and viability. The property manager generally is
responsible for:
o responding to changes in the local market;
o planning and implementing the rental structure, including
staggering durations of leases and establishing levels of rent
payments;
o operating the property and providing building services;
o managing operating expenses; and
o ensuring that maintenance and capital improvements are carried
out in a timely fashion.
Income-producing properties that derive revenues primarily from
short-term rental commitments, such as hospitality or self-storage properties,
generally require more intensive management than properties leased to tenants
under long-term leases.
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By controlling costs, providing appropriate and efficient services to
tenants and maintaining improvements in good condition, a property manager can--
o maintain or improve occupancy rates, business and cash flow,
o reduce operating and repair costs, and
o preserve building value.
On the other hand, management errors can, in some cases, impair the long term
viability of an income-producing property.
MAINTAINING A PROPERTY IN GOOD CONDITION IS EXPENSIVE. The owner may be
required to expend a substantial amount to maintain, renovate or refurbish a
commercial or multifamily property. Failure to do so may materially impair the
property's ability to generate cash flow. The effects of poor construction
quality will increase over time in the form of increased maintenance and capital
improvements. Even superior construction will deteriorate over time if
management does not schedule and perform adequate maintenance in a timely
fashion. There can be no assurance that an income-producing property will
generate sufficient cash flow to cover the increased costs of maintenance and
capital improvements in addition to paying debt service on the mortgage loan(s)
that may encumber that property.
COMPETITION WILL ADVERSELY AFFECT THE PROFITABILITY AND VALUE OF AN
INCOME-PRODUCING PROPERTY. Some income-producing properties are located in
highly competitive areas. Comparable income-producing properties located in the
same area compete on the basis of a number of factors including:
o rental rates;
o location;
o type of business or services and amenities offered; and
o nature and condition of the particular property.
The profitability and value of an income-producing property may be
adversely affected by a comparable property that:
o offers lower rents;
o has lower operating costs;
o offers a more favorable location; or
o offers better facilities.
Costs of renovating, refurbishing or expanding an income-producing
property in order to remain competitive can be substantial.
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VARIOUS TYPES OF INCOME-PRODUCING PROPERTIES MAY PRESENT SPECIAL RISKS.
The relative importance of any factor affecting the value or operation of an
income-producing property will depend on the type and use of the property. In
addition, the type and use of a particular income-producing property may present
special risks. For example--
o Health care-related facilities and casinos are subject to
significant governmental regulation of the ownership,
operation, maintenance and/or financing of those properties.
o Multifamily rental properties, manufactured housing
communities and mobile home parks may be subject to rent
control or rent stabilization laws and laws governing
landlord/tenant relationships.
o Hospitality and restaurant properties are often operated under
franchise, management or operating agreements, which may be
terminable by the franchisor or operator. Moreover, the
transferability of a hotel's or restaurant's operating, liquor
and other licenses upon a transfer of the hotel or restaurant
is subject to local law requirements.
o Depending on their location, recreational and resort
properties, properties that provide entertainment services,
hospitality properties, restaurants and taverns,
mini-warehouses and self-storage facilities tend to be
adversely affected more quickly by a general economic downturn
than other types of commercial properties.
o Marinas will be affected by various statutes and government
regulations that govern the use of, and construction on,
rivers, lakes and other waterways.
o Some recreational and hospitality properties may have seasonal
fluctuations and/or may be adversely affected by prolonged
unfavorable weather conditions.
o Churches and other religious facilities may be highly
dependent on donations which are likely to decline as economic
conditions decline.
o Properties used as gas stations, automotive sales and service
centers, dry cleaners, warehouses and industrial facilities
may be more likely to have environmental issues.
Additionally, many types of commercial properties are not readily
convertible to alternative uses if the original use is not successful or may
require significant capital expenditures to effect any conversion to an
alternative use. As a result, the liquidation value of any of those types of
property would be substantially less than would otherwise be the case. See
"Description of the Trust Assets--Mortgage Loans--A Discussion of the Various
Types of Multifamily and Commercial Properties that may Secure Mortgage Loans
Underlying a Series of Offered Certificates."
BORROWER CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF
DEFAULT AND LOSS
A particular borrower or group of related borrowers may be associated
with multiple real properties securing the mortgage loans underlying a series of
offered certificates. The bankruptcy or insolvency of, or other financial
problems with respect to, that borrower or group of borrowers could have an
adverse effect on--
o the operation of all of the related real properties, and
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o the ability of those properties to produce sufficient cash
flow to make required payments on the related mortgage loans.
For example, if a borrower or group of related borrowers that owns or controls
several real properties experiences financial difficulty at one of those
properties, it could defer maintenance at another of those properties in order
to satisfy current expenses with respect to the first property. That borrower or
group of related borrowers could also attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting debt service
payments on all the related mortgage loans for an indefinite period. In
addition, multiple real properties owned by the same borrower or related
borrowers are likely to have common management. This would increase the risk
that financial or other difficulties experienced by the property manager could
have a greater impact on the owner of the related loans.
LOAN CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF DEFAULT
AND LOSS
Any of the mortgage assets in one of our trusts may be substantially
larger than the other assets in that trust. In general, the inclusion in a trust
of one or more mortgage assets that have outstanding principal balances that are
substantially larger than the other mortgage assets in the trust can result in
losses that are more severe, relative to the size of the related mortgage asset
pool, than would be the case if the total principal balance of that pool were
distributed more evenly.
GEOGRAPHIC CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF
DEFAULT AND LOSS
If a material concentration of mortgage loans underlying a series of
offered certificates is secured by real properties in a particular locale, state
or region, then the holders of those certificates will have a greater exposure
to:
o any adverse economic developments that occur in the locale,
state or region where the properties are located;
o changes in the real estate market where the properties are
located;
o changes in governmental rules and fiscal policies in the
governmental jurisdiction where the properties are located;
and
o acts of nature, including floods, tornadoes and earthquakes,
in the areas where properties are located.
CHANGES IN POOL COMPOSITION WILL CHANGE THE NATURE OF YOUR INVESTMENT
The mortgage loans underlying any series of offered certificates will
amortize at different rates and mature on different dates. In addition, some of
those mortgage loans may be prepaid or liquidated. As a result, the relative
composition of the related mortgage asset pool will change over time.
If you purchase certificates with a pass-through rate that is equal to
or calculated based upon a weighted average of interest rates on the underlying
mortgage loans, your pass-through rate will be affected, and may decline, as the
relative composition of the mortgage pool changes.
In addition, as payments and other collections of principal are
received with respect to the underlying mortgage loans, the remaining mortgage
pool backing your offered certificates may exhibit
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an increased concentration with respect to property type, number and affiliation
of borrowers and geographic location.
ADJUSTABLE RATE MORTGAGE LOANS MAY ENTAIL GREATER RISKS OF DEFAULT TO LENDERS
THAN FIXED RATE MORTGAGE LOANS
Some or all of the mortgage loans underlying a series of offered
certificates may provide for adjustments to their respective mortgage interest
rates and corresponding adjustments to their respective periodic debt service
payments. As the periodic debt service payment for any of those mortgage loans
increases, the likelihood that cash flow from the underlying real property will
be insufficient to make that periodic debt service payment and pay operating
expenses also increases.
SUBORDINATE DEBT INCREASES THE LIKELIHOOD THAT A BORROWER WILL DEFAULT ON A
MORTGAGE LOAN UNDERLYING YOUR OFFERED CERTIFICATES
Some or all of the mortgage loans included in one of our trusts may
permit the related borrower to encumber the related real property with
additional secured debt.
Even if a mortgage loan prohibits further encumbrance of the related
real property, a violation of this prohibition may not become evident until the
affected mortgage loan otherwise defaults. Accordingly, a lender, such as one of
our trusts, may not realistically be able to prevent a borrower from incurring
subordinate debt.
The existence of any secured subordinated indebtedness increases the
difficulty of refinancing a mortgage loan at the loan's maturity. In addition,
the related borrower may have difficulty repaying multiple loans. Moreover, the
filing of a petition in bankruptcy by, or on behalf of, a junior lienholder may
stay the senior lienholder from taking action to foreclose out the junior lien.
See "Legal Aspects of Mortgage Loans--Subordinate Financing."
BORROWER BANKRUPTCY PROCEEDINGS CAN DELAY AND IMPAIR RECOVERY ON A MORTGAGE LOAN
UNDERLYING YOUR OFFERED CERTIFICATES
Under the U.S. Bankruptcy Code, the filing of a petition in bankruptcy
by or against a borrower will stay the sale of a real property owned by that
borrower, as well as the commencement or continuation of a foreclosure action.
In addition, if a court determines that the value of a real property is
less than the principal balance of the mortgage loan it secures, the court may
reduce the amount of secured indebtedness to the then-value of the property.
This would make the lender a general unsecured creditor for the difference
between the then-value of the property and the amount of its outstanding
mortgage indebtedness.
A bankruptcy court also may:
o grant a debtor a reasonable time to cure a payment default on
a mortgage loan;
o reduce monthly payments due under a mortgage loan;
o change the rate of interest due on a mortgage loan; or
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o otherwise alter a mortgage loan's repayment schedule.
Furthermore, the borrower, as debtor-in-possession, or its bankruptcy
trustee has special powers to avoid, subordinate or disallow debts. In some
circumstances, the claims of a secured lender, such as one of our trusts, may be
subordinated to financing obtained by a debtor-in-possession subsequent to its
bankruptcy.
Under the U.S. Bankruptcy Code, a lender will be stayed from enforcing
a borrower's assignment of rents and leases. The U.S. Bankruptcy Code also may
interfere with a lender's ability to enforce lockbox requirements. The legal
proceedings necessary to resolve these issues can be time consuming and may
significantly delay the receipt of rents. Rents also may escape an assignment to
the extent they are used by borrower to maintain its property or for other court
authorized expenses.
As a result of the foregoing, the related trust's recovery with respect
to borrowers in bankruptcy proceedings may be significantly delayed, and the
total amount ultimately collected may be substantially less than the amount
owed.
TAXES ON FORECLOSURE PROPERTY WILL REDUCE AMOUNTS AVAILABLE TO MAKE PAYMENTS ON
THE OFFERED CERTIFICATES
One of our trusts may be designated, in whole or in part, as a real
estate mortgage investment conduit for federal income tax purposes. If that
trust acquires a real property through a foreclosure or deed in lieu of
foreclosure, then the related special servicer may be required to retain an
independent contractor to operate and manage the property. Receipt of the
following types of income on that property will subject the trust to federal,
and possibly state or local, tax on that income at the highest marginal
corporate tax rate:
o any net income from that operation and management that does
not consist of qualifying rents from real property within the
meaning of Section 856(d) of the Internal Revenue Code of
1986, and
o any rental income based on the net profits of a tenant or
sub-tenant or allocable to a service that is non-customary in
the area and for the type of building involved.
These taxes would reduce the net proceeds available for payment with respect to
the related offered certificates.
ENVIRONMENTAL LIABILITIES WILL ADVERSELY AFFECT THE VALUE AND OPERATION OF THE
CONTAMINATED PROPERTY AND MAY DETER A LENDER FROM FORECLOSING
There can be no assurance--
o as to the degree of environmental testing conducted at any of
the real properties securing the mortgage loans that back your
offered certificates;
o that the environmental testing conducted by or on behalf of
the applicable originators or any other parties in connection
with the origination of those mortgage loans or otherwise
identified all adverse environmental conditions and risks at
the related real properties;
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o that the results of the environmental testing were accurately
evaluated in all cases;
o that the related borrowers have implemented or will implement
all operations and maintenance plans and other remedial
actions recommended by any environmental consultant that may
have conducted testing at the related real properties; or
o that the recommended action will fully remediate or otherwise
address all the identified adverse environmental conditions
and risks.
Environmental site assessments vary considerably in their content,
quality and cost. Even when adhering to good professional practices,
environmental consultants will sometimes not detect significant environmental
problems because to do an exhaustive environmental assessment would be far too
costly and time-consuming to be practical.
In addition, the current environmental condition of a real property
securing a mortgage loan underlying your offered certificates could be adversely
affected by--
o tenants at the property, such as gasoline stations or dry
cleaners, or
o conditions or operations in the vicinity of the property, such
as leaking underground storage tanks at another property
nearby.
Various environmental laws may make a current or previous owner or
operator of real property liable for the costs of removal or remediation of
hazardous or toxic substances on, under or adjacent to the property. Those 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. For example,
there are laws that impose liability for release of asbestos containing
materials into the air or require the removal or containment of the materials.
The owner's liability for any required remediation generally is unlimited and
could exceed the value of the property and/or the total assets of the owner. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate the adverse environmental condition, may adversely affect the owner's
or operator's ability to use the affected property. In some states,
contamination of a property may give rise to a lien on the property to ensure
the costs of cleanup. Depending on the state, this lien may have priority over
the lien of an existing mortgage, deed of trust or other security instrument. In
addition, third parties may seek recovery from owners or operators of real
property for personal injury associated with exposure to hazardous substances,
including asbestos and lead-based paint. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may be liable for the costs of
removal or remediation of the substances at the disposal or treatment facility.
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, as well as other federal and state laws,
provide that a secured lender, such as one of our trusts, may be liable as an
"owner" or "operator" of the real property, regardless of whether the borrower
or a previous owner caused the environmental damage, if--
o agents or employees of the lender are deemed to have
participated in the management of the borrower, or
o the lender actually takes possession of a borrower's property
or control of its day-to-day operations, including through the
appointment of a receiver or foreclosure.
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Although recently enacted legislation clarifies the activities in which
a lender may engage without becoming subject to liability under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, and similar federal laws, that legislation has no applicability to
state environmental laws. Moreover, future laws, ordinances or regulations could
impose material environmental liability.
Federal law requires owners of residential housing constructed prior to
1978 to disclose to potential residents or purchasers--
o any condition on the property that causes exposure to
lead-based paint, and
o the potential hazards to pregnant women and young children,
including that the ingestion of lead-based paint chips and/or
the inhalation of dust particles from lead-based paint by
children can cause permanent injury, even at low levels of
exposure.
Property owners may be liable for injuries to their tenants resulting
from exposure under various laws that impose affirmative obligations on property
owners of residential housing containing lead-based paint.
SOME PROVISIONS IN THE MORTGAGE LOANS UNDERLYING YOUR OFFERED CERTIFICATES MAY
BE CHALLENGED AS BEING UNENFORCEABLE
CROSS-COLLATERALIZATION ARRANGEMENTS. It may be possible to challenge
cross-collateralization arrangements involving more than one borrower as a
fraudulent conveyance, even if the borrowers are related. If one of those
borrowers were to become a debtor in a bankruptcy case, creditors of the
bankrupt party or the representative of the bankruptcy estate of the bankrupt
party could seek to have the bankruptcy court avoid any lien granted by the
bankrupt party to secure repayment of another borrower's loan. In order to do
so, the court would have to determine that--
o the bankrupt party--
1. was insolvent at the time of granting the lien,
2. was rendered insolvent by the granting of the lien,
3. was left with inadequate capital, or
4. was not able to pay its debts as they matured; and
o the bankrupt party did not, when it allowed its property to be
encumbered by a lien securing the other borrower's loan,
receive fair consideration or reasonably equivalent value for
pledging its property for the equal benefit of the other
borrower.
If the court were to conclude that the granting of the lien was an avoidable
fraudulent conveyance, it could nullify the lien or security instrument
effecting the cross-collateralization. The court could also allow the bankrupt
party to recover payments it made under the avoided cross-collateralization.
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PREPAYMENT PREMIUMS, FEES AND CHARGES. Under the laws of a number of
states, the enforceability of any mortgage loan provisions that require payment
of a prepayment premium, fee or charge upon an involuntary prepayment, is
unclear. If those provisions were unenforceable, borrowers would have an
incentive to default in order to prepay their loans.
DUE-ON-SALE AND DEBT ACCELERATION CLAUSES. Some or all of the mortgage
loans included in one of our trusts may contain a due-on-sale clause, which
permits the lender, with some exceptions, to accelerate the maturity of the
mortgage loan upon the sale, transfer or conveyance of--
o the related real property, or
o a majority ownership interest in the related borrower.
We anticipate that all of the mortgage loans included in one of our
trusts will contain some form of debt-acceleration clause, which permits the
lender to accelerate the debt upon specified monetary or non-monetary defaults
by the related borrower.
The courts of all states will enforce acceleration clauses in the event
of a material payment default. The equity courts of any state, however, may
refuse to allow the foreclosure of a mortgage, deed of trust or other security
instrument or to permit the acceleration of the indebtedness if:
o the default is deemed to be immaterial,
o the exercise of those remedies would be inequitable or unjust,
or
o the circumstances would render the acceleration
unconscionable.
ASSIGNMENTS OF LEASES. Some or all of the mortgage loans included in
one of our trusts may be secured by, among other things, an assignment of leases
and rents. Under that document, the related borrower will assign its right,
title and interest as landlord under the leases on the related real property and
the income derived from those leases to the lender as further security for the
related mortgage loan, while retaining a license to collect rents for so long as
there is no default. In the event the borrower defaults, the license terminates
and the lender is entitled to collect rents. In some cases, those assignments
may not be perfected as security interests prior to actual possession of the
cash flow. Accordingly, state law may require that the lender take possession of
the property and obtain a judicial appointment of a receiver before becoming
entitled to collect the rents. In addition, the commencement of bankruptcy or
similar proceedings by or with respect to the borrower will adversely affect the
lender's ability to collect the rents. See "Legal Aspects of Mortgage
Loans--Bankruptcy Laws."
DEFEASANCE. A mortgage loan underlying a series of offered certificates
may permit the related borrower, during the periods specified and subject to the
conditions set forth in the loan, to pledge to the holder of the mortgage loan a
specified amount of direct, non-callable United States government securities and
thereby obtain a release of the related mortgaged property. The cash amount
which a Borrower must expend to purchase, or must deliver to a master servicer
in order for the master servicer to purchase, the required United States
government securities may be in excess of the principal balance of the mortgage
loan. A court could interpret that excess amount as a form of prepayment premium
or could take it into account for usury purposes. In some states, some forms of
prepayment premiums are unenforceable. If the payment of that excess amount were
held to be unenforceable, the remaining
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portion of the cash amount to be delivered may be insufficient to purchase the
requisite amount of United States government securities.
LACK OF INSURANCE COVERAGE EXPOSES A TRUST TO RISK FOR PARTICULAR SPECIAL HAZARD
LOSSES
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of a property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in the
related policy. Most insurance policies typically do not cover any physical
damage resulting from, among other things:
o war,
o revolution,
o governmental actions,
o floods and other water-related causes,
o earth movement, including earthquakes, landslides and
mudflows,
o wet or dry rot,
o vermin, and
o domestic animals.
Unless the related mortgage loan documents specifically require the
borrower to insure against physical damage arising from these causes, then the
resulting losses may be borne by you as a holder of offered certificates.
GROUND LEASES CREATE RISKS FOR LENDERS THAT ARE NOT PRESENT WHEN LENDING ON AN
ACTUAL OWNERSHIP INTEREST IN A REAL PROPERTY
In order to secure a mortgage loan, a borrower may grant a lien on its
leasehold interest in a real property as tenant under a ground lease. If the
ground base does not provide for notice to a lender of a default thereunder on
the part of the borrower, together with a reasonable opportunity for the lender
to cure the default, the lender may be unable to prevent termination of the
lease and may lose its collateral.
In addition, upon the bankruptcy of a landlord or a tenant under a
ground lease, the debtor entity has the right to assume or reject the ground
lease. If a debtor landlord rejects the lease, the tenant has the right to
remain in possession of its leased premises at the rent reserved in the lease
for the term, including renewals. If a debtor tenant rejects any or all of its
leases, the tenant's lender may not be able to succeed to the tenant's position
under the lease unless the landlord has specifically granted the lender that
right. If both the landlord and the tenant are involved in bankruptcy
proceedings, the trustee for your offered certificates may be unable to enforce
the bankrupt tenant's obligation to refuse to treat as terminated a ground lease
rejected by a bankrupt landlord. In those circumstances, it is possible that the
trustee could be deprived of its security interest in the leasehold estate,
notwithstanding lender protection provisions contained in the lease or mortgage
loan documents.
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CHANGES IN ZONING LAWS MAY ADVERSELY AFFECT THE USE OR VALUE OF A REAL PROPERTY
Due to changes in zoning requirements since construction, an
income-producing property may not comply with current zoning laws, including
density, use, parking and set back requirements. Accordingly, the property may
be a permitted non-conforming structure or the operation of the property may be
a permitted non-conforming use. This means that the owner is not required to
alter the property's structure or use to comply with the new law, but the owner
may be limited in its ability to rebuild the premises "as is" in the event of a
substantial casualty loss. This may adversely affect the cash flow available
following the casualty. If a substantial casualty were to occur, insurance
proceeds may not be sufficient to pay a mortgage loan secured by the property in
full. In addition, if the property were repaired or restored in conformity with
the current law, its value or revenue-producing potential may be less than that
which existed before the casualty.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT OF 1990 MAY BE EXPENSIVE
Under the Americans with Disabilities Act of 1990, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. If a property does not currently comply with that Act,
the property owner may be required to incur significant costs in order to effect
that compliance. This will reduce the amount of cash flow available to cover
other required maintenance and capital improvements and to pay debt service on
the mortgage loan(s) that may encumber that property. There can be no assurance
that the owner will have sufficient funds to cover the costs necessary to comply
with that Act. In addition, noncompliance could result in the imposition of
fines by the federal government or an award or damages to private litigants.
LITIGATION MAY ADVERSELY AFFECT A BORROWER'S ABILITY TO REPAY ITS MORTGAGE LOAN
The owner of a multifamily or commercial property may be a defendant in
a litigation arising out of, among other things, the following:
o breach of contract involving a tenant, a supplier or other
party;
o negligence resulting in a personal injury, or
o responsibility for an environmental problem.
Litigation will divert the owner's attention from operating its
property. If the litigation were decided adversely to the owner, the award to
the plaintiff may adversely affect the owner's ability to repay a mortgage loan
secured by the property.
RESIDUAL INTERESTS IN A REAL ESTATE MORTGAGE INVESTMENT CONDUIT HAVE ADVERSE TAX
CONSEQUENCES
INCLUSION OF TAXABLE INCOME IN EXCESS OF CASH RECEIVED. If you own a
certificate that is a residual interest in a real estate mortgage investment
conduit for federal income tax purposes, you will have to report on your income
tax return as ordinary income your PRO RATA share of the taxable income of that
REMIC, regardless of the amount or timing of your possible receipt of any cash
on the certificate. As a result, your offered certificate may have phantom
income early in the term of the REMIC because the taxable income from the
certificate may exceed the amount of economic income, if any, attributable to
the certificate. While you will have a corresponding amount of tax losses later
in the term of the
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REMIC, the present value of the phantom income may significantly exceed the
present value of the tax losses. Therefore, the after-tax yield on any REMIC
residual certificate may be significantly less than that of a corporate bond or
other instrument having similar cash flow characteristics. In fact, some offered
certificates that are residual interests, may have a negative value.
You have to report your share of the taxable income and net loss of the
REMIC until all the certificates in the related series have a principal balance
of zero. See "Federal Income Tax Consequences--REMICs."
SOME TAXABLE INCOME OF A RESIDUAL INTEREST CAN NOT BE OFFSET UNDER THE
INTERNAL REVENUE CODE OF 1986. A portion of the taxable income from a REMIC
residual certificate may be treated as excess inclusions under the Internal
Revenue Code of 1986. You will have to pay tax on the excess inclusions
regardless of whether you have other credits, deductions or losses. In
particular, the tax on excess inclusion:
o generally will not be reduced by losses from other activities,
o for a tax-exempt holder, will be treated as unrelated business
taxable income, and
o for a foreign holder, will not qualify for any exemption from
withholding tax.
SOME ENTITIES SHOULD NOT INVEST IN REMIC RESIDUAL CERTIFICATES. The
fees and non-interest expenses of a REMIC will be allocated PRO RATA to
certificates that are residual interests in the REMIC. However, individuals will
only be able to deduct these expenses as miscellaneous itemized deductions,
which are subject to numerous restrictions and limitations under the Internal
Revenue Code of 1986. Therefore, the certificates that are residual interests
generally are not appropriate investments for:
o individuals,
o estates,
o trusts beneficially owned by any individual or estate, and
o pass-through entities having any individual, estate or trust
as a shareholder, member or partner.
In addition, the REMIC residual certificates will be subject to
numerous transfer restrictions. These restrictions will reduce your ability to
liquidate a REMIC residual certificate. For example, unless we indicate
otherwise in the related prospectus supplement, you will not be able to transfer
a REMIC residual certificate to a foreign person under the Internal Revenue Code
of 1986.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates."
PROBLEMS WITH BOOK-ENTRY REGISTRATION
Your offered certificates may be issued in book-entry form through the
facilities of the Depository Trust Company. As a result--
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o you will be able to exercise your rights as a certificateholder only
indirectly through the Depository Trust Company and its participating
organizations;
o you may have only limited access to information regarding your offered
certificates;
o you may suffer delays in the receipt of payments on your offered
certificates; and
o your ability to pledge or otherwise take action with respect to your
offered certificates may be limited due to the lack of a physical
certificate evidencing your ownership of those certificates.
See "Description of the Certificates--Book-Entry Registration and
Definitive Certificates."
POTENTIAL CONFLICTS OF INTEREST CAN AFFECT A PERSON'S PERFORMANCE
The master servicer or special servicer for one of our trusts, or any
of their respective affiliates, may purchase certificates evidencing interests
in that trust.
In addition, the master servicer or special servicer for one of our
trusts, or any of their respective affiliates, may have interests in, or other
financial relationships with, borrowers under the related mortgage loans.
In servicing the mortgage loans in any of our trusts, the related
master servicer and special servicer will each be required to observe the terms
of the governing document(s) for the related series of offered certificates and,
in particular, to act in accordance with the servicing standard described in the
related prospectus supplement. You should consider, however, that either of
these parties, if it or an affiliate owns certificates, or has financial
interests in or other financial dealings with any of the related borrowers, may
have interests when dealing with the mortgage loans underlying your offered
certificates that are in conflict with your interests. For example, if the
related special servicer owns any certificates, it could seek to mitigate the
potential loss on its certificates from a troubled mortgage loan by delaying
enforcement in the hope of realizing greater proceeds in the future. However,
this action by a special servicer could result a lower recovery to the related
trust than would have been the case if the special servicer had not delayed in
taking enforcement action.
Furthermore, the master servicer or special servicer for any of our
trusts may service existing and new loans for third parties, including
portfolios of loans similar to the mortgage loans included in that trust. The
properties securing these other loans may be in the same markets as and compete
with the properties securing mortgage loans in our trust. Accordingly, that
master servicer or special servicer may be acting on behalf of parties with
conflicting interests.
CAPITALIZED TERMS USED IN THIS PROSPECTUS
From time to time we use capitalized terms in this prospectus. Each of
those capitalized terms will have the meaning assigned to it in the "Glossary"
attached to this prospectus.
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DESCRIPTION OF THE TRUST ASSETS
GENERAL
We will be responsible for establishing the trust underlying each
series of offered certificates. The assets of the trust will primarily consist
of:
o various types of multifamily and/or commercial mortgage loans;
o mortgage participations, pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that directly or indirectly evidence interests in,
or are secured by pledges of, one or more of various types of
multifamily and/or commercial mortgage loans; or
o a combination of mortgage loans and mortgage-backed securities
of the types described above.
We do not originate mortgage loans. Accordingly, we must acquire each
of the mortgage loans to be included in one of our trusts from the originator or
a subsequent assignee. In some cases, that originator or subsequent assignee
will be one of our affiliates.
Unless we indicate otherwise in the related prospectus supplement, we
will acquire, directly or through one of our affiliates, in the secondary
market, any mortgage-backed security to be included in one of our trusts.
Neither we nor any of our affiliates will guarantee any of the mortgage
assets included in one of our trusts. Furthermore, unless we indicate otherwise
in the related prospectus supplement, no governmental agency or instrumentality
will guarantee or insure any of those mortgage assets.
MORTGAGE LOANS
GENERAL. Each mortgage loan underlying the offered certificates will
constitute the obligation of one or more persons to repay a debt. That
obligation will be evidenced by a promissory note or bond. In addition, that
obligation will be secured by a mortgage, deed of trust or other security
instrument that creates a first or junior lien on, or security interest in, an
interest in one or more of the following types of real property:
o rental or cooperatively-owned buildings with multiple dwelling
units;
o retail properties related to the sale of consumer goods and
other products to the general public, such as shopping
centers, malls, factory outlet centers, automotive sales
centers, department stores and other retail stores, grocery
stores, specialty shops, convenience stores and gas stations;
o retail properties related to providing entertainment,
recreational and personal services to the general public, such
as movie theaters, fitness centers, bowling alleys, salons,
dry cleaners and automotive service centers;
o office properties;
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o hospitality properties, such as hotels, motels and other
lodging facilities;
o casino properties;
o health care-related properties, such as hospitals, skilled
nursing facilities, nursing homes, congregate care facilities
and, in some cases, assisted living centers and senior
housing;
o industrial properties; o warehouse facilities, mini-warehouse
facilities and self-storage facilities;
o restaurants, taverns and other establishments involved in the
food and beverage industry;
o manufactured housing communities, mobile home parks and
recreational vehicle parks;
o recreational and resort properties, such as recreational
vehicle parks, golf courses, marinas, ski resorts and
amusement parks;
o arenas and stadiums;
o churches and other religious facilities;
o parking lots and garages;
o mixed use properties;
o other income-producing properties; and
o unimproved land.
The real property interests that may be encumbered in order to secure a
mortgage loan underlying your offered certificates, include--
o a fee interest or estate, which consists of ownership of the
property for an indefinite period,
o an estate for years, which consists of ownership of the
property for a specified period of years,
o a leasehold interest or estate, which consists of a right to
occupy and use the property for a specified period of years,
subject to the terms and conditions of a lease,
o shares in a cooperative corporation which owns the property,
or
o any other real estate interest under applicable local law.
Any of these real property interests may be subject to deed restrictions,
easements, rights of way and other matters of public record with respect to the
related property. In addition, the use of, and
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improvements that may be constructed on, any particular real property will, in
most cases, be subject to zoning laws and other legal restrictions.
Most, if not all, of the mortgage loans underlying a series of offered
certificates will be secured by liens on real properties located in the United
States, its territories and possessions. However, some of those mortgage loans
may be secured by liens on real properties located outside the United States,
its territories and possessions, provided that foreign mortgage loans do not
represent more than 10% of the related mortgage asset pool, by balance.
If we so indicate in the related prospectus supplement, one or more of
the mortgage loans underlying a series of offered certificates may be secured by
a junior lien on the related real property. However, the loan or loans secured
by the more senior liens on that property may not be included in the related
trust. The primary risk to the holder of a mortgage loan secured by a junior
lien on a real property is the possibility that the foreclosure proceeds
remaining after payment of the loans secured by more senior liens on that
property will be insufficient to pay the junior loan in full. In a foreclosure
proceeding, the sale proceeds are applied--
o FIRST, to the payment of court costs and fees in connection
with the foreclosure,
o SECOND, to the payment of real estate taxes, and
o THIRD, to the payment of any and all principal, interest,
prepayment or acceleration penalties, and other amounts owing
to the holder of the senior loans.
The claims of the holders of the senior loans must be satisfied in full before
the holder of the junior loan receives any payments with respect to the junior
loan. If a lender forecloses on a junior loan, it does so subject to any related
senior loans.
If we so indicate in the related prospectus supplement, the mortgage
loans underlying a series of offered certificates may be delinquent as of the
date the certificates are initially issued. In those cases, we will describe in
the related prospectus supplement--
o the period of the delinquency,
o any forbearance arrangement then in effect,
o the condition of the related real property, and
o the ability of the related real property to generate income to
service the mortgage debt.
We will not, however, transfer any mortgage loan to a trust if we know that the
mortgage loan is, at the time of transfer, more than 90 days delinquent with
respect to any scheduled payment of principal or interest or in foreclosure.
A DISCUSSION OF THE VARIOUS TYPES OF MULTIFAMILY AND COMMERCIAL
PROPERTIES THAT MAY SECURE MORTGAGE LOANS UNDERLYING A SERIES OF OFFERED
CERTIFICATES. The mortgage loans underlying a series of offered certificates may
be secured by numerous types of multifamily and commercial properties. As we
discuss below under "--Mortgage Loans--Default and Loss Considerations with
Respect to Commercial and Multifamily Mortgage Loans," the adequacy of an
income-producing property as
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security for a mortgage loan depends in large part on its value and ability to
generate net operating income. Set forth below is a discussion of some of the
various factors that may affect the value and operations of the indicated types
of multifamily and commercial properties.
MULTIFAMILY RENTAL PROPERTIES. Factors affecting the value and
operation of a multifamily rental property include:
o the physical attributes of the property, such as its age,
appearance, amenities and construction quality;
o the types of services offered at the property;
o the location of the property;
o the characteristics of the surrounding neighborhood, which may
change over time;
o the rents charged for dwelling units at the property relative
to the rents charged for comparable units at competing
properties;
o the ability of management to provide adequate maintenance and
insurance;
o the property's reputation;
o the level of mortgage interest rates, which may encourage
tenants to purchase rather than lease housing;
o the existence or construction of competing or alternative
residential properties, including other apartment buildings
and complexes, manufactured housing communities, mobile home
parks and single-family housing;
o the ability of management to respond to competition;
o the tenant mix and whether the property is primarily occupied
by workers from a particular company or type of business,
personnel from a local military base or students;
o adverse local, regional or national economic conditions, which
may limit the amount that may be charged for rents and may
result in a reduction in timely rent payments or a reduction
in occupancy levels;
o state and local regulations, which may affect the property
owner's ability to increase rent to the market rent for an
equivalent apartment;
o the extent to which the property is subject to land use
restrictive covenants or contractual covenants that require
that units be rented to low income tenants;
o the extent to which the cost of operating the property,
including the cost of utilities and the cost of required
capital expenditures, may increase; and
o the extent to which increases in operating costs may be passed
through to tenants.
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Because units in a multifamily rental property are leased to
individuals, usually for no more than a year, the property is likely to respond
relatively quickly to a downturn in the local economy or to the closing of a
major employer in the area.
Some states regulate the relationship of an owner and its tenants at a
multifamily rental property. Among other things, these states may--
o require written leases;
o require good cause for eviction;
o require disclosure of fees;
o prohibit unreasonable rules;
o prohibit retaliatory evictions;
o prohibit restrictions on a resident's choice of unit vendors;
o limit the bases on which a landlord may increase rent; or
o prohibit a landlord from terminating a tenancy solely by
reason of the sale of the owner's building.
Apartment building owners have been the subject of suits under state
Unfair and Deceptive Practices Acts and other general consumer protection
statutes for coercive, abusive or unconscionable leasing and sales practices.
Some counties and municipalities also impose rent control regulations
on apartment buildings. These regulations may limit rent increases to--
o fixed percentages,
o percentages of increases in the consumer price index,
o increases set or approved by a governmental agency, or
o increases determined through mediation or binding arbitration.
In many cases, the rent control laws do not provide for decontrol of
rental rates upon vacancy of individual units. Any limitations on a landlord's
ability to raise rents at a multifamily rental property may impair the
landlord's ability to repay a mortgage loan secured by the property or to meet
operating costs.
Some multifamily rental properties are subject to land use restrictive
covenants or contractual covenants in favor of federal or state housing
agencies. These covenants generally require that a minimum number or percentage
of units be rented to tenants who have incomes that are substantially lower than
median incomes in the area or region. These covenants may limit the potential
rental rates that may be charged at a multifamily rental property, the potential
tenant base for the property or both.
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An owner may subject a multifamily rental property to these covenants in
exchange for tax credits or rent subsidies. When the credits or subsidies cease,
net operating income will decline.
Some mortgage loans underlying the offered certificates will be secured
by--
o the related borrower's interest in multiple units in a
residential condominium project, and
o the related voting rights in the owners' association for the
project.
Due to the nature of condominiums, a default on any of those mortgage loans will
not allow the related special servicer the same flexibility in realizing on the
real property collateral as is generally available with respect to multifamily
rental properties that are not condominiums. The rights of other unit owners,
the governing documents of the owners' association and the state and local laws
applicable to condominiums must be considered and respected. Consequently,
servicing and realizing upon the collateral for those mortgage loans could
subject the related trust to greater delay, expense and risk than a loan secured
by a multifamily rental property that is not a condominium.
COOPERATIVELY-OWNED APARTMENT BUILDINGS. Some multifamily properties
are owned or leased by cooperative corporations. In general, each shareholder in
the corporation is entitled to occupy a particular apartment unit under a
long-term proprietary lease or occupancy agreement.
A tenant/shareholder of a cooperative corporation must make a monthly
maintenance payment to the corporation. The monthly maintenance payment
represents a tenant/shareholder's PRO RATA share of the corporation's--
o mortgage loan payments,
o real property taxes,
o maintenance expenses, and
o other capital and ordinary expenses of the property.
These monthly maintenance payments are in addition to any payments of principal
and interest the tenant/shareholder must make on any loans of the
tenant/shareholder secured by its shares in the corporation.
A cooperative corporation is directly responsible for building
maintenance and payment of real estate taxes and hazard and liability insurance
premiums. A cooperative corporation's ability to meet debt service obligations
on a mortgage loan secured by, and to pay all other operating expenses of, the
cooperatively owned property depends primarily upon the receipt of--
o maintenance payments from the tenant/shareholders, and
o any rental income from units or commercial space that the
cooperative corporation might control.
A cooperative corporation may have to impose special assessments on the
tenant/shareholders in order to pay unanticipated expenditures. Accordingly, a
cooperative corporation is highly dependent on
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the financial well being of its tenant/shareholders. A cooperative corporation's
ability to pay the amount of any balloon payment due at the maturity of a
mortgage loan secured by the cooperatively owned property depends primarily on
its ability to refinance the property.
In a typical cooperative conversion plan, the owner of a rental
apartment building contracts to sell the building to a newly formed cooperative
corporation. Shares are allocated to each apartment unit by the owner or
sponsor. The current tenants have a specified period to subscribe at prices
discounted from the prices to be offered to the public after that period. As
part of the consideration for the sale, the owner or sponsor receives all the
unsold shares of the cooperative corporation. In general the sponsor controls
the corporation's board of directors and management for a limited period of
time. If the sponsor holds the shares allocated to a large number of apartment
units, the lender on a mortgage loan secured by a cooperatively owned property
may be adversely affected by a decline in the creditworthiness of the sponsor.
Many cooperative conversion plans are non-eviction plans. Under a
non-eviction plan, a tenant at the time of conversion who chooses not to
purchase shares is entitled to reside in its apartment unit as a subtenant from
the owner of the shares allocated to that unit. Any applicable rent control or
rent stabilization laws would continue to be applicable to the subtenancy. In
addition, the subtenant may be entitled to renew its lease for an indefinite
number of years with continued protection from rent increases above those
permitted by any applicable rent control and rent stabilization laws. The
owner/shareholder is responsible for the maintenance payments to the cooperative
corporation without regard to whether it receives rent from the subtenant or
whether the rent payments are lower than maintenance payments on the unit.
Newly-formed cooperative corporations typically have the greatest concentration
of non-tenant/shareholders.
RETAIL PROPERTIES. The term "retail property" encompasses a broad range
of properties at which businesses sell consumer goods and other products and
provide various entertainment, recreational or personal services to the general
public. Some examples of retail properties include:
o shopping centers,
o factory outlet centers,
o malls,
o automotive sales and service centers,
o consumer oriented businesses,
o department stores,
o grocery stores,
o convenience stores,
o specialty shops,
o gas stations,
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o movie theaters,
o fitness centers,
o bowling alleys,
o salons, and
o dry cleaners
Unless owner occupied, retail properties generally derive all or a
substantial percentage of their income from lease payments from commercial
tenants. Therefore, it is important for the owner of a retail property to
attract and keep tenants, particularly significant tenants, that are able to
meet their lease obligations. In order to attract tenants, the owner of a retail
property may be required--
o to lower rents;
o to grant a potential tenant a free rent or reduced rent
period;
o to improve the condition of the property generally; or
o to make at its own expense, or grant a rent abatement to
cover, tenant improvements for a potential tenant.
A prospective tenant will also be interested in the number and type of
customers that it will be able to attract at a particular retail property. The
ability of a tenant at a particular retail property to attract customers will be
affected by a number of factors related to the property and the surrounding
area, including--
o competition from other retail properties;
o perceptions regarding the safety, convenience and
attractiveness of the property;
o perceptions regarding the safety of the surrounding area;
o demographics of the surrounding area;
o the strength and stability of the local, regional and national
economies;
o traffic patterns and access to major thoroughfares;
o the visibility of the property;
o availability of parking;
o the particular mixture of the goods and services offered at
the property;
o customer tastes, preferences and spending patterns; and
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o the drawing power of other tenants.
The success of a retail property is often dependent on the success of
its tenants' businesses. A significant component of the total rent paid by
tenants of retail properties is often tied to a percentage of gross sales or
revenues. Declines in sales or revenues of the tenants will likely cause a
corresponding decline in percentage rents and/or impair the tenants' ability to
pay their rent or other occupancy costs. A default by a tenant under its lease
could result in delays and costs in enforcing the landlord's rights. Retail
properties would be directly and adversely affected by a decline in the local
economy and reduced consumer spending.
Repayment of a mortgage loan secured by a retail property will be
affected by the expiration of space leases at the property and the ability of
the borrower to renew or relet the space on comparable terms. Even if vacant
space is successfully relet, the costs associated with reletting, including
tenant improvements, leasing commissions and free rent, may be substantial and
could reduce cash flow from a retail property.
The presence or absence of an anchor tenant in a multi-tenanted retail
property can be important. Anchor tenants play a key role in generating customer
traffic and making the center desirable for other tenants. An anchor tenant is,
in general, a retail tenant whose space is substantially larger in size than
that of other tenants at the same retail property and whose operation is vital
in attracting customers to the property. At some retail properties, the anchor
tenant owns the space it occupies. In those cases where the property owner does
not control the space occupied by the anchor tenant, the property owner may not
be able to take actions with respect to the space that it otherwise typically
would, such as granting concessions to retain an anchor tenant or removing an
ineffective anchor tenant. In some cases, an anchor tenant may cease to operate
at the property, thereby leaving its space unoccupied even though it continues
to own or pay rent on the vacant space. If an anchor tenant ceases operations at
a retail property, other tenants at the property may be entitled to terminate
their leases prior to the scheduled termination date or to pay rent at a reduced
rate for the remaining term of the lease.
Various factors will adversely affect the economic performance of an
anchored retail property, including:
o an anchor tenant's failure to renew its lease;
o termination of an anchor tenant's lease;
o the bankruptcy or economic decline of an anchor tenant or a
self-owned anchor;
o the cessation of the business of a self-owned anchor or of an
anchor tenant, notwithstanding its continued ownership of the
previously occupied space or its continued payment of rent, as
the case may be; or
o a loss of an anchor tenant's ability to attract shoppers.
Retail properties may also face competition from sources outside a
given real estate market or with lower operating costs. For example, all of the
following compete with more traditional department stores and specialty shops
for consumer dollars:
o factory outlet centers;
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o discount shopping centers and clubs;
o catalogue retailers;
o television shopping networks and programs;
o internet web sites; and
o telemarketing.
Similarly, home movie rentals and pay-per-view movies provide alternate
sources of entertainment to movie theaters. Continued growth of these
alternative retail outlets and entertainment sources, which are often
characterized by lower operating costs, could adversely affect the rents
collectible at retail properties.
Gas stations, automotive sales and service centers and dry cleaners
also pose unique environmental risks because of the nature of their businesses
and the types of products used or sold in those businesses.
OFFICE PROPERTIES. Factors affecting the value and operation of an
office property include:
o the number and quality of the tenants, particularly
significant tenants, at the property;
o the physical attributes of the building in relation to
competing buildings;
o the location of the property with respect to the central
business district or population centers;
o demographic trends within the metropolitan area to move away
from or towards the central business district;
o social trends combined with space management trends, which may
change towards options such as telecommuting or hoteling to
satisfy space needs;
o tax incentives offered to businesses or property owners by
cities or suburbs adjacent to or near where the building is
located;
o local competitive conditions, such as the supply of office
space or the existence or construction of new competitive
office buildings;
o the quality and philosophy of building management;
o access to mass transportation; and
o changes in zoning laws.
Office properties may be adversely affected by an economic decline in
the business operated by their tenants. The risk associated with that economic
decline is increased if revenue is dependent on a single tenant or if there is a
significant concentration of tenants in a particular business or industry.
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Office properties are also subject to competition with other office
properties in the same market. Competitive factors affecting an office property
include:
o rental rates;
o the building's age, condition and design, including floor
sizes and layout; o access to public transportation and
availability of parking; and
o amenities offered to its tenants, including sophisticated
building systems, such as fiber optic cables, satellite
communications or other base building technological features.
The cost of refitting office space for a new tenant is often higher
than for other property types.
The success of an office property also depends on the local economy.
Factors influencing a company's decision to locate in a given area include:
o the cost and quality of labor;
o tax incentives; and
o quality of life matters, such as schools and cultural
amenities.
The strength and stability of the local or regional economy will affect
an office property's ability to attract stable tenants on a consistent basis. A
central business district may have a substantially different economy from that
of a suburb.
HOSPITALITY PROPERTIES. Hospitality properties may involve different
types of hotels and motels, including:
o full service hotels;
o resort hotels with many amenities;
o limited service hotels;
o hotels and motels associated with national or regional
franchise chains;
o hotels that are not affiliated with any franchise chain but
may have their own brand identity; and
o other lodging facilities.
Factors affecting the economic performance of a hospitality property
include:
o the location of the property and its proximity to major
population centers or attractions;
o the seasonal nature of business at the property;
o the level of room rates relative to those charged by
competitors;
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o quality and perception of the franchise affiliation;
o economic conditions, either local, regional or national, which
may limit the amount that can be charged for a room and may
result in a reduction in occupancy levels;
o the existence or construction of competing hospitality
properties;
o nature and quality of the services and facilities;
o financial strength and capabilities of the owner and operator;
o the need for continuing expenditures for modernizing,
refurbishing and maintaining existing facilities;
o increases in operating costs, which may not be offset by
increased room rates;
o the property's dependence on business and commercial travelers
and tourism; and
o changes in travel patterns caused by changes in access, energy
prices, labor strikes, relocation of highways, the
reconstruction of additional highways or other factors.
Because limited service hotels and motels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of these hotels and motels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Further, because
rooms at hospitality properties are generally rented for short periods of time,
hospitality properties tend to be more sensitive to adverse economic conditions
and competition than many other types of commercial properties. Additionally,
the revenues of some hospitality properties, particularly those located in
regions whose economies depend upon tourism, may be highly seasonal in nature.
Hospitality properties may be operated under franchise agreements. The
continuation of a franchise is typically subject to specified operating
standards and other terms and conditions. The franchisor periodically inspects
its licensed properties to confirm adherence to its operating standards. The
failure of the hospitality property to maintain those standards or adhere to
those other terms and conditions could result in the loss or cancellation of the
franchise license. It is possible that the franchisor could condition the
continuation of a franchise license on the completion of capital improvements or
the making of capital expenditures that the owner of the hospitality property
determines are too expensive or are otherwise unwarranted in light of the
operating results or prospects of the property. In that event, the owner of the
hospitality property may elect to allow the franchise license to lapse. In any
case, if the franchise is terminated, the owner of the hospitality property may
seek to obtain a suitable replacement franchise or to operate property
independently of a franchise license. The loss of a franchise license could have
a material adverse effect upon the operations or value of the hospitality
property because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor.
The viability of any hospitality property that is a franchise of a
national or a regional hotel or motel chain is dependent upon:
o the continued existence and financial strength of the
franchisor;
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o the public perception of the franchise service mark; and
o the duration of the franchise licensing agreement.
The transferability of franchise license agreements may be restricted.
The consent of the franchisor would be required for the continued use of the
franchise license by the hospitality property following a foreclosure.
Conversely, a lender may be unable to remove a franchisor that it desires to
replace following a foreclosure. Further, in the event of a foreclosure on a
hospitality property, the lender or other purchaser of the hospitality property
may not be entitled to the rights under any associated liquor license. That
party would be required to apply in its own right for a new liquor license.
There can be no assurance that a new license could be obtained or that it could
be obtained promptly.
CASINO PROPERTIES. Factors affecting the economic performance of a
casino property include:
o location, including proximity to or easy access from major
population centers;
o appearance;
o economic conditions, either local, regional or national, which
may limit the amount of disposable income that potential
patrons may have for gambling;
o the existence or construction of competing casinos;
o dependence on tourism; and
o local or state governmental regulation.
Competition among major casinos may involve attracting patrons by--
o providing alternate forms of entertainment, such as performers
and sporting events, and
o offering low-priced or free food and lodging.
Casino owners may expend substantial sums to modernize, refurbish and
maintain existing facilities.
Because of their dependence on disposable income of patrons, casino
properties are likely to respond quickly to a downturn in the economy.
To avoid criminal influence, the ownership and operation of casino
properties is often subject to local or state governmental regulation. A
government agency or authority may have jurisdiction over or influence with
respect to the foreclosure of a casino property or the bankruptcy of its owner
or operator. In some jurisdictions, it may be necessary to receive governmental
approval before foreclosing, thereby resulting in substantial delays to a
lender. Gaming licenses are not transferable, including in connection with a
foreclosure. There can be no assurance that a lender or another purchaser in
foreclosure or otherwise will be able to obtain the requisite approvals to
continue operating the foreclosed property as a casino.
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Any given state or municipality that currently allows legalized
gambling could pass legislation banning it.
The loss of a gaming license for any reason would have a material
adverse effect on the value of a casino property.
HEALTH CARE-RELATED PROPERTIES. Health-care related properties include
o hospitals;
o skilled nursing facilities;
o nursing homes;
o congregate care facilities; and
o in some cases, assisted living centers and housing for
seniors.
Health care-related facilities, particularly nursing homes, may receive
a substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to
o statutory and regulatory changes;
o retroactive rate adjustments;
o administrative rulings;
o policy interpretations;
o delays by fiscal intermediaries; and
o government funding restrictions.
All of the foregoing can adversely affect revenues from the operation a health
care-related facility. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers. In
addition, there are currently under consideration various proposals for national
health care relief that could further limit these payments.
Providers of long-term nursing care and other medical services are
highly regulated by federal, state and local law. They are subject to numerous
factors which can increase the cost of operation, limit growth and, in extreme
cases, require or result in suspension or cessation of operations, including:
o federal and state licensing requirements;
o facility inspections;
o rate setting;
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o reimbursement policies; and
o laws relating to the adequacy of medical care, distribution of
pharmaceuticals, use of equipment, personnel operating
policies and maintenance of and additions to facilities and
services.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements generally may not be made to any person other than the
provider who actually furnished the related material goods and services.
Accordingly, in the event of foreclosure on a health care-related facility,
neither a lender nor other subsequent lessee or operator of the property would
generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at the
property prior to foreclosure. Furthermore, in the event of foreclosure, there
can be no assurance that a lender or other purchaser in a foreclosure sale would
be entitled to the rights under any required licenses and regulatory approvals.
The lender or other purchaser may have to apply in its own right for those
licenses and approvals. There can be no assurance that a new license could be
obtained or that a new approval would be granted.
Health care-related facilities are generally special purpose properties
that could not be readily converted to general residential, retail or office
use. This will adversely affect their liquidation value. Furthermore, transfers
of health care-related facilities are subject to regulatory approvals under
state, and in some cases federal, law not required for transfers of most other
types of commercial properties.
INDUSTRIAL PROPERTIES. Industrial properties may be adversely affected
by reduced demand for industrial space occasioned by a decline in a particular
industry segment and/or by a general slowdown in the economy. In addition, an
industrial property that suited the particular needs of its original tenant may
be difficult to relet to another tenant or may become functionally obsolete
relative to newer properties.
The value and operation of an industrial property depends on:
o location of the property, the desirability of which in a
particular instance may depend on--
1. availability of labor services,
2. proximity to supply sources and customers, and
3. accessibility to various modes of transportation and
shipping, including railways, roadways, airline
terminals and ports;
o building design of the property, the desirability of which in
a particular instance may depend on--
1. ceiling heights,
2. column spacing,
3. number and depth of loading bays,
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4. divisibility,
5. floor loading capacities,
6. truck turning radius,
7. overall functionality, and
8. adaptability of the property, because industrial
tenants often need space that is acceptable for
highly specialized activities; and
o the quality and creditworthiness of individual tenants,
because industrial properties frequently have higher tenant
concentrations.
Industrial properties are generally special purpose properties that
could not be readily converted to general residential, retail or office use.
This will adversely affect their liquidation value.
WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES. Warehouse,
mini-warehouse and self-storage properties are considered vulnerable to
competition because both acquisition costs and break-even occupancy are
relatively low. In addition, it would require substantial capital expenditures
to convert a warehouse, mini-warehouse or self-storage property to an
alternative use. This will materially impair the liquidation value of the
property if its operation for storage purposes becomes unprofitable due to
decreased demand, competition, age of improvements or other factors.
Successful operation of a warehouse, mini-warehouse or self-store
property depends on--
o building design;
o location and visibility;
o tenant privacy;
o efficient access to the property;
o proximity to potential users, including apartment complexes or
commercial users;
o services provided at the property, such as security;
o age and appearance of the improvements; and
o quality of management.
Restaurants and Taverns. Factors affecting the economic viability of
individual restaurants, taverns and other establishments that are part of the
food and beverage service industry include:
o competition from facilities having businesses similar to a
particular restaurant or tavern;
o perceptions by prospective customers of safety, convenience,
services and attractiveness;
o the cost, quality and availability of food and beverage
products;
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o negative publicity, resulting from instances of food
contamination, food-borne illness and similar events;
o changes in demographics, consumer habits and traffic patterns;
o the ability to provide or contract for capable management; and
o retroactive changes to building codes, similar ordinances and
other legal requirements.
Adverse economic conditions, whether local, regional or national, may
limit the amount that may be charged for food and beverages and the extent to
which potential customers dine out. Because of the nature of the business,
restaurants and taverns tend to respond to adverse economic conditions more
quickly than do many other types of commercial properties. Furthermore, the
transferability of any operating, liquor and other licenses to an entity
acquiring a bar or restaurant, either through purchase or foreclosure, is
subject to local law requirements.
The food and beverage service industry is highly competitive. The
principal means of competition are--
o segment,
o product,
o price,
o value,
o quality,
o service,
o convenience,
o location, and
o the nature and condition of the restaurant facility.
A restaurant or tavern operator competes with the operators of
comparable establishments in the area in which its restaurant or tavern is
located. Other restaurants could have--
o lower operating costs,
o more favorable locations,
o more effective marketing,
o more efficient operations, or
o better facilities.
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The location and condition of a particular restaurant or tavern will
affect the number of customers and, to an extent, the prices that may be
charged. The characteristics of an area or neighborhood in which a restaurant or
tavern is located may change over time or in relation to competing facilities.
Also, the cleanliness and maintenance at a restaurant or tavern will affect its
appeal to customers. In the case of a regionally- or nationally-known chain
restaurant, there may be costly expenditures for renovation, refurbishment or
expansion, regardless of its condition.
Factors affecting the success of a regionally- or nationally-known
chain restaurant include:
o actions and omissions of any franchisor, including management
practices that--
1. adversely affect the nature of the business, or
2. require renovation, refurbishment, expansion or other
expenditures;
o the degree of support provided or arranged by the franchisor,
including its franchisee organizations and third-party
providers of products or services; and
o the bankruptcy or business discontinuation of the franchisor
or any of its franchisee organizations or third-party
providers.
Chain restaurants may be operated under franchise agreements. Those
agreements typically do not contain provisions protective of lenders. A
borrower's rights as franchisee typically may be terminated without informing
the lender, and the borrower may be precluded from competing with the franchisor
upon termination. In addition, a lender that acquires title to a restaurant site
through foreclosure or similar proceedings may be restricted in the use of the
site or may be unable to succeed to the rights of the franchisee under the
related franchise agreement. The transferability of a franchise may be subject
to other restrictions. Also, federal and state franchise regulations may impose
additional risk, including the risk that the transfer of a franchise acquired
through foreclosure or similar proceedings may require registration with
governmental authorities or disclosure to prospective transferees.
MANUFACTURED HOUSING COMMUNITIES, MOBILE HOME PARKS AND RECREATIONAL
VEHICLE PARKS. Manufactured housing communities and mobile home parks consist of
land that is divided into "spaces" or "home sites" that are primarily leased to
owners of the individual mobile homes or other housing units. The home owner
often invests in site-specific improvements such as carports, steps, fencing,
skirts around the base of the home, and landscaping. The land owner typically
provides private roads within the park, common facilities and, in many cases,
utilities. Due to relocation costs and, in some cases, demand for homesites, the
value of a mobile home or other housing unit in place in a manufactured housing
community or mobile home park is generally higher, and can be significantly
higher, than the value of the same unit not placed in a manufactured housing
community or mobile home park. As a result, a well-operated manufactured housing
community or mobile home park that has achieved stabilized occupancy is
typically able to maintain occupancy at or near that level. For the same reason,
a lender that provided financing for the home of a tenant who defaulted in his
or her space rent generally has an incentive to keep rental payments current
until the home can be resold in place, rather than to allow the unit to be
removed from the park. In general, the individual mobile homes and other housing
units will not constitute collateral for a mortgage loan underlying a series of
offered certificates.
Recreational vehicle parks lease spaces primarily or exclusively for
motor homes, travel trailers and portable truck campers, primarily designed for
recreational, camping or travel use. In general, parks
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that lease recreational vehicle spaces can be viewed as having a less stable
tenant population than parks occupied predominantly by mobile homes. However, it
is not unusual for the owner of a recreational vehicle to leave the vehicle at
the park on a year-round basis or to use the vehicle as low cost housing and
reside in the park indefinitely.
Factors affecting the successful operation of a manufactured housing
community, mobile home park or recreational vehicle park include:
o the number of comparable competing properties in the local
market;
o the age, appearance and reputation of the property;
o the quality of management; and
o the types of facilities and services it provides.
Manufactured housing communities and mobile home parks also compete
against alternative forms of residential housing, including--
o multifamily rental properties,
o cooperatively-owned apartment buildings,
o condominium complexes, and
o single-family residential developments.
Recreational vehicle parks also compete against alternative forms of
recreation and short-term lodging, such as staying at a hotel at the beach.
Manufactured housing communities, mobile home parks and recreational
vehicle parks are special purpose properties that could not be readily converted
to general residential, retail or office use. This will adversely affect the
liquidation value of the property if its operation as a manufactured housing
community, mobile home park or recreational vehicle park, as the case may be,
becomes unprofitable due to competition, age of the improvements or other
factors.
Some states regulate the relationship of an owner of a manufactured
housing community or mobile home park and its tenants in a manner similar to the
way they regulate the relationship between a landlord and tenant at a
multifamily rental property. In addition, some states also regulate changes in
the use of a manufactured housing community or mobile home park and require that
the owner give written notice to its tenants a substantial period of time prior
to the projected change.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on manufactured housing
communities and mobile home parks. These ordinances may limit rent increases to:
o fixed percentages,
o percentages of increases in the consumer price index,
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o increases set or approved by a governmental agency, or
o increases determined through mediation or binding arbitration.
In many cases, the rent control laws either do not permit vacancy
decontrol or permit vacancy decontrol only in the relatively rare event that the
mobile home or manufactured housing unit is removed from the homesite. Local
authority to impose rent control on manufactured housing communities and mobile
home parks is pre-empted by state law in some states and rent control is not
imposed at the state level in those states. In some states, however, local rent
control ordinances are not pre-empted for tenants having short-term or
month-to-month leases, and properties there may be subject to various forms of
rent control with respect to those tenants.
RECREATIONAL AND RESORT PROPERTIES. Any mortgage loan underlying a
series of offered certificates may be secured by a golf course, marina, ski
resort, amusement park or other property used for recreational purposes or as a
resort. Factors affecting the economic performance of a property of this type
include:
o the location and appearance of the property;
o the appeal of the recreational activities offered;
o the existence or construction of competing properties, whether
are not they offer the same activities;
o the need to make capital expenditures to maintain, refurbish,
improve and/or expand facilities in order to attract potential
patrons;
o geographic location and dependence on tourism;
o changes in travel patterns caused by changes in energy prices,
strikes, location of highways, construction of additional
highways and similar factors;
o seasonality of the business, which may cause periodic
fluctuations in operating revenues and expenses;
o sensitivity to weather and climate changes; and
o local, regional and national economic conditions.
A marina or other recreational or resort property located next to water
will also be affected by various statutes and government regulations that govern
the use of, and construction on, rivers, lakes and other waterways.
Because of the nature of the business, recreational and resort
properties tend to respond to adverse economic conditions more quickly than do
many other types of commercial properties.
Recreational and resort properties are generally special purpose
properties that are not readily convertible to alternative uses. This will
adversely affect their liquidation value.
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ARENAS AND STADIUMS. The success of an arena or stadium generally
depends on its ability to attract patrons to a variety of events, including:
o sporting events;
o musical events;
o theatrical events;
o animal shows; and/or
o circuses.
The ability to attract patrons is dependent on, among others, the
following factors:
o the appeal of the particular event;
o the cost of admission;
o perceptions by prospective patrons of the safety, convenience,
services and attractiveness of the arena or stadium;
o perceptions by prospective patrons of the safety of the
surrounding area; and
o the alternative forms of entertainment available in the
particular locale.
In some cases, an arena's or stadium's success will depend on its
ability to attract and keep a sporting team as a tenant. An arena or stadium may
become unprofitable, or unacceptable to a tenant of that type, due to decreased
attendance, competition and age of improvements. Often, substantial expenditures
must be made to modernize, refurbish and/or maintain existing facilities.
Arenas and stadiums are special purpose properties which cannot be
readily convertible to alternative uses. This will adversely affect their
liquidation value.
CHURCHES AND OTHER RELIGIOUS FACILITIES. Churches and other religious
facilities generally depend on charitable donations to meet expenses and pay for
maintenance and capital expenditures. The extent of those donations is dependent
on the attendance at any particular religious facility and the extent to which
attendees are prepared to make donations, which is influenced by a variety of
social, political and economic factors. Donations may be adversely affected by
economic conditions, whether local, regional or national. Religious facilities
are special purpose properties that are not readily convertible to alternative
uses. This will adversely affect their liquidation value.
PARKING LOTS AND GARAGES. The primary source of income for parking lots
and garages is the rental fees charged for parking spaces. Factors affecting the
success of a parking lot or garage include:
o the number of rentable parking spaces and rates charged;
o the location of the lot or garage and, in particular, its
proximity to places where large numbers of people work, shop
or live;
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o the amount of alternative parking spaces in the area;
o the availability of mass transit; and
o the perceptions of the safety, convenience and services of the
lot or garage.
UNIMPROVED LAND. The value of unimproved land is largely a function of
its potential use. This may depend on--
o its location,
o its size,
o the surrounding neighborhood, and
o local zoning laws.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO COMMERCIAL AND
MULTIFAMILY MORTGAGE LOANS. Mortgage loans secured by liens on income-producing
properties are substantially different from mortgage loans made on the security
of owner-occupied single-family homes. The repayment of a loan secured by a lien
on an income-producing property is typically dependent upon--
o the successful operation of the property, and
o its ability to generate income sufficient to make payments on
the loan.
This is particularly true because most or all of the mortgage loans underlying
the offered certificates will be nonrecourse loans.
The debt service coverage ratio of a multifamily or commercial mortgage
loan is an important measure of the likelihood of default on the loan. In
general, the debt service coverage ratio of a multifamily or commercial mortgage
loan at any given time is the ratio of--
o the amount of income derived or expected to be derived from
the related real property for a twelve-month period that is
available to pay debt service, to
o the annualized scheduled payments of principal and/or interest
on the mortgage loan and any other senior loans that are
secured by the related real property.
The amount described in the first bullet point of the preceding sentence is
often a highly subjective number based on a variety of assumptions regarding,
and adjustments to, revenues and expenses with respect to the related real
property. We will provide a more detailed discussion of its calculation in the
related prospectus supplement.
The cash flow generated by a multifamily or commercial property will
generally fluctuate over time and may or may not be sufficient to make--
o the loan payments on the related mortgage loan,
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o cover operating expenses, and
o fund capital improvements at any given time.
Operating revenues of a nonowner occupied, income- producing property
may be affected by the condition of the applicable real estate market and/or
area economy. Properties leased, occupied or used on a short-term basis, such
as--
o some health care-related facilities,
o hotels and motels,
o recreational vehicle parks, and
o mini-warehouse and self-storage facilities,
tend to be affected more rapidly by changes in market or business conditions
than do properties typically leased for longer periods, such as--
o warehouses,
o retail stores,
o office buildings, and
o industrial facilities.
Some commercial properties may be owner-occupied or leased to a small
number of tenants. Accordingly, the operating revenues may depend substantially
on the financial condition of the borrower or one or a few tenants. Mortgage
loans secured by liens on owner-occupied and single tenant properties may pose a
greater likelihood of default and loss than loans secured by liens on
multifamily properties or on multi-tenant commercial properties.
Increases in property operating expenses can increase the likelihood of
a borrower default on a multifamily or commercial mortgage loan secured by the
property. Increases in property operating expenses may result from:
o increases in energy costs and labor costs;
o increases in interest rates and real estate tax rates; and
o changes in governmental rules, regulations and fiscal
policies.
Some net leases of commercial properties may provide that the lessee,
rather than the borrower/landlord, is responsible for payment of operating
expenses. However, a net lease will result in stable net operating income to the
borrower/landlord only if the lessee is able to pay the increased operating
expense while also continuing to make rent payments.
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Lenders also look to the loan-to-value ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property is liquidated
following a default. In general, the loan-to-value ratio of a multifamily or
commercial mortgage loan at any given time is the ratio, expressed as a
percentage, of--
o the then outstanding principal balance of the mortgage loan
and any other senior loans that are secured by the related
real property, to
o the estimated value of the related real property based on an
appraisal, a cash flow analysis, a recent sales price or
another method or benchmark of valuation.
A low loan-to-value ratio means the borrower has a large amount of its
own equity in the multifamily or commercial property that secures its loan. In
these circumstances--
o the borrower has a greater incentive to perform under the
terms of the related mortgage loan in order to protect that
equity, and
o the lender has greater protection against loss on liquidation
following a borrower default.
Loan-to-value ratios are not necessarily an accurate measure of the
likelihood of liquidation loss in a pool of multifamily and commercial mortgage
loans. For example, the value of a multifamily or commercial property as of the
date of initial issuance of a series of offered certificates may be less than
the estimated value determined at loan origination. The value of any real
property, in particular a multifamily or commercial property, will likely
fluctuate from time to time. Moreover, even a current appraisal is not
necessarily a reliable estimate of value. Appraised values of income-producing
properties are generally based on--
o the market comparison method, which takes into account the
recent resale value of comparable properties at the date of
the appraisal;
o the cost replacement method, which takes into account the cost
of replacing the property at the date of the appraisal;
o the income capitalization method, which takes into account the
property's projected net cash flow; or
o a selection from the values derived from the foregoing
methods.
Each of these appraisal methods presents analytical difficulties. For
example,
o it is often difficult to find truly comparable properties that
have recently been sold;
o the replacement cost of a property may have little to do with
its current market value; and
o income capitalization is inherently based on inexact
projections of income and expense and the selection of an
appropriate capitalization rate and discount rate.
If more than one appraisal method is used and significantly different
results are produced, an accurate determination of value and, correspondingly, a
reliable analysis of the likelihood of default and loss, is even more difficult.
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The value of a multifamily or commercial property will be affected by
property performance. As a result, if a multifamily or commercial mortgage loan
defaults because the income generated by the related property is insufficient to
pay operating costs and expenses as well as debt service, then the value of the
property will decline and a liquidation loss may occur.
We believe that the foregoing considerations are important factors that
generally distinguish mortgage loans secured by liens on income-producing real
estate from single-family mortgage loans. However, the originators of the
mortgage loans underlying your offered certificates may not have considered all
of those factors for all or any of those loans.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real Property,
Which May Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance."
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Each of the mortgage loans
included in one of our trusts will have the following features:
o an original term to maturity of not more than approximately 40
years; and
scheduled payments of principal, interest or both, to be made on specified
dates, that occur monthly, bi-monthly, quarterly, semi-annually, annually or at
some other interval.
A mortgage loan included in one of our trusts may also include terms
that:
o provide for the accrual of interest at a mortgage interest
rate that is fixed over its term, that resets on one or more
specified dates or that otherwise adjusts from time to time;
o provide for the accrual of interest at a mortgage interest
rate that may be converted at the borrower's election from an
adjustable to a fixed interest rate or from a fixed to an
adjustable interest rate;
o provide for no accrual of interest;
o provide for level payments to stated maturity, for payments
that reset in amount on one or more specified dates or for
payments that otherwise adjust from time to time to
accommodate changes in the coupon rate or to reflect the
occurrence of specified events;
o be fully amortizing or, alternatively, may be partially
amortizing or nonamortizing, with a substantial payment of
principal due on its stated maturity date;
o permit the negative amortization or deferral of accrued
interest;
o permit defeasance and the release of the real property
collateral in connection with that defeasance; and/or
o prohibit some or all voluntary prepayments or require payment
of a premium, fee or charge in connection with those
prepayments.
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MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. We will describe
in the related prospectus supplement the characteristics of the mortgage loans
that we will include in any of our trusts. In general, we will provide in the
related prospectus supplement, among other items, the following information on
the particular mortgage loans in one of our trusts:
o the total outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
mortgage loans;
o the type or types of property that provide security for
repayment of the mortgage loans;
o the earliest and latest origination date and maturity date of
the mortgage loans;
o the original and remaining terms to maturity of the mortgage
loans, or the range of each of those terms to maturity, and
the weighted average original and remaining terms to maturity
of the mortgage loans;
o loan-to-value ratios of the mortgage loans either at
origination or as of a more recent date, or the range of those
loan-to-value ratios, and the weighted average of those
loan-to-value ratios;
o the mortgage interest rates of the mortgage loans, or the
range of those mortgage interest rates, and the weighted
average mortgage interest rate of the mortgage loans;
o if any mortgage loans have adjustable mortgage interest rates,
the index or indices upon which the adjustments are based, the
adjustment dates, the range of gross margins and the weighted
average gross margin, and any limits on mortgage interest rate
adjustments at the time of any adjustment and over the life of
the loan;
o information on the payment characteristics of the mortgage
loans, including applicable prepayment restrictions;
o debt service coverage ratios of the mortgage loans either at
origination or as of a more recent date, or the range of those
debt service coverage ratios, and the weighted average of
those debt service coverage ratios; and
o the geographic distribution of the properties securing the
mortgage loans on a state-by-state basis.
If we are unable to provide the specific information described above at
the time a series of offered certificates is initially offered, we will
provide--
o more general information in the related prospectus supplement,
and
o specific information in a report which will be filed with the
SEC as part of a Current Report on Form 8-K within 15 days
following the issuance of those certificates.
If any mortgage loan, or group of related mortgage loans, included in
one of our trusts represents a material concentration of credit risk, we will
include in the related prospectus supplement financial statements or other
financial information on the related real property or properties.
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MORTGAGE-BACKED SECURITIES
The mortgage backed-securities underlying a series of offered
certificates may include:
o mortgage participations, mortgage pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that are not insured or guaranteed by any
governmental agency or instrumentality, or
o certificates issued and/or insured or guaranteed by Freddie
Mac, Fannie Mae, Ginnie Mae, Farmer Mac, or another federal or
state governmental agency or instrumentality.
In addition, each of those mortgage-backed securities will directly or
indirectly evidence an interest in, or be secured by a pledge of, multifamily
and/or commercial mortgage loans.
Each mortgage-backed security included in one of our trusts--
o will have been registered under the Securities Act of 1933, as
amended, or
o will be exempt from the registration requirements of that Act,
or
o will have been held for at least the holding period specified
in Rule 144(k) under that Act, or
o may otherwise be resold by us publicly without registration
under that Act.
We will describe in the related prospectus supplement the
characteristics of the mortgage-backed securities that we will include in any of
our trusts. In general, we will provide in the related prospectus supplement,
among other items, the following information on the particular mortgage-backed
securities included in one of our trusts:
o the initial and outstanding principal amount(s) and type of
the securities;
o the original and remaining term(s) to stated maturity of the
securities;
o the pass-through or bond rate(s) of the securities or the
formula for determining those rate(s);
o the payment characteristics of the securities;
o the identity of the issuer(s), servicer(s) and trustee(s) for
the securities;
o a description of the related credit support, if any;
o the type of mortgage loans underlying the securities;
o the circumstances under which the related underlying mortgage
loans, or the securities themselves, may be purchased prior to
maturity;
o the terms and conditions for substituting mortgage loans
backing the securities; and
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o the characteristics of any agreements or instruments providing
interest rate protection to the securities.
With respect to any mortgage-backed security included in one of our
trusts, we will provide in our reports filed under the Securities Exchange Act
of 1934, as amended, the same information regarding the security as is provided
by the issuer of the security in its own reports filed under that Act, if the
security was publicly offered, or in the reports the issuer of the security
provides to the related trustee, if the security was privately issued.
SUBSTITUTION, ACQUISITION AND REMOVAL OF MORTGAGE ASSETS
If so specified in the related prospectus supplement, we or another
specified person or entity may be permitted, at our or its option, but subject
to the conditions specified in that prospectus supplement, to acquire from the
related trust particular mortgage assets underlying a series of offered
certificates in exchange for:
o cash that would be applied to pay down the principal balances
of the certificates of that series; and/or
o other mortgage loans or mortgage-backed securities that--
1. conform to the description of mortgage assets in this
prospectus, and
2. satisfy the criteria set forth in the related
prospectus supplement.
In addition, if so specified in the related prospectus supplement, the
trustee may be authorized or required to apply collections on the related
mortgage assets to acquire new mortgage loans or mortgage-backed securities
that--
o conform to the description of mortgage assets in this
prospectus, and
o satisfy the criteria set forth in the related prospectus
supplement.
No replacement of mortgage assets or acquisition of new mortgage assets
will be permitted if it would result in a qualification, downgrade or withdrawal
of the then-current rating assigned by any rating agency to any class of
affected offered certificates.
UNDELIVERED MORTGAGE ASSETS
In general, the total outstanding principal balance of the mortgage
assets transferred by us to any particular trust will equal or exceed the
initial total outstanding principal balance of the related series of
certificates. In the event that the total outstanding principal balance of the
related mortgage assets initially delivered by us to the related trustee is less
than the initial total outstanding principal balance of any series of
certificates, we may deposit or arrange for the deposit of cash or liquid
investments on an interim basis with the related trustee to cover the shortfall.
For 90 days following the date of initial issuance of that series of
certificates, we will be entitled to obtain a release of the deposited cash or
investments if we deliver or arrange for delivery of a corresponding amount of
mortgage assets. If we fail, however, to deliver mortgage assets sufficient to
make up the entire shortfall, any of the cash or, following liquidation,
investments remaining on deposit with the related trustee will be used by the
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related trustee to pay down the total principal balance of the related series of
certificates, as described in the related prospectus supplement.
ACCOUNTS
The trust assets underlying a series of offered certificates will
include one or more accounts established and maintained on behalf of the
holders. All payments and collections received or advanced on the mortgage
assets and other trust assets will be deposited and held in those accounts. We
will identify and describe those accounts, and will further describe the
deposits to and withdrawals from those accounts, in the related prospectus
supplement.
CREDIT SUPPORT
GENERAL. The holders of any class of offered certificates may be the
beneficiaries of credit support designed to protect them partially or fully
against all or particular defaults and losses on the related mortgage assets.
The types of credit support that may benefit the holders of a class of offered
certificates include:
o the subordination or one or more other classes of certificates
of the same series;
o a letter of credit;
o a surety bond;
o an insurance policy;
o a guarantee;
o a credit derivative; and/or
o a reserve fund.
In the related prospectus supplement, we will describe the amount and
types of any credit support benefiting the holders of a class of offered
certificates.
ARRANGEMENTS PROVIDING REINVESTMENT, INTEREST RATE AND CURRENCY RELATED
PROTECTION
The trust assets for a series of offered certificates may include
guaranteed investment contracts in accordance with which moneys held in the
funds and accounts established for that series will be invested at a specified
rate. Those trust assets may also include:
o interest rate exchange agreements;
o interest rate cap agreements;
o interest rate floor agreements;
o currency exchange agreements; or
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o other agreements or arrangements designed to reduce the
effects of interest rate or currency exchange rate
fluctuations with respect to the related mortgage assets and
one or more classes of offered certificates.
In the related prospectus supplement, we will describe any agreements
or other arrangements designed to protect the holders of a class of offered
certificates against shortfalls resulting from movements or fluctuations in
interest rates or currency exchange rates. If applicable, we will also identify
any obligor under the agreement or other arrangement.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on your offered certificates will depend on--
o the price you paid for your offered certificates,
o the pass-through rate on your offered certificates,
o the amount and timing of payments on your offered
certificates.
The following discussion contemplates a trust established by us that
consists only of mortgage loans. If one of our trusts also includes a
mortgage-backed security, the payment terms of that security will soften or
enhance the effects that the characteristics and behavior of mortgage loans
backing that security can have on the yield to maturity and/or weighted average
life of a class of offered certificates. If one of our trusts includes a
mortgage-backed security, we will discuss in the related prospectus supplement
the effect, if any, that the security may have on the yield to maturity and
weighted average lives of the related offered certificates.
PASS-THROUGH RATE
A class of interest-bearing offered certificates may have a fixed,
variable or adjustable pass-through rate. We will specify in the related
prospectus supplement the pass-through rate for each class of interest-bearing
offered certificates or, if the pass-through rate is variable or adjustable, the
method of determining the pass-through rate.
PAYMENT DELAYS
There will be a delay between the date on which payments on the
underlying mortgage loans are due and the date on which those payments are
passed through to you and other investors. That delay will reduce the yield that
would otherwise be produced if those payments were passed through on your
offered certificates on the same date that they were due.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity on your offered certificates will be affected by
the rate of principal payments on the underlying mortgage loans and the
allocation of those principal payments to reduce the
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principal balance or notional amount of your offered certificates. The rate of
principal payments on those mortgage loans will be affected by the following:
o the amortization schedules of the mortgage loans, which may
change from time to time to reflect, among other things,
changes in mortgage interest rates or partial prepayments of
principal;
o the dates on which any balloon payments are due; and
the rate of principal prepayments on the mortgage loans, including voluntary
prepayments by borrowers and involuntary prepayments resulting from
liquidations, casualties or purchases of mortgage loans.
Because the rate of principal prepayments on the mortgage loans
underlying your offered certificates will depend on future events and a variety
of factors, we cannot give you any assurance as to that rate.
The extent to which the yield to maturity of your offered certificates
may vary from your anticipated yield will depend upon--
o whether you purchased your offered certificates at a discount
or premium and, if so, the extent of that discount or premium,
and
o when, and to what degree, payments of principal on the
underlying mortgage loans are applied or otherwise result in
the reduction of the principal balance or notional amount of
your offered certificates.
If you purchase your offered certificates at a discount, you should
consider the risk that a slower than anticipated rate of principal payments on
the underlying mortgage loans could result in an actual yield to you that is
lower than your anticipated yield. If you purchase your offered certificates at
a premium, you should consider the risk that a faster than anticipated rate of
principal payments on the underlying mortgage loans could result in an actual
yield to you that is lower than your anticipated yield.
If your offered certificates entitle you to payments of interest, with
disproportionate, nominal or no payments of principal, you should consider that
your yield will be extremely sensitive to prepayments on the underlying mortgage
loans and, under some prepayment scenarios, may be negative.
If a class of offered certificates accrues interest on a notional
amount, that notional amount will, in general, either--
o be based on the principal balances of some or all of the
mortgage assets in the related trust, or
o equal the total principal balance of one or more of the other
classes of certificates of the same series.
Accordingly, the yield on that class of certificates will be inversely related
to, as applicable, the rate at which--
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o payments and other collections of principal are received on
the mortgage assets referred to in the first bullet point of
the prior sentence, or
o payments are made in reduction of the total principal balance
of the class or classes of certificates referred to in the
second bullet point of the prior sentence.
The extent of prepayments of principal of the mortgage loans underlying
your offered certificates may be affected by a number of factors, including:
o the availability of mortgage credit;
o the relative economic vitality of the area in which the
related real properties are located;
o the quality of management of the related real properties;
o the servicing of the mortgage loans;
o possible changes in tax laws; and
o other opportunities for investment.
In general, those factors that increase--
o the attractiveness of selling or refinancing a commercial or
multifamily property, or
o the likelihood of default under a commercial or multifamily
mortgage loan,
would be expected to cause the rate of prepayment to accelerate. In contrast,
those factors having an opposite effect would be expected to cause the rate of
prepayment to slow.
The rate of principal payments on the mortgage loans underlying your
offered certificates may also be affected by the existence and enforceability of
prepayment restrictions, such as--
o prepayment lock-out periods, and
o requirements that voluntary principal prepayments be
accompanied by prepayment premiums, fees or charges.
If enforceable, those provisions could constitute either an absolute
prohibition, in the case of a prepayment lock-out period, or a disincentive, in
the case of a prepayment premium, fee or charge, to a borrower's voluntarily
prepaying its mortgage loan, thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a comparable
type, term and risk level. As prevailing market interest rates decline, a
borrower may have an increased incentive to refinance its mortgage loan. Even in
the case of adjustable rate mortgage loans, as prevailing market interest rates
decline, the related borrowers may have an increased incentive to refinance for
the following purposes:
o to convert to a fixed rate loan and thereby lock in that rate,
or
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o to take advantage of a different index, margin or rate cap or
floor on another adjustable rate mortgage loan.
Subject to prevailing market interest rates and economic conditions
generally, a borrower may sell a real property in order to--
o realize its equity in the property,
o meet cash flow needs or
o make other investments.
Additionally, some borrowers may be motivated by federal and state tax
laws, which are subject to change, to sell their properties prior to the
exhaustion of tax depreciation benefits.
We make no representation as to--
o the particular factors that will affect the prepayment of the
mortgage loans underlying any series of offered certificates,
o the relative importance of those factors
o the percentage of the principal balance of those mortgage
loans that will be paid as of any date, or
o the overall rate of prepayment on those mortgage loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the mortgage loans
underlying any series of offered certificates will affect the ultimate maturity
and the weighted average life of one or more classes of those certificates. In
general, weighted average life refers to the average amount of time that will
elapse from the date of issuance of an instrument until each dollar allocable as
principal of that instrument is repaid to the investor.
The weighted average life and maturity of a class of offered
certificates will be influenced by the rate at which principal on the underlying
mortgage loans is paid to that class, whether in the form of--
o scheduled amortization or
o prepayments, including--
1. voluntary prepayments by borrowers, and
2. involuntary prepayments resulting from liquidations,
casualties or condemnations and purchases of mortgage
loans out of the related trust.
Prepayment rates on loans are commonly measured relative to a
prepayment standard or model, such as the CPR prepayment model or the SPA
prepayment model. CPR represents an assumed constant rate of prepayment each
month, expressed as an annual percentage, relative to the then
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outstanding principal balance of a pool of mortgage loans for the life of those
loans. SPA represents an assumed variable rate of prepayment each month,
expressed as an annual percentage, relative to the then outstanding principal
balance of a pool of mortgage loans, with different prepayment assumptions often
expressed as percentages of SPA. For example, a prepayment assumption of 100% of
SPA assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of those loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the 30th month.
Beginning in the 30th month, and in each month thereafter during the life of the
loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither CPR nor SPA nor any other prepayment model or assumption is a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. It is unlikely that the prepayment
experience of the mortgage loans underlying your offered certificates will
conform to any particular level of CPR or SPA.
In the prospectus supplement for a series of offered certificates, we
will include tables, if applicable, setting forth--
o the projected weighted average life of each class of those
offered certificates with principal balances, and
o the percentage of the initial total principal balance of each
class of those offered certificates that would be outstanding
on specified dates,
based on the assumptions stated in that prospectus supplement, including
assumptions regarding prepayments on the underlying mortgage loans. Those tables
and assumptions illustrate the sensitivity of the weighted average lives of
those offered certificates to various assumed prepayment rates and are not
intended to predict, or to provide information that will enable you to predict,
the actual weighted average lives of your offered certificates.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
BALLOON PAYMENTS; EXTENSIONS OF MATURITY. Some or all of the mortgage
loans underlying a series of offered certificates may require that balloon
payments be made at maturity. The ability of a borrower to make a balloon
payment typically will depend upon its ability either--
o to refinance the loan, or
o to sell the related real property.
If a borrower is unable to refinance or sell the related real property, there is
a possibility that the borrower may default on the mortgage loan or that the
maturity of the mortgage loan may be extended in connection with a workout. If a
borrower defaults, recovery of proceeds may be delayed by--
o the bankruptcy of the borrower, or
o adverse economic conditions in the market where the related
real property is located.
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In order to minimize losses on defaulted mortgage loans, the related
master servicer or special servicer may be authorized within prescribed limits
to modify mortgage loans that are in default or as to which a payment default is
reasonably foreseeable. Any defaulted balloon payment or modification that
extends the maturity of a mortgage loan may delay payments of principal on your
offered certificates and extend the weighted average life of your offered
certificates.
NEGATIVE AMORTIZATION. The weighted average life of a class of offered
certificates can be affected by mortgage loans that permit negative amortization
to occur. Those are the mortgage loans that provide for the current payment of
interest calculated at a rate lower than the rate at which interest accrues on
the mortgage loan, with the unpaid portion of that interest being added to the
related principal balance. Negative amortization most commonly occurs with
respect to an adjustable rate mortgage loan that:
o limits the amount by which its scheduled payment may adjust in
response to a change in its mortgage interest rate;
o provides that its scheduled payment will adjust less
frequently than its mortgage interest rate; or
provides for constant scheduled payments regardless of adjustments to its
mortgage interest rate.
Negative amortization on one or more mortgage loans in any of our
trusts may result in negative amortization on a related class of offered
certificates. We will describe in the related prospectus supplement, if
applicable, the manner in which negative amortization with respect to the
underlying mortgage loans is allocated among the respective classes of a series
of offered certificates.
The portion of any mortgage loan negative amortization allocated to a
class of offered certificates may result in a deferral of some or all of the
interest payable on those certificates. Deferred interest may be added to the
total principal balance of a class of offered certificates. In addition, an
adjustable rate mortgage loan that permits negative amortization would be
expected during a period of increasing interest rates to amortize, if at all, at
a slower rate than if interest rates were declining or were remaining constant.
This slower rate of mortgage loan amortization would be reflected in a slower
rate of amortization for one or more classes of certificates of the related
series. Accordingly, there may be an increase in the weighted average lives of
those classes of certificates to which any mortgage loan negative amortization
would be allocated or that would bear the effects of a slower rate of
amortization of the underlying mortgage loans.
The extent to which the yield on your offered certificates may be
affected by any negative amortization on the underlying mortgage loans will
depend, in part, upon whether you purchase your offered certificates at a
premium or a discount.
During a period of declining interest rates, the scheduled payment on
an adjustable rate mortgage loan may exceed the amount necessary to amortize the
loan fully over its remaining amortization schedule and pay interest at the then
applicable mortgage interest rate. The result is the accelerated amortization of
the mortgage loan. The acceleration in amortization of a mortgage loan will
shorten the weighted average lives of those classes of certificates that entitle
their holders to a portion of the principal payments on the mortgage loan.
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FORECLOSURES AND PAYMENT PLANS. The weighted average life of and yield
on your offered certificates will be affected by--
o the number of foreclosures with respect to the underlying
mortgage loans; and
o the principal amount of the foreclosed mortgage loans in
relation to the principal amount of those mortgage loans that
are repaid in accordance with their terms.
Servicing decisions made with respect to the underlying mortgage loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of mortgage loans in bankruptcy proceedings or otherwise, may also
affect the payment patterns of particular mortgage loans and, as a result, the
weighted average life of and yield on your offered certificates.
LOSSES AND SHORTFALLS ON THE MORTGAGE ASSETS. The yield on your offered
certificates will directly depend on the extent to which you are required to
bear the effects of any losses or shortfalls in collections on the underlying
mortgage loans and the timing of those losses and shortfalls. In general, the
earlier that you bear any loss or shortfall, the greater will be the negative
effect on the yield of your offered certificates.
The amount of any losses or shortfalls in collections on the mortgage
assets in any of our trusts will, to the extent not covered or offset by draws
on any reserve fund or under any instrument of credit support, be allocated
among the various classes of certificates of the related series in the priority
and manner, and subject to the limitations, that we specify in the related
prospectus supplement. As described in the related prospectus supplement, those
allocations may be effected by the following:
o a reduction in the entitlements to interest and/or the total
principal balances of one or more classes of certificates;
and/or
o the establishment of a priority of payments among classes of
certificates.
If you purchase subordinated certificates, the yield to maturity on
those certificates may be extremely sensitive to losses and shortfalls in
collections on the underlying mortgage loans.
ADDITIONAL CERTIFICATE AMORTIZATION. If your offered certificates have
a principal balance, then they entitle you to a specified portion of the
principal payments received on the underlying mortgage loans. They may also
entitle you to payments of principal from the following sources:
o amounts attributable to interest accrued but not currently
payable on one or more other classes of certificates of the
applicable series;
o interest received or advanced on the underlying mortgage
assets that is in excess of the interest currently accrued on
the certificates of the applicable series;
o prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the underlying
mortgage assets that do not constitute interest or principal;
or
o any other amounts described in the related prospectus
supplement.
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The amortization of your offered certificates out of the sources
described in the prior paragraph would shorten their weighted average life and,
if your offered certificates were purchased at a premium, reduce their yield to
maturity.
SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
We were incorporated in Delaware on January 27, 1987. We were
organized, among other things, for the purpose of serving as a private secondary
mortgage market conduit.
We are an indirect, wholly-owned subsidiary of Salomon Smith Barney
Holdings Inc. and an affiliate of Salomon Smith Barney Inc. Our principal
executive offices are located at 388 Greenwich Street, New York, New York 10013.
Our telephone number is 212-816-6000.
We do not have, and do not expect in the future to have, any
significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of offered certificates, together with any non-offered
certificates of the same series, will represent the entire beneficial ownership
interest in a trust established by us. Each series of offered certificates will
consist of one or more classes. Any non-offered certificates of that series will
likewise consist of one or more classes.
A series of certificates consists of all those certificates that--
o have the same series designation;
o were issued under the same governing documents; and
o represent beneficial ownership interests in the same trust.
A class of certificates consists of all those certificates of a
particular series that--
o have the same class designation; and
o have the same payment terms.
The respective classes of offered and non-offered certificates of any
series may have a variety of payment terms. An offered certificate may entitle
the holder to receive:
o a stated principal amount, which will be represented by its
principal balance;
o interest on a principal balance or notional amount, at a
fixed, variable or adjustable pass-through rate;
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o specified, fixed or variable portions of the interest,
principal or other amounts received on the related mortgage
assets;
o payments of principal, with disproportionate, nominal or no
payments of interest;
o payments of interest, with disproportionate, nominal or no
payments of principal;
o payments of interest or principal that commence only as of a
specified date or only after the occurrence of specified
events, such as the payment in full of the interest and
principal outstanding on one or more other classes of
certificates of the same series;
o payments of principal to be made, from time to time or for
designated periods, at a rate that is--
1. faster and, in some cases, substantially faster, or
2. slower and, in some cases, substantially slower,
than the rate at which payments or other collections of
principal are received on the related mortgage assets;
o payments of principal to be made, subject to available funds,
based on a specified principal payment schedule or other
methodology; or
o payments of all or part of the prepayment or repayment
premiums, fees and charges, equity participations payments or
other similar items received on the related mortgage assets.
Any class of offered certificates may be senior or subordinate to one
or more other classes of certificates of the same series, including a
non-offered class of certificates of that series, for purposes of some or all
payments and/or allocations of losses or other shortfalls.
A class of offered certificates may have two or more component parts,
each having characteristics that are described in this prospectus as being
attributable to separate and distinct classes. For example, a class of offered
certificates may have a total principal balance on which it accrues interest at
a fixed, variable or adjustable rate. That class of offered certificates may
also accrue interest on a total notional amount at a different fixed, variable
or adjustable rate. In addition, a class of offered certificates may accrue
interest on one portion of its total principal balance or notional amount at one
fixed, variable or adjustable rate and on another portion of its total principal
balance or notional amount at a different fixed, variable or adjustable rate.
Each class of offered certificates will be issued in minimum
denominations corresponding to specified principal balances, notional amounts or
percentage interests, as described in the related prospectus supplement. A class
of offered certificates may be issued in fully registered, definitive form and
evidenced by physical certificates or may be issued in book-entry form through
the facilities of The Depository Trust Company. Offered certificates held in
fully registered, definitive form may be transferred or exchanged, subject to
any restrictions on transfer described in the related prospectus supplement, at
the location specified in the related prospectus supplement, without the payment
of any service charges, except for any tax or other governmental charge payable
in connection with the transfer
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or exchange. Interests in offered certificates held in book-entry form will be
transferred on the book-entry records of DTC and its participating
organizations. If we so specify in the related prospectus supplement, we will
arrange for clearance and settlement through Clearstream Banking, societe
anonyme or the Euroclear System, for so long as they are participants in DTC.
PAYMENTS ON THE CERTIFICATES
GENERAL. Payments on a series of offered certificates may occur
monthly, bi-monthly, quarterly, semi-annually, annually or at any other
specified interval. In the prospectus supplement for each series of offered
certificates, we will identify:
o the periodic payment date for that series, and
o the record date as of which certificateholders entitled to
payments on any particular payment date will be established.
All payments with respect to a class of offered certificates on any
payment date will be allocated PRO RATA among the outstanding certificates of
that class in proportion to the respective principal balances, notional amounts
or percentage interests, as the case may be, of those certificates. Payments on
an offered certificate will be made to the holder entitled thereto either--
o by wire transfer of immediately available funds to the account
of that holder at a bank or similar entity, provided that the
holder has furnished the party making the payments with wiring
instructions no later than the applicable record date and has
satisfied any other conditions specified in the related
prospectus supplement, or
o by check mailed to the address of that holder as it appears in
the certificate register, in all other cases.
In general, the final payment on any offered certificate will be made
only upon presentation and surrender of that certificate at the location
specified to the holder in notice of final payment.
PAYMENTS OF INTEREST. In the case of each class of interest-bearing
offered certificates, interest will accrue from time to time, at the applicable
pass-through rate and in accordance with the applicable interest accrual method,
on the total outstanding principal balance or notional amount of that class.
The pass-through rate for a class of interest-bearing offered
certificates may be fixed, variable or adjustable. We will specify in the
related prospectus supplement the pass-through rate for each class of
interest-bearing offered certificates or, in the case of a variable or
adjustable pass-through rate, the method for determining that pass-through rate.
Interest may accrue with respect to any offered certificate on the
basis of:
o a 360-day year consisting of 12 30-day months,
o the actual number of days elapsed during each relevant period
in a year assumed to consist of 360 days,
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o the actual number of days elapsed during each relevant period
in a normal calendar year, or
o any other method identified in the related prospectus
supplement.
We will identify the interest accrual method for each class of offered
certificates in the related prospectus supplement.
Subject to available funds and any adjustments to interest entitlements
described in the related prospectus supplement, accrued interest with respect to
each class of interest-bearing offered certificates will normally be payable on
each payment date. However, in the case of some classes of interest-bearing
offered certificates, payments of accrued interest will only begin on a
particular payment date or under the circumstances described in the related
prospectus supplement. Prior to that time, the amount of accrued interest
otherwise payable on that class will be added to its total principal balance on
each date or otherwise deferred as described in the related prospectus
supplement.
If a class of offered certificates accrues interest on a total notional
amount, that total notional amount, in general, will be either:
o based on the principal balances of some or all of the related
mortgage assets; or
o equal to the total principal balances of one or more other
classes of certificates of the same series.
Reference to the notional amount of any certificate is solely for
convenience in making calculations of interest and does not represent the right
to receive any payments of principal.
We will describe in the related prospectus supplement the extent to
which the amount of accrued interest that is payable on, or that may be added to
the total principal balance of, a class of interest-bearing offered certificates
may be reduced as a result of any contingencies, including shortfalls in
interest collections due to prepayments, delinquencies, losses and deferred
interest on the related mortgage assets.
PAYMENTS OF PRINCIPAL. An offered certificate may or may not have a
principal balance. If it does, that principal balance outstanding from time to
time will represent the maximum amount that the holder of that certificate will
be entitled to receive as principal out of the future cash flow on the related
mortgage assets and the other related trust assets.
The total outstanding principal balance of any class of offered
certificates will be reduced by--
o payments of principal actually made to the holders of that
class, and
o if and to the extent that we so specify in the related
prospectus supplement, losses of principal on the related
mortgage assets that are allocated to or are required to be
borne by that class.
A class of interest-bearing offered certificates may provide that
payments of accrued interest will only begin on a particular payment date or
under the circumstances described in the related prospectus
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supplement. If so, the total outstanding principal balance of that class may be
increased by the amount of any interest accrued, but not currently payable, on
that class.
We will describe in the related prospectus supplement any other
adjustments to the total outstanding principal balance of a class of offered
certificates.
Unless we so state in the related prospectus supplement, the initial
total principal balance of all classes of a series will not be greater than the
total outstanding principal balance of the related mortgage assets transferred
by us to the related trust. We will specify the expected initial total principal
balance of each class of offered certificates in the related prospectus
supplement.
The payments of principal to be made on a series of offered
certificates from time to time will, in general, be a function of the payments,
other collections and advances received or made with respect to the related
prospectus supplement. Payments of principal on a series of offered certificates
may also be made from the following sources:
o amounts attributable to interest accrued but not currently
payable on one or more other classes of certificates of the
applicable series;
o interest received or advanced on the underlying mortgage
assets that is in excess of the interest currently accrued on
the certificates of the applicable series;
o prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the underlying
mortgage assets that do not constitute interest or principal;
or
o any other amounts described in the related prospectus
supplement.
We will describe in the related prospectus supplement the principal
entitlement of each class of offered certificates on each payment date.
ALLOCATION OF LOSSES AND SHORTFALLS
If and to the extent that any losses or shortfalls in collections on
the mortgage assets in any of our trusts are not covered or offset by
delinquency advances or draws on any reserve fund or under any instrument of
credit support, they will be allocated among the various classes of certificates
of the related series in the priority and manner, and subject to the
limitations, specified in the related prospectus supplement. As described in the
related prospectus supplement, the allocations may be effected as follows:
o by reducing the entitlements to interest and/or the total
principal balances of one or more of those classes; and/or
o by establishing a priority of payments among those classes.
See "Description of Credit Support."
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ADVANCES
If any trust established by us includes mortgage loans, then as and to
the extent described in the related prospectus supplement, the related master
servicer, the related special servicer, the related trustee, any related
provider of credit support and/or any other specified person may be obligated to
make, or may have the option of making, advances with respect to those mortgage
loans to cover--
o delinquent payments of principal and/or interest, other than
balloon payments,
o property protection expenses,
o other servicing expenses, or
o any other items specified in the related prospectus
supplement.
If there are any limitations with respect to a party's advancing
obligations, we will discuss those limitations in the related prospectus
supplement.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to certificateholders. Advances are not a guarantee
against losses. The advancing party will be entitled to recover all of its
advances out of--
o subsequent recoveries on the related mortgage loans, including
amounts drawn under any fund or instrument constituting credit
support, and
o any other specific sources identified in the related
prospectus supplement.
If and to the extent that we so specify in the related prospectus
supplement, any entity making advances will be entitled to receive interest on
some or all of those advances for a specified period during which they are
outstanding at the rate specified in that prospectus supplement. That entity may
be entitled to payment of interest on its outstanding advances--
o periodically from general collections on the mortgage assets
in the related trust, prior to any payment to the related
series of certificateholders, or
o at any other times and from any other sources as we may
describe in the related prospectus supplement.
If any trust established by us includes mortgage-backed securities, we
will discuss in the related prospectus supplement any comparable advancing
obligations with respect to those securities or the mortgage loans that back
them.
REPORTS TO CERTIFICATEHOLDERS
On or about each payment date, the related master servicer, manager or
trustee will forward to each offered certificateholder a statement substantially
in the form, or specifying the information, set forth in the related prospectus
supplement. In general, that statement will include information regarding--
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o the payments made on that payment date with respect to the
applicable class of offered certificates, and
o the recent performance of the mortgage assets.
Within a reasonable period of time after the end of each calendar year,
the related master servicer, manager or trustee, as the case may be, will be
required to furnish to each person who at any time during the calendar year was
a holder of an offered certificate a statement containing information regarding
the principal, interest and other amounts paid on the applicable class of
offered certificates, aggregated for--
o that calendar year, or
o the applicable portion of that calendar year during which the
person was a certificateholder.
The obligation to provide that annual statement will be deemed to have been
satisfied by the related master servicer, manager or trustee, as the case may
be, to the extent that substantially comparable information is provided in
accordance with any requirements of the Internal Revenue Code of 1986.
If one of our trusts includes mortgage-backed securities, the ability
of the related master servicer, manager or trustee, as the case may be, to
include in any payment date statement information regarding the mortgage loans
that back those securities will depend on comparable reports being received with
respect to them.
VOTING RIGHTS
Voting rights will be allocated among the respective classes of offered
and non-offered certificates of each series in the manner described in the
related prospectus supplement. Certificateholders will generally not have a
right to vote, except--
o with respect to those amendments to the governing documents
described under "Description of the Governing
Documents--Amendment", or
o as otherwise specified in this prospectus or in the related
prospectus supplement.
As and to the extent described in the related prospectus supplement,
the certificateholders entitled to a specified amount of the voting rights for a
particular series will have the right to act as a group to remove or replace the
related trustee, master servicer, special servicer or manager. In general, that
removal or replacement must be for cause. We will identify exceptions in the
related prospectus supplement.
TERMINATION
The trust for each series of offered certificates will terminate and
cease to exist following:
o the final payment or other liquidation of the last mortgage
asset in that trust; and
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o the payment, or provision for payment, to the
certificateholders of that series of all amounts required to
be paid to them.
Written notice of termination of a trust will be given to each affected
certificateholder. The final payment will be made only upon presentation and
surrender of the certificates of the related series at the location to be
specified in the notice of termination.
If we so specify in the related prospectus supplement, one or more
designated parties will be entitled to purchase all of the mortgage assets
underlying a series of offered certificates, thereby effecting early retirement
of the certificates and early termination of the related trust. We will describe
in the related prospectus supplement the circumstances under which that purchase
may occur.
If we so specify in the related prospectus supplement, one or more
certificateholders will be entitled to exchange all of the certificates of a
particular series for all of the mortgage assets underlying that series, thereby
effecting early termination of the related trust. We will describe in the
related prospectus supplement the circumstances under which that exchange may
occur.
In addition, if we so specify in the related prospectus supplement, on
a specified date or upon the reduction of the total principal balance of a
specified class or classes of certificates by a specified percentage or amount,
a party designated in the related prospectus supplement may be authorized or
required to solicit bids for the purchase of all the mortgage assets of the
related trust or of a sufficient portion of the mortgage assets to retire that
class or those classes of certificates. The solicitation of bids must be
conducted in a commercially reasonable manner, and assets will, in general, be
sold at their fair market value. If the fair market value of the mortgage assets
being sold is less than their unpaid balance, then the certificateholders of one
or more classes of certificates may receive an amount less than the total
principal balance of, and accrued and unpaid interest on, their certificates.
BOOK-ENTRY REGISTRATION
GENERAL. Any class of offered certificates may be issued in book-entry
form through the facilities of DTC. If so, that class will be represented by one
or more global certificates registered in the name of DTC or its nominee. If we
so specify in the related prospectus supplement, we will arrange for clearance
and settlement through the Euroclear System or Clearstream Banking, societe
anonyme, for so long as they are participants in DTC.
DTC, EUROCLEAR AND CLEARSTREAM. DTC is:
o a limited-purpose trust company organized under the New York
Banking Law,
o a "banking corporation" within the meaning of the New York
Banking Law,
o a member of the Federal Reserve System,
o a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and
o a "clearing agency" registered under the provisions of Section
17A of the Securities Exchange Act of 1934, as amended.
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DTC was created to hold securities for participants in the DTC system
and to facilitate the clearance and settlement of securities transactions
between those participants through electronic computerized book-entry changes in
their accounts, thereby eliminating the need for physical movement of securities
certificates. Organizations that maintain accounts with DTC include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. DTC is owned by a number of its participating
organizations and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with one of the organizations that maintains an account
with DTC. The rules applicable to DTC and its participating organizations are on
file with the SEC.
It is our understanding that Clearstream was incorporated in 1970 as
"Cedel S.A.," a company with limited liability under the laws of Luxembourg.
Cedel S.A. subsequently changed its name to Cedelbank. On January 10, 2000,
Cedelbank's parent company, Cedel International, societe anonyme merged its
clearing, settlement and custody business with that of Deutsche Borse Clearing
AG. The merger involved the transfer by Cedel International of substantially all
of its assets and liabilities, including its shares in Cedelbank, to a new
Luxembourg company, New Cedel International, societe anonyme. New Cedel
International is 50% owned by Cedel International and 50% by Deutsche Borse AG,
the parent of Deutsche Borse Clearing AG. The shareholders of these two entities
are recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations. On January 18, 2000, Cedelbank was renamed Clearstream Banking,
societe anonyme. Clearstream holds securities for its member organizations and
facilitates the clearance and settlement of securities transactions between its
member organizations through electronic book-entry changes in accounts of those
organizations, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream in any of 36
currencies, including United States dollars. Clearstream provides to its member
organizations, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream interfaces with domestic securities markets
in over 30 countries through established depository and custodial relationships.
Clearstream is registered as a bank in Luxembourg. It is subject to regulation
by the Commission de Surveillance du Secteur Financier, which supervises
Luxembourg banks. Clearstream's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream's U.S. customers are limited to
securities brokers and dealers, and banks. Currently, Clearstream has
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada and the United States. Indirect access to Clearstream
is available to other institutions that clear through or maintain a custodial
relationship with an account holder of Clearstream. Clearstream and Euroclear
have established an electronic bridge between their two systems across which
their respective participants may settle trades with each other.
It is our understanding that Euroclear was founded in December 1968 to
hold securities for its member organizations and to clear and settle
transactions between its member organizations 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. Over 100,000 different securities are accepted for
settlement through Euroclear, the majority of which are domestic securities from
over 30 markets. Transactions may be settled in Euroclear in any of over 35
currencies, including United States dollars. The Euroclear system includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries
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generally similar to the arrangements for cross-market transfers with DTC
described below in this "--Book-Entry Registration" section. Euroclear is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office,
under contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation. 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 ECS. ECS establishes policy for the Euroclear
system on behalf of the more than 120 member organizations of Euroclear. Those
member organizations include banks, including central banks, securities brokers
and dealers and other professional financial intermediaries. Indirect access to
the Euroclear system is also available to other firms that clear through or
maintain a custodial relationship with a member organization of Euroclear,
either directly or indirectly. Euroclear and Clearstream have established an
electronic bridge between their two systems across which their respective
participants may settle trades with each other.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. 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 Euroclear Terms and Conditions. The Euroclear Terms
and Conditions govern transfers of securities and cash within the Euroclear
system, withdrawal of securities and cash from the Euroclear system, and
receipts of payments with respect to securities in the Euroclear system. All
securities in the Euroclear system are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Euroclear Terms and Conditions only on
behalf of member organizations of Euroclear and has no record of or relationship
with persons holding through those member organizations.
The information in this prospectus concerning DTC, Euroclear and
Clearstream, and their book-entry systems, has been obtained from sources
believed to be reliable, but we do not take any responsibility for the accuracy
or completeness of that information.
HOLDING AND TRANSFERRING BOOK-ENTRY CERTIFICATES. Purchases of
book-entry certificates under the DTC system must be made by or through, and
will be recorded on the records of, the Financial Intermediary that maintains
the beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of those certificates will be recorded on the records
of DTC or, alternatively, if the Financial Intermediary does not maintain an
account with DTC, on the records of a participating firm that acts as agent for
the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC. A beneficial owner of book-entry certificates must rely on the
foregoing procedures to evidence its beneficial ownership of those certificates.
DTC has no knowledge of the actual beneficial owners of the book-entry
certificates. DTC's records reflect only the identity of the direct participants
to whose accounts those certificates are credited, which may or may not be the
actual beneficial owners. The participants in the DTC system will remain
responsible for keeping account of their holdings on behalf of their customers.
Transfers between participants in the DTC system will be effected in
the ordinary manner in accordance with DTC's rules and will be settled in
same-day funds. Transfers between direct account holders at Euroclear and
Clearstream, or between persons or entities participating indirectly in
Euroclear
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or Clearstream, will be effected in the ordinary manner in accordance with their
respective procedures and in accordance with DTC's rules.
Cross-market transfers between direct participants in DTC, on the one
hand, and member organizations at Euroclear or Clearstream, on the other, will
be effected through DTC in accordance with DTC's rules and the rules of
Euroclear or Clearstream, as applicable. These cross-market transactions will
require, among other things, delivery of instructions by the applicable member
organization to Euroclear or Clearstream, as the case may be, in accordance with
the rules and procedures and within deadlines, Brussels time, established in
Euroclear or Clearstream, as the case may be. If the transaction complies with
all relevant requirements, Euroclear or Clearstream, as the case may be, will
then deliver instructions to its depositary to take action to effect final
settlement on its behalf.
Because of time-zone differences, the securities account of a member
organization of Euroclear or Clearstream purchasing an interest in a global
certificate from a DTC participant that is not a member organization, will be
credited during the securities settlement processing day, which must be a
business day for Euroclear or Clearstream, as the case may be, immediately
following the DTC settlement date. Transactions in interests in a book-entry
certificate settled during any securities settlement processing day will be
reported to the relevant member organization of Euroclear or Clearstream on the
same day. Cash received in Euroclear or Clearstream as a result of sales of
interests in a book-entry certificate by or through a member organization of
Euroclear or Clearstream, as the case may be, to a DTC participant that is not a
member organization will be received with value on the DTC settlement date, but
will not be available in the relevant Euroclear or Clearstream cash account
until the business day following settlement in DTC. The related prospectus
supplement will contain additional information regarding clearance and
settlement procedures for the book-entry certificates and with respect to tax
documentation procedures relating to the book-entry certificates.
Conveyance of notices and other communications by DTC to DTC
participants, and by DTC participants to Financial Intermediaries and beneficial
owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Payments on the book-entry certificates will be made to DTC. DTC's
practice is to credit DTC participants' accounts on the related payment date in
accordance with their respective holdings shown on DTC's records, unless DTC has
reason to believe that it will not receive payment on that date. Disbursement of
those payments by DTC participants to Financial Intermediaries and beneficial
owners will be--
o governed by standing instructions and customary practices, as
is the case with securities held for the accounts of customers
in bearer form or registered in street name, and
o the sole responsibility of each of those DTC participants,
subject to any statutory or regulatory requirements in effect
from time to time.
Under a book-entry system, beneficial owners may receive payments after
the related payment date.
The only "certificateholder" of book-entry certificates will be DTC or
its nominee. Parties to the governing documents for any series of offered
certificates need not recognize beneficial owners of book-entry certificates as
"certificateholders." The beneficial owners of book-entry certificates will be
permitted to exercise the rights of "certificateholders" only indirectly through
the DTC participants, who
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in turn will exercise their rights through DTC. We have been informed that DTC
will take action permitted to be taken by a "certificateholder" only at the
direction of one or more DTC participants. DTC may take conflicting actions with
respect to the book-entry certificates to the extent that those actions are
taken on behalf of Financial Intermediaries whose holdings include those
certificates.
Because DTC can act only on behalf of DTC participants, who in turn act
on behalf of Financial Intermediaries and beneficial owners of the applicable
book-entry securities, the ability of a beneficial owner to pledge its interest
in a class of book-entry certificates to persons or entities that do not
participate in the DTC system, or otherwise to take actions with respect to its
interest in a class of book-entry certificates, may be limited due to the lack
of a physical certificate evidencing that interest.
ISSUANCE OF DEFINITIVE CERTIFICATES. Unless we specify otherwise in the
related prospectus supplement, beneficial owners of affected offered
certificates initially issued in book-entry form will not be able to obtain
physical certificates that represent those offered certificates, unless:
o we advise the related trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to those offered certificates and we
are unable to locate a qualified successor; or
o we elect, at our option, to terminate the book-entry system
through DTC with respect to those offered certificates.
Upon the occurrence of either of the two events described in the prior
paragraph, DTC will be required to notify all DTC participants of the
availability through DTC of physical certificates with respect to the affected
offered certificates. Upon surrender by DTC of the certificate or certificates
representing a class of book-entry offered certificates, together with
instructions for registration, the related trustee or other designated party
will be required to issue to the beneficial owners identified in those
instructions physical certificates representing those offered certificates.
DESCRIPTION OF THE GOVERNING DOCUMENTS
GENERAL
The "Governing Document" for purposes of issuing the offered
certificates of each series will be a pooling and servicing agreement or other
similar agreement or collection of agreements. In general, the parties to the
Governing Document for a series of offered certificates will include us, a
trustee, a master servicer and a special servicer. However, if the related trust
assets include mortgage-backed securities, the Governing Document may include a
manager as a party, but may not include a master servicer, special servicer or
other servicer as a party. We will identify in the related prospectus supplement
the parties to the Governing Document for a series of offered certificates.
If we so specify in the related prospectus supplement, a party from
whom we acquire mortgage assets or one of its affiliates may perform the
functions of master servicer, special servicer or manager for the trust to which
we transfer those assets. If we so specify in the related prospectus supplement,
the same person or entity may act as both master servicer and special servicer
for one of our trusts.
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Any party to the Governing Document for a series of offered
certificates, or any of its affiliates, may own certificates issued thereunder.
However, except in limited circumstances, including with respect to required
consents to amendments to the Governing Document for a series of offered
certificates, certificates that are held by the related master servicer, special
servicer or manager will not be allocated voting rights.
A form of a pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part.
However, the provisions of the Governing Document for each series of offered
certificates will vary depending upon the nature of the certificates to be
issued thereunder and the nature of the related trust assets. The following
summaries describe select provisions that may appear in the Governing Document
for each series of offered certificates. The prospectus supplement for each
series of offered certificates will provide material additional information
regarding the Governing Document for that series. The summaries in this
prospectus do not purport to be complete, and you should refer to the provisions
of the Governing Document for your offered certificates and, further, to the
description of those provisions in the related prospectus supplement. We will
provide a copy of the Governing Document, exclusive of exhibits, that relates to
your offered certificates, without charge, upon written request addressed to our
principal executive offices specified under "Salomon Brothers Mortgage
Securities VII, Inc."
ASSIGNMENT OF MORTGAGE ASSETS
At the time of initial issuance of any series of offered certificates,
we will assign or cause to be assigned to the designated trustee the mortgage
assets and any other assets to be included in the related trust. We will specify
in the related prospectus all material documents to be delivered, and all other
material actions to be taken, by us or any prior holder of the related mortgage
assets in connection with that assignment. We will also specify in the related
prospectus supplement any remedies available to the related certificateholders,
or the related trustee on their behalf, in the event that any of those material
documents are not delivered or any of those other material actions are not taken
as required. Concurrently with that assignment, the related trustee will deliver
to us or our designee the certificates of that series in exchange for the
mortgage assets and the other assets to be included in the related trust.
Each mortgage asset included in one of our trusts will be identified in
a schedule appearing as an exhibit to the related Governing Document. That
schedule generally will include detailed information about each mortgage asset
transferred to the related trust, including:
1. in the case of a mortgage loan--
2. the address of the related real property and the type of that
property,
3. the mortgage interest rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap
information,
4. the remaining term to maturity,
5. the remaining amortization term, and
6. the outstanding principal balance; and
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7. in the case of a mortgage-backed security, the outstanding
principal balance and the pass-through rate or coupon rate.
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO MORTGAGE ASSETS
Unless we state otherwise in the prospectus supplement for any series
of offered certificates, we will, with respect to each mortgage asset in the
related trust, make or assign, or cause to be made or assigned, a limited set of
representations and warranties covering, by way of example:
o the accuracy of the information set forth for each mortgage
asset on the schedule of mortgage assets appearing as an
exhibit to the Governing Document for that series;
o the warranting party's title to each mortgage asset and the
authority of the warranting party to sell that mortgage asset;
and
o in the case of a mortgage loan--
1. the enforceability of the related mortgage note and
mortgage,
2. the existence of title insurance insuring the lien
priority of the related mortgage, and
3. the payment status of the mortgage loan.
We will identify the warranting party, and give a more complete
sampling of the representations and warranties made thereby, in the related
prospectus supplement. We will also specify in the related prospectus supplement
any remedies against the warranting party available to the related
certificateholders, or the related trustee on their behalf, in the event of a
breach of any of those representations and warranties. In most cases, the
warranting party will be a prior holder of the particular mortgage assets.
COLLECTION AND OTHER SERVICING PROCEDURES WITH RESPECT TO MORTGAGE LOANS
The Governing Document for each series of offered certificates will
govern the servicing and administration of any mortgage loans included in the
related trust.
In general, the related master servicer and special servicer, directly
or through sub-servicers, will be obligated to service and administer for the
benefit of the related certificateholders the mortgage loans in any of our
trusts. The master servicer and the special servicer will be required to service
and administer those mortgage loans in accordance with applicable law and,
further, in accordance with the terms of the related Governing Document, the
mortgage loans themselves and any instrument of credit support included in that
trust. Subject to the foregoing, the master servicer and the special servicer
will each have full power and authority to do any and all things in connection
with that servicing and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the master servicer and the
special servicer for one of our trusts will be required to make reasonable
efforts to collect all payments called for under the terms and provisions of the
related mortgage loans that it services. In general, each of the master servicer
and the
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special servicer for one of our trusts will be obligated to follow the same
collection procedures as it would follow for comparable mortgage loans held for
its own account, provided that:
o those procedures are consistent with the terms of the related
Governing Document; and
o they do not impair recovery under any instrument of credit
support included in the related trust.
Consistent with the foregoing, the master servicer and the special
servicer will each be permitted, in its discretion, to waive any default charge
in connection with collecting a late payment on any defaulted mortgage loan.
The master servicer and/or the special servicer for one or our trusts,
directly or through sub-servicers, will also be required to perform various
other customary functions of a servicer of comparable loans, including:
o maintaining escrow or impound accounts for the payment of
taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items;
o ensuring that the related properties are properly insured;
o attempting to collect delinquent payments;
o supervising foreclosures;
o negotiating modifications;
o responding to borrower requests for partial releases of the
encumbered property, easements, consents to alteration or
demolition and similar matters;
o protecting the interests of certificateholders with respect to
senior lienholders;
o conducting inspections of the related real properties on a
periodic or other basis;
o collecting and evaluating financial statements for the related
real properties;
o managing or overseeing the management of real properties
acquired on behalf of the trust through foreclosure,
deed-in-lieu of foreclosure or otherwise; and
o maintaining servicing records relating to mortgage loans in
the trust.
We will specify in the related prospectus supplement when, and the
extent to which, servicing of a mortgage loan is to be transferred from a master
servicer to a special servicer. In general, a special servicer for any of our
trusts will be responsible for the servicing and administration of:
o mortgage loans that are delinquent with respect to a specified
number of scheduled payments;
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o mortgage loans as to which there is a material non-monetary
default;
o mortgage loans as to which the related borrower has--
1. entered into or consented to bankruptcy, appointment
of a receiver or conservator or similar insolvency
proceeding, or
2. become the subject of a decree or order for such a
proceeding which has remained in force undischarged
or unstayed for a specified number of days; and
o real properties acquired as part of the trust with respect to
defaulted mortgage loans.
The related Governing Document may also may provide that if a default
on a mortgage loan in the related trust has occurred or, in the judgment of the
related master servicer, a payment default is reasonably foreseeable, the
related master servicer may elect to transfer the servicing of that mortgage
loan, in whole or in part, to the related special servicer. When the
circumstances no longer warrant a special servicer's continuing to service a
particular mortgage loan, such as when the related borrower is paying in
accordance with the forbearance arrangement entered into between the special
servicer and that borrower, the master servicer will generally resume the
servicing duties with respect to the particular mortgage loan.
A borrower's failure to make required mortgage loan payments may mean
that operating income from the related real property is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a borrower that is unable to make
mortgage loan payments may also be unable to make timely payment of taxes and
otherwise to maintain and insure the related real property. In general, with
respect to each series of offered certificates, the related special servicer
will be required to monitor any mortgage loan in the related trust that is in
default, evaluate whether the causes of the default can be corrected over a
reasonable period without significant impairment of the value of the related
real property, initiate corrective action in cooperation with the mortgagor if
cure is likely, inspect the related real property and take any other actions as
it deems necessary and appropriate. A significant period of time may elapse
before a special servicer is able to assess the success of any corrective action
or the need for additional initiatives. The time within which a special servicer
can--
o make the initial determination of appropriate action,
o evaluate the success of corrective action,
o develop additional initiatives,
o institute foreclosure proceedings and actually foreclose, or
o accept a deed to a real property in lieu of foreclosure, on
behalf of the certificateholders of the related series,
may vary considerably depending on the particular mortgage loan, the related
real property, the borrower, the presence of an acceptable party to assume the
mortgage loan and the laws of the jurisdiction in which the related real
property is located. If a borrower files a bankruptcy petition, the special
servicer may not be permitted to accelerate the maturity of the defaulted loan
or to foreclose on
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the related real property for a considerable period of time. See "Legal Aspects
of Mortgage Loans--Bankruptcy Laws."
A special servicer for one of our trusts may also perform limited
duties with respect to mortgage loans in that trust for which the related master
servicer is primarily responsible, such as--
o performing property inspections and collecting, and
o evaluating financial statements.
A master servicer for one of our trusts may perform limited duties with
respect to any mortgage loan in that trust for which the related special
servicer is primarily responsible, such as--
o continuing to receive payments on the mortgage loan,
o making calculations with respect to the mortgage loan, and
o making remittances and preparing reports to the related
trustee and/or certificateholders with respect to the mortgage
loan.
The duties of the master servicer and special servicer for your series
will be more fully described in the related prospectus supplement.
Unless we state otherwise in the related prospectus supplement, the
master servicer for your series will be responsible for filing and settling
claims with respect to particular mortgage loans for your series under any
applicable instrument of credit support. See "Description of Credit Support" in
this prospectus.
SUB-SERVICERS
A master servicer or special servicer may delegate its servicing
obligations to one or more third-party servicers or sub-servicers. However,
unless we specify otherwise in the related prospectus supplement, the master
servicer or special servicer will remain obligated under the related Governing
Document. Each sub-servicing agreement between a master servicer or special
servicer, as applicable, and a sub-servicer must provide for servicing of the
applicable mortgage loans consistent with the related Governing Document. Any
master servicer and special servicer for one of our trusts will each be required
to monitor the performance of sub-servicers retained by it.
Unless we specify otherwise in the related prospectus supplement, any
master servicer or special servicer for one of our trusts will be solely liable
for all fees owed by it to any sub-servicer, regardless of whether the master
servicer's or special servicer's compensation under the related Governing
Document is sufficient to pay those fees. Each sub-servicer will be entitled to
reimbursement from the master servicer or special servicer, as the case may be,
that retained it, for expenditures which it makes, generally to the same extent
the master servicer or special servicer would be reimbursed under the related
Governing Document.
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COLLECTION OF PAYMENTS ON MORTGAGE-BACKED SECURITIES
Unless we specify otherwise in the related prospectus supplement, if a
mortgage-backed security is included among the trust assets underlying any
series of offered certificates, then--
o that mortgage-backed security will be registered in the name
of the related trustee or its designee;
o the related trustee will receive payments on that
mortgage-backed security; and
o subject to any conditions described in the related prospectus
supplement, the related trustee or a designated manager will,
on behalf and at the expense of the trust, exercise all rights
and remedies with respect to that mortgaged-backed security,
including the prosecution of any legal action necessary in
connection with any payment default.
MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE MANAGER AND US
Unless we specify otherwise in the related prospectus supplement, no
master servicer, special servicer or manager for any of our trusts may resign
from its obligations in that capacity, except upon--
o the appointment of, and the acceptance of that appointment by,
a successor to the resigning party and receipt by the related
trustee of written confirmation from each applicable rating
agency that the resignation and appointment will not result in
a withdrawal or downgrade of any rating assigned by that
rating agency to any class of certificates of the related
series, or
o a determination that those obligations are no longer
permissible under applicable law or are in material conflict
by reason of applicable law with any other activities carried
on by the resigning party.
In general, no resignation will become effective until the related
trustee or other successor has assumed the obligations and duties of the
resigning master servicer, special servicer or manager, as the case may be.
In no event will we, any master servicer, special servicer or manager
for one of our trusts, or any of our or their respective directors, officers,
employees or agents, be under any liability to that trust or the related
certificateholders for any action taken, or not taken, in good faith under the
related Governing Document or for errors in judgment. Neither we nor any of
those other persons or entities will be protected, however, against any
liability that would otherwise be imposed by reason of--
o willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under the Governing
Document for any series of offered certificates, or
o reckless disregard of those obligations and duties.
Furthermore, the Governing Document for each series of offered
certificates will entitle us, the master servicer, special servicer and/or
manager for the related trust, and our and their respective directors, officers,
employees and agents, to indemnification out of the related trust assets for any
loss, liability or expense incurred in connection with any legal action that
relates to that Governing Document
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or series of offered certificates or to the related trust. The indemnification
will not extend, however, to any loss, liability or expense:
o specifically required to be borne by the relevant party,
without right of reimbursement, under the terms of that
Governing Document;
o incurred in connection with any legal action against the
relevant party resulting from any breach of a representation
or warranty made in that Governing Document; or
o incurred in connection with any legal action against the
relevant party resulting from any willful misfeasance, bad
faith or gross negligence in the performance of obligations or
duties under that Governing Document.
Neither we nor any master servicer, special servicer or manager for the
related trust will be under any obligation to appear in, prosecute or defend any
legal action unless:
o the action is related to the respective responsibilities of
that party under the Governing Document for the affected
series of offered certificates; and
o either--
1. that party is specifically required to bear the
expense of the action, or
2. the action will not, in its opinion, involve that
party in any ultimate expense or liability for which
it would not be reimbursed under the Governing
Document for the affected series of offered
certificates.
However, we and each of those other parties may undertake any legal action that
may be necessary or desirable with respect to the enforcement or protection of
the rights and duties of the parties to the Governing Document for any series of
offered certificates and the interests of the certificateholders of that series
under that Government Document. In that event, the legal expenses and costs of
the action, and any liability resulting from the action, will be expenses, costs
and liabilities of the related trust and payable out of related trust assets.
With limited exception, any person or entity--
o into which we or any related master servicer, special servicer
or manager may be merged or consolidated, or
o resulting from any merger or consolidation to which we or any
related master servicer, special servicer or manager is a
party, or
o succeeding to our business or the business of any related
master servicer, special servicer or manager,
will be the successor of us or that master servicer, special servicer or
manager, as the case may be, under the Governing Document for a series of
offered certificates.
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The compensation arrangements with respect to any master servicer,
special servicer or manager for any of our trusts will be set forth in the
related prospectus supplement. In general, that compensation will be payable out
of the related trust assets.
EVENTS OF DEFAULT
We will identify in related prospectus supplement the various events of
default under the Governing Document for each series of offered certificates for
which any related master servicer, special servicer or manager may be terminated
in that capacity.
AMENDMENT
The Governing Document for each series of offered certificates may be
amended by the parties thereto, without the consent of any of the holders of
those certificates, or of any non-offered certificates of the same series, for
the following reasons:
1. to cure any ambiguity;
2. to correct, modify or supplement any provision in the
Governing Document which may be inconsistent with any other
provision in that document or with the description of that
document set forth in the related prospectus supplement;
3. to make any other provisions with respect to matters or
questions arising under the Governing Document that are not
inconsistent with the existing provisions of that document;
4. to the extent applicable, to relax or eliminate any
requirement under the Governing Document imposed by the
provisions of the Internal Revenue Code of 1986 relating to
REMICs if the provisions of that Code are amended or clarified
so as to allow for the relaxation or elimination of that
requirement;
5. to relax or eliminate any requirement under the Governing
Document imposed by the Securities Act of 1933, as amended, or
the rules under that Act if that Act or those rules are
amended or clarified so as to allow for the relaxation or
elimination of that requirement;
6. to comply with any requirements imposed by the Internal
Revenue Code of 1986 or any final, temporary or, in some
cases, proposed regulation, revenue ruling, revenue procedure
or other written official announcement or interpretation
relating to federal income tax laws, or to avoid a prohibited
transaction or reduce the incidence of any tax that would
arise from any actions taken with respect to the operation of
any REMIC created under the Governing Document;
7. to the extent applicable, to modify, add to or eliminate the
transfer restrictions relating to the certificates which are
residual interests in a REMIC; or
8. to otherwise modify or delete existing provisions of the
Governing Document.
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However, no amendment of the Governing Document for any series of
offered certificates, covered solely by clauses 3. or 8. above, may adversely
affect in any material respect the interests of any holders of offered or
non-offered certificates of that series.
In general, the Governing Document for a series of offered certificates
may also be amended by the parties to that document, with the consent of the
holders of offered and non-offered certificates representing, in total, not less
than 51%, or any other percentage specified in the related prospectus
supplement, of all the voting rights allocated to those classes of that series
that are affected by the amendment. However, the Governing Document for a series
of offered certificates may not be amended to--
o reduce in any manner the amount of, or delay the timing of,
payments received on the related mortgage assets which are
required to be distributed on any offered or non-offered
certificate of that series without the consent of the holder
of that certificate; or
o adversely affect in any material respect the interests of the
holders of any class of offered or non-offered certificates of
that series in any other manner without the consent of the
holders of all certificates of that class; or
o modify the provisions of the Governing Document relating to
amendments of that document without the consent of the holders
of all offered and non-offered certificates of that series
then outstanding.
LIST OF CERTIFICATEHOLDERS
Upon written request of any certificateholder of record of any series
made for purposes of communicating with other holders of certificates of the
same series with respect to their rights under the related Governing Document,
the related trustee or other certificate registrar of that series will afford
the requesting certificateholders access during normal business hours to the
most recent list of certificateholders of that series. However, the trustee may
first require a copy of the communication that the requesting certificateholders
proposed to send.
THE TRUSTEE
The trustee for each series of offered certificates will be named in
the related prospectus supplement. The commercial bank, national banking
association, banking corporation or trust company that serves as trustee for any
series of offered certificates may have typical banking relationships with the
us and our affiliates and with any of the other parties to the related Governing
Document and its affiliates.
DUTIES OF THE TRUSTEE
The trustee for each series of offered certificates will not--
o make any representation as to the validity or sufficiency of
those certificates, the related Governing Document or any
underlying mortgage asset or related document, or
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o be accountable for the use or application by or on behalf of
any other party to the related Governing Document of any funds
paid to that party with respect to those certificates or the
underlying mortgage assets.
If no event of default has occurred and is continuing under the related
Governing Document, the trustee for each series of offered certificates will be
required to perform only those duties specifically required under the related
Governing Document. However, upon receipt of any of the various certificates,
reports or other instruments required to be furnished to it under the related
Governing Document, the trustee must examine those documents and determine
whether they conform to the requirements of that Governing Document.
MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related prospectus supplement,
the fees and normal disbursements of the trustee for any series of offered
certificates may be the expense of the related master servicer or other
specified person or may be required to be paid by the related trust assets.
The trustee for each series of offered certificates will be entitled to
indemnification, out of related trust assets, for any loss, liability or expense
incurred by that trustee in connection with its acceptance or administration of
its trusts under the related Governing Document. However, the indemnification of
a trustee will not extend to any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence on the part of the trustee
in the performance of its obligations and duties under the related Governing
Document.
No trustee for any series of offered certificates will be required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related Governing Document, or in the
exercise of any of its rights or powers, if it has reasonable grounds for
believing that repayment of those funds or adequate indemnity against that risk
or liability is not reasonably assured to it.
The trustee for each series of offered certificates will be entitled to
execute any of its trusts or powers and perform any of its duties under the
related Governing Document, either directly or by or through agents or
attorneys. The trustee will not be responsible for any willful misconduct or
gross negligence on the part of any agent or attorney appointed by it with due
care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee for any series of offered certificates may resign at any
time. We will be obligated to appoint a successor to a resigning trustee. We may
also remove the trustee for any series of offered certificates if that trustee
ceases to be eligible to continue as such under the related Governing Document
or if that trustee becomes insolvent. Unless we indicate otherwise in the
related prospectus supplement, the trustee for any series of offered
certificates may also be removed at any time by the holders of the offered and
non-offered certificates of that series evidencing not less than 51%, or any
other percentage specified in the related prospectus supplement, of the voting
rights for that series. However, if the removal was without cause, the
certificateholders effecting the removal may be responsible for any costs and
expenses incurred by the terminated trustee in connection with its removal. Any
resignation or removal of a trustee and appointment of a successor trustee will
not become effective until acceptance of the appointment by the successor
trustee.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of
the offered certificates of any series or with respect to the related mortgage
assets. That credit support may be in the form of any of the following:
o the subordination of one or more other classes of certificates
of the same series;
o the use of a letter of credit, a surety bond, an insurance
policy, a guarantee or a credit derivative;
o the establishment of one or more reserve funds; or
o any combination of the foregoing.
If and to the extent described in the related prospectus supplement,
any of the above forms of credit support may provide credit enhancement for
non-offered certificates, as well as offered certificates, or for more than one
series of certificates.
If you are the beneficiary of any particular form of credit support,
that credit support may not protect you against all risks of loss and will not
guarantee payment to you of all amounts to which you are entitled under your
offered certificates. If losses or shortfalls occur that exceed the amount
covered by that credit support or that are of a type not covered by that credit
support, you will bear your allocable share of deficiencies. Moreover, if that
credit support covers the offered certificates of more than one class or series
and total losses on the related mortgage assets exceed the amount of that credit
support, it is possible that the holders of offered certificates of other
classes and/or series will be disproportionately benefited by that credit
support to your detriment.
If you are the beneficiary of any particular form of credit support, we
will include in the related prospectus supplement a description of the
following:
o the nature and amount of coverage under that credit support;
o any conditions to payment not otherwise described in this
prospectus;
o any conditions under which the amount of coverage under that
credit support may be reduced and under which that credit
support may be terminated or replaced; and
o the material provisions relating to that credit support.
Additionally, we will set forth in the related prospectus supplement
information with respect to the obligor, if any, under any instrument of credit
support.
SUBORDINATE CERTIFICATES
If and to the extent described in the related prospectus supplement,
one or more classes of certificates of any series may be subordinate to one or
more other classes of certificates of that series. If
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you purchase subordinate certificates, your right to receive payments out of
collections and advances on the related trust assets on any payment date will be
subordinated to the corresponding rights of the holders of the more senior
classes of certificates. If and to the extent described in the related
prospectus supplement, the subordination of a class of certificates may not
cover all types of losses or shortfalls. In the related prospectus supplement,
we will set forth information concerning the method and amount of subordination
provided by a class or classes of subordinate certificates in a series and the
circumstances under which that subordination will be available.
If the mortgage assets in any trust established us are divided into
separate groups, each supporting a separate class or classes of certificates of
the related series, credit support may be provided by cross-support provisions
requiring that payments be made on senior certificates evidencing interests in
one group of those mortgage assets prior to payments on subordinate certificates
evidencing interests in a different group of those mortgage assets. We will
describe in the related prospectus supplement the manner and conditions for
applying any cross-support provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
The mortgage loans included in any trust established by us may be
covered for some default risks by insurance policies or guarantees. If so, we
will describe in the related prospectus supplement the nature of those default
risks and the extent of that coverage.
LETTER OF CREDIT
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered by one or more letters of
credit, issued by a bank or other financial institution specified in the related
prospectus supplement. The issuer of a letter of credit will be obligated to
honor draws under that letter of credit in a total fixed dollar amount, net of
unreimbursed payments under the letter of credit, generally equal to a
percentage specified in the related prospectus supplement of the total principal
balance of some or all of the related mortgage assets as of the date the related
trust was formed or of the initial total principal balance of one or more
classes of certificates of the applicable series. The letter of credit may
permit draws only in the event of select types of losses and shortfalls. The
amount available under the letter of credit will, in all cases, be reduced to
the extent of the unreimbursed payments thereunder and may otherwise be reduced
as described in the related prospectus supplement. The obligations of the letter
of credit issuer under the letter of credit for any series of offered
certificates will expire at the earlier of the date specified in the related
prospectus supplement or the termination of the related trust.
CERTIFICATE INSURANCE AND SURETY BONDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered by insurance policies or
surety bonds provided by one or more insurance companies or sureties. Those
instruments may cover, with respect to one or more classes of the offered
certificates of the related series, timely payments of interest and principal or
timely payments of interest and payments of principal on the basis of a schedule
of principal payments set forth in or determined in the manner specified in the
related prospectus supplement. We will describe in the related prospectus
supplement any limitations on the draws that may be made under any of those
instruments.
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CREDIT DERIVATIVE
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered by credit derivatives, such
as credit default swaps and total return swaps. A credit derivative is a
financial instrument designed to offset losses and shortfalls derived from the
credit risk of an underlying or reference asset or the credit risk of an
underlying or reference credit. We will describe in the related prospectus
supplement when and how payments are made under the particular instrument and
the specific credit risk that is being covered.
RESERVE FUNDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered, to the extent of available
funds, by one or more reserve funds in which cash, a letter of credit, permitted
investments, a demand note or a combination of the foregoing, will be deposited,
in the amounts specified in the related prospectus supplement. If and to the
extent described in the related prospectus supplement, the reserve fund for the
related series of offered certificates may also be funded over time.
Amounts on deposit in any reserve fund for a series of offered
certificates will be applied for the purposes, in the manner, and to the extent
specified in the related prospectus supplement. If and to the extent described
in the related prospectus supplement, reserve funds may be established to
provide protection only against select types of losses and shortfalls. Following
each payment date for the related series of offered certificates, amounts in a
reserve fund in excess of any required balance may be released from the reserve
fund under the conditions and to the extent specified in the related prospectus
supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If and to the extent described in the related prospectus supplement,
any mortgage-backed security included in one of our trusts and/or the mortgage
loans that back that security may be covered by one or more of the types of
credit support described in this prospectus. We will specify in the related
prospectus supplement, as to each of those forms of credit support, the
information indicated above with respect to that mortgage-backed security, to
the extent that the information is material and available.
LEGAL ASPECTS OF MORTGAGE LOANS
Most, if not all, of the mortgage loans underlying a series of offered
certificates will be secured by multifamily and commercial properties in the
United States, its territories and possessions. However, some of those mortgage
loans may be secured by multifamily and commercial properties outside the United
States, its territories and possessions.
The following discussion contains general summaries of select legal
aspects of mortgage loans secured by multifamily and commercial properties in
the United States. Because these legal aspects are governed by applicable state
law, which may differ substantially from state to state, the summaries do not
purport to be complete, to reflect the laws of any particular state, or to
encompass the laws of all jurisdictions in which the security for the mortgage
loans underlying the offered certificates is situated.
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Accordingly, you should be aware that the summaries are qualified in their
entirety by reference to the applicable laws of those states. See "Description
of the Trust Assets--Mortgage Loans."
If a significant percentage of mortgage loans underlying a series of
offered certificates, are secured by properties in a particular state, we will
discuss the relevant state laws, to the extent they vary materially from this
discussion, in the related prospectus supplement.
GENERAL
Each mortgage loan underlying a series of offered certificates will be
evidenced by a note or bond and secured by an instrument granting a security
interest in real property. The instrument granting a security interest in real
property may be a mortgage, deed of trust or a deed to secure debt, depending
upon the prevailing practice and law in the state in which that real property is
located. Mortgages, deeds of trust and deeds to secure debt are often
collectively referred to in this prospectus as "mortgages." A mortgage creates a
lien upon, or grants a title interest in, the real property covered by the
mortgage, and represents the security for the repayment of the indebtedness
customarily evidenced by a promissory note. The priority of the lien created or
interest granted will depend on--
o the terms of the mortgage,
o the terms of separate subordination agreements or
intercreditor agreements with others that hold interests in
the real property,
o the knowledge of the parties to the mortgage, and
o in general, the order of recordation of the mortgage in the
appropriate public recording office.
However, the lien of a recorded mortgage will generally be subordinate
to later-arising liens for real estate taxes and assessments and other charges
imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage--
o a mortgagor, who is the owner of the encumbered interest in
the real property, and
o a mortgagee, who is the lender.
In general, the mortgagor is also the borrower.
In contrast, a deed of trust is a three-party instrument. The parties
to a deed of trust are--
o the trustor, who is the equivalent of a mortgagor,
o the trustee to whom the real property is conveyed, and
o the beneficiary for whose benefit the conveyance is made, who
is the lender.
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Under a deed of trust, the trustor grants the property, irrevocably
until the debt is paid, in trust and generally with a power of sale, to the
trustee to secure repayment of the indebtedness evidenced by the related note.
A deed to secure debt typically has two parties. Under a deed to secure
debt, the grantor, who is the equivalent of a mortgagor, conveys title to the
real property to the grantee, who is the lender, generally with a power of sale,
until the debt is repaid.
Where the borrower is a land trust, there would be an additional party
because legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the borrower. At origination of a mortgage loan
involving a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally liable
for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a deed to secure debt
are governed by:
o the express provisions of the related instrument,
o the law of the state in which the real property is located,
o various federal laws, and
o in some deed of trust transactions, the directions of the
beneficiary.
LEASES AND RENTS
A mortgage that encumbers an income-producing property often contains
an assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases. Under an assignment of rents and leases, the
borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived from each lease. However, the
borrower retains a revocable license to collect the rents, provided there is no
default and the rents are not directly paid to the lender. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect the
rents.
In most states, hotel and motel room rates are considered accounts
receivable under the UCC. Room rates are generally pledged by the borrower as
additional security for the loan when a mortgage loan is secured by a hotel or
motel. In general, the lender must file financing statements in order to perfect
its security interest in the room rates and must file continuation statements,
generally every five years, to maintain that perfection. Mortgage loans secured
by hotels or motels may be included in one of our trusts even if the security
interest in the room rates was not perfected or the requisite UCC filings were
allowed to lapse. A lender will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default, even if the lender's
security interest in room rates is perfected under applicable nonbankruptcy law.
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In the bankruptcy setting, the lender will be stayed from enforcing its
rights to collect hotel and motel room rates. However, the room rates will
constitute cash collateral and cannot be used by the bankrupt borrower--
o without a hearing or the lender's consent, or
o unless the lender's interest in the room rates is given
adequate protection.
For purposes of the foregoing, the adequate protection may include a cash
payment for otherwise encumbered funds or a replacement lien on unencumbered
property, in either case equal in value to the amount of room rates that the
bankrupt borrower proposes to use. See "--Bankruptcy Laws" below.
PERSONALTY
Some types of income-producing real properties, such as hotels, motels
and nursing homes, may include personal property, which may, to the extent it is
owned by the borrower and not previously pledged, constitute a significant
portion of the property's value as security. The creation and enforcement of
liens on personal property are governed by the UCC. Accordingly, if a borrower
pledges personal property as security for a mortgage loan, the lender generally
must file UCC financing statements in order to perfect its security interest in
the personal property and must file continuation statements, generally every
five years, to maintain that perfection. Mortgage loans secured in part by
personal property may be included in one of our trusts even if the security
interest in the personal property was not perfected or the requisite UCC filings
were allowed to lapse.
FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property security at public auction to
satisfy the indebtedness.
FORECLOSURE PROCEDURES VARY FROM STATE TO STATE. The two primary
methods of foreclosing a mortgage are--
o judicial foreclosure, involving court proceedings, and
o nonjudicial foreclosure under a power of sale granted in the
mortgage instrument.
Other foreclosure procedures are available in some states, but they are
either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed. A
foreclosure action sometimes requires several years to complete.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, a lender
initiates the action by the service of legal pleadings upon--
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o all parties having a subordinate interest of record in the
real property, and
o all parties in possession of the property, under leases or
otherwise, whose interests are subordinate to the mortgage.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating defendants. When the lender's right to foreclose is
contested, the legal proceedings can be time-consuming. The court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property upon successful completion of a
judicial foreclosure proceeding. The proceeds of that public sale are used to
satisfy the judgment. The procedures that govern these public sales vary from
state to state.
EQUITABLE AND OTHER LIMITATIONS ON ENFORCEABILITY OF PARTICULAR
PROVISIONS. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects of
mortgage defaults perceived as harsh or unfair. Relying on these principles, a
court may:
o alter the specific terms of a loan to the extent it considers
necessary to prevent or remedy an injustice, undue oppression
or overreaching;
o require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the
likelihood that the borrower will be able to reinstate the
loan;
o require the lender to reinstate a loan or recast a payment
schedule in order to accommodate a borrower that is suffering
from a temporary financial disability; or
o limit the right of the lender to foreclose in the case of a
nonmonetary default, such as--
1. a failure to adequately maintain the mortgaged
property, or
2. an impermissible further encumbrance of the mortgaged
property.
Some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have--
o upheld the reasonableness of the notice provisions, or
o found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to
trigger constitutional protections.
In addition, some states may have statutory protection such as the
right of the borrower to reinstate its mortgage loan after commencement of
foreclosure proceedings but prior to a foreclosure sale.
NONJUDICIAL FORECLOSURE/POWER OF SALE. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale under a power of sale typically
granted in the deed of trust. A power of sale may also be contained in
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any other type of mortgage instrument if applicable law so permits. A power of
sale under a deed of trust allows a nonjudicial public sale to be conducted
generally following--
o a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower, and
o notice of sale is given in accordance with the terms of the
deed of trust and applicable state law.
In some states, prior to a nonjudicial public sale, the trustee under
the deed of trust must--
o record a notice of default and notice of sale, and
o send a copy of those notices to the borrower and to any other
party who has recorded a request for a copy of them.
In addition, in some states, the trustee must provide notice to any other party
having an interest of record in the real property, including junior lienholders.
A notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. Some states require a
reinstatement period during which the borrower or junior lienholder may have the
right to cure the default by paying the entire actual amount in arrears, without
regard to the acceleration of the indebtedness, plus the lender's expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, state law governs the procedure for public sale,
the parties entitled to notice, the method of giving notice and the applicable
time periods.
PUBLIC SALE. A third party may be unwilling to purchase a mortgaged
property at a public sale because of--
o the difficulty in determining the exact status of title to the
property due to, among other things, redemption rights that
may exist, and
o the possibility that physical deterioration of the property
may have occurred during the foreclosure proceedings.
As a result of the foregoing, it is common for the lender to purchase
the mortgaged property and become its owner, subject to the borrower's right in
some states to remain in possession during a redemption period. In that case,
the lender will have both the benefits and burdens of ownership, including the
obligation to pay debt service on any senior mortgages, to pay taxes, to obtain
casualty insurance and to make repairs necessary to render the property suitable
for sale. The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The lender also will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
or lease of the property. Whether, the ultimate proceeds of the sale of the
property equal the lender's investment in the property depends upon market
conditions. Moreover, because of the expenses associated with acquiring, owning
and selling a mortgaged property, a lender could realize an overall loss on the
related mortgage loan even if the mortgaged property is sold at foreclosure, or
resold after it is acquired through foreclosure, for an amount equal to the full
outstanding principal amount of the loan plus accrued interest.
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The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens. In addition, it
may be obliged to keep senior mortgage loans current in order to avoid
foreclosure of its interest in the property. Furthermore, if the foreclosure of
a junior mortgage triggers the enforcement of a due-on-sale clause contained in
a senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are--
o to enable the lender to realize upon its security, and
o to bar the borrower, and all persons who have interests in the
property that are subordinate to that of the foreclosing
lender, from exercising their equity of redemption.
The doctrine of equity of redemption provides that, until the property
encumbered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate to
that of the foreclosing lender have an equity of redemption and may redeem the
property by paying the entire debt with interest. Those having an equity of
redemption must generally be made parties to the foreclosure proceeding in order
for their equity of redemption to be terminated.
The equity of redemption is a common-law, nonstatutory right which
should be distinguished from post-sale statutory rights of redemption. In some
states, the borrower and foreclosed junior lienors are given a statutory period
in which to redeem the property after sale under a deed of trust or foreclosure
of a mortgage. In some states, statutory redemption may occur only upon payment
of the foreclosure sale price. In other states, redemption may be permitted if
the former borrower pays only a portion of the sums due. A statutory right of
redemption will diminish the ability of the lender to sell the foreclosed
property because the exercise of a right of redemption would defeat the title of
any purchaser through a foreclosure. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states, a
post-sale statutory right of redemption may exist following a judicial
foreclosure, but not following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. Some or all of the mortgage loans
underlying a series of offered certificates may be nonrecourse loans. Recourse
in the case of a default on a non-recourse mortgage loan will be limited to the
mortgaged property and any other assets that were pledged to secure the mortgage
loan. However, even if a mortgage loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may be
limited by state law. For example, in some states, a lender cannot obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal to the difference between the net amount realized upon the public
sale of the real property and the amount due to the lender. Other statutes may
require the lender to exhaust the security afforded under a mortgage before
bringing a personal action against the borrower. In other states, the lender has
the option of bringing a personal action against the borrower on the debt
without first exhausting the security, but in doing so, the lender may be deemed
to have elected a remedy and thus may be precluded from foreclosing upon the
security. Consequently, lenders will usually proceed first against the security
in states where an election of remedy provision exists. Finally, other statutory
provisions limit any deficiency judgment to the excess of the outstanding debt
over the fair market value of the property at
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the time of the sale. These other statutory provisions are intended to protect
borrowers from exposure to large deficiency judgments that might result from
bidding at below-market values at the foreclosure sale.
LEASEHOLD CONSIDERATIONS. Some or all of the mortgage loans underlying
a series of offered certificates may be secured by a mortgage on the borrower's
leasehold interest under a ground lease. Leasehold mortgage loans are subject to
some risks not associated with mortgage loans secured by a lien on the fee
estate of the borrower. The most significant of these risks is that if the
borrower's leasehold were to be terminated upon a lease default, the leasehold
mortgagee would lose its security. This risk may be lessened if the ground
lease:
o requires the lessor to give the leasehold mortgagee notices of
lessee defaults and an opportunity to cure them,
o permits the leasehold estate to be assigned to and by the
leasehold mortgagee or the purchaser at a foreclosure sale,
and
o contains other protective provisions typically required by
prudent lenders to be included in a ground lease.
Some mortgage loans underlying a series of offered certificates,
however, may be secured by ground leases which do not contain these provisions.
COOPERATIVE SHARES. Some or all of the mortgage loans underlying a
series of offered certificates may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases belonging to
those shares, allocable to cooperative dwelling units that may be vacant or
occupied by nonowner tenants. Loans secured in this manner are subject to some
risks not associated with mortgage loans secured by a lien on the fee estate of
a borrower in real property. Loans secured in this manner typically are
subordinate to the mortgage, if any, on the cooperative's building. That
mortgage, if foreclosed, could extinguish the equity in the building and the
proprietary leases of the dwelling units derived from ownership of the shares of
the cooperative. Further, transfer of shares in a cooperative is subject to
various regulations as well as to restrictions under the governing documents of
the cooperative. The shares may be canceled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the cooperative
provides, among other things, that the lender may cure a default under a
proprietary lease.
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a commercially reasonable manner, which
may be dependent upon, among other things, the notice given the debtor and the
method, manner, time, place and terms of the sale. 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. A 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 leases.
BANKRUPTCY LAWS
Operation of the U.S. Bankruptcy Code and related state laws may
interfere with or affect the ability of a lender to realize upon collateral or
to enforce a deficiency judgment. For example, under the
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U.S. Bankruptcy Code, virtually all actions, including foreclosure actions and
deficiency judgment proceedings, to collect a debt are automatically stayed upon
the filing of the bankruptcy petition. Often, no interest or principal payments
are made during the course of the bankruptcy case. The delay caused by an
automatic stay and its consequences can be significant. Also, under the U.S.
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out the
junior lien.
Under the U.S. Bankruptcy Code, the amount and terms of a mortgage loan
secured by a lien on property of the debtor may be modified provided that
substantive and procedural safeguards protective of the lender are met. A
bankruptcy court may, among other things--
o reduce the secured portion of the outstanding amount of the
loan to the then-current value of the property, thereby
leaving the lender a general unsecured creditor for the
difference between the then-current value of the property and
the outstanding balance of the loan;
o reduce the amount of each scheduled payment, by means of a
reduction in the rate of interest and/or an alteration of the
repayment schedule, with or without affecting the unpaid
principal balance of the loan;
o extend or shorten the term to maturity of the loan;
o permit the bankrupt borrower to cure of the subject loan
default by paying the arrearage over a number of years; or
o permit the bankrupt borrower, through its rehabilitative plan,
to reinstate the loan payment schedule even if the lender has
obtained a final judgment of foreclosure prior to the filing
of the debtor's petition.
Federal bankruptcy law may also interfere with or affect the ability of
a secured lender to enforce the borrower's assignment of rents and leases
related to the mortgaged property. A lender may be stayed from enforcing the
assignment under the U.S. Bankruptcy Code. In addition, the legal proceedings
necessary to resolve the issue could be time-consuming, and result in delays in
the lender's receipt of the rents. However, recent amendments to the U.S.
Bankruptcy Code may minimize the impairment of the lender's ability to enforce
the borrower's assignment of rents and leases. In addition to the inclusion of
hotel revenues within the definition of cash collateral as noted above, the
amendments provide that a pre-petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest in
rents is unperfected under the laws of some states until the lender has taken
some further action, such as commencing foreclosure or obtaining a receiver
prior to activation of the assignment of rents.
A borrower's ability to make payment on a mortgage loan may be impaired
by the commencement of a bankruptcy case relating to the tenant under a lease of
the related property. Under the U.S. Bankruptcy Code, the filing of a petition
in bankruptcy by or on behalf of a tenant results in a stay in bankruptcy
against the commencement or continuation of any state court proceeding for--
o past due rent,
o accelerated rent,
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o damages, or
o a summary eviction order with respect to a default under the
lease that occurred prior to the filing of the tenant's
bankruptcy petition.
In addition, the U.S. Bankruptcy Code generally provides that a trustee
or debtor-in-possession may, subject to approval of the court:
o assume the lease and either retain it or assign it to a third
party, or
o reject the lease.
If the lease is assumed, the trustee, debtor-in-possession or assignee,
if applicable, must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with adequate assurance of future performance.
These remedies may be insufficient, and any assurances provided to the lessor
may be inadequate. If the lease is rejected, the lessor will be treated, except
potentially to the extent of any security deposit, as an unsecured creditor with
respect to its claim for damages for termination of the lease. The U.S.
Bankruptcy Code also limits a lessor's damages for lease rejection to:
o the rent reserved by the lease without regard to acceleration
for the greater of one year, or 15%, not to exceed three
years, of the remaining term of the lease, plus
o unpaid rent to the earlier of the surrender of the property or
the lessee's bankruptcy filing.
ENVIRONMENTAL CONSIDERATIONS
GENERAL. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Those environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In some circumstances, a lender may
decide to abandon a contaminated real property as collateral for its loan rather
than foreclose and risk liability for clean-up costs.
SUPERLIEN LAWS. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In several
states, that lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to that superlien.
CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, imposes strict liability on present and
past "owners" and "operators" of contaminated real property for the costs of
clean-up. A secured lender may be liable as an "owner" or "operator" of a
contaminated mortgaged property if agents or employees of the lender have
participated in the management of the property or the operations of the
borrower. Liability may exist even if the lender did not cause or contribute to
the contamination and regardless of whether the lender has actually taken
possession of the contaminated mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator," however, is a person who, without participating in the management of
the
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facility, holds indicia of ownership primarily to protect his security interest.
This is the so called "secured creditor exemption."
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 amended, among other things, the provisions of CERCLA with respect to
lender liability and the secured creditor exemption. The Lender Liability Act
offers substantial protection to lenders by defining the activities in which a
lender can engage and still have the benefit of the secured creditor exemption.
In order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the property of the borrower. The Lender Liability Act provides that
"merely having the capacity to influence, or unexercised right to control"
operations does not constitute participation in management. A lender will lose
the protection of the secured creditor exemption only if--
o it exercises decision-making control over a borrower's
environmental compliance and hazardous substance handling and
disposal practices, or
o assumes day-to-day management of operational functions of a
mortgaged property.
The Lender Liability Act also provides that a lender will continue to
have the benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a deed-in-lieu
of foreclosure, provided that the lender seeks to sell that property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
OTHER FEDERAL AND STATE LAWS. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption. In
addition, under federal law, there is potential liability relating to hazardous
wastes and underground storage tanks under the federal Resource Conservation and
Recovery Act.
Some federal, state and local laws, regulations and ordinances govern
the management, removal, encapsulation or disturbance of asbestos-containing
materials. These laws, as well as common law standards, may--
o impose liability for releases of or exposure to
asbestos-containing materials, and
o provide for third parties to seek recovery from owners or
operators of real properties for personal injuries associated
with those releases.
Federal law requires owners of residential housing constructed prior to
1978 to disclose to potential residents or purchasers any known lead-based paint
hazards and will impose treble damages for any failure to disclose. In addition,
the ingestion of lead-based paint chips or dust particles by children can result
in lead poisoning. If lead-based paint hazards exist at a property, then the
owner of that property may be held liable for injuries and for the costs of
removal or encapsulation of the lead-based paint.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
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Beyond statute-based environmental liability, there exist common law
causes of action related to hazardous environmental conditions on a property,
such as actions based on nuisance or on toxic tort resulting in death, personal
injury or damage to property. While it may be more difficult to hold a lender
liable under common law causes of action, unanticipated or uninsured liabilities
of the borrower may jeopardize the borrower's ability to meet its loan
obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. These costs may jeopardize
the borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard. However, that individual or entity may be without
substantial assets. Accordingly, it is possible that the costs could become a
liability of the related trust and occasion a loss to the related
certificateholders.
If the operations on a foreclosed property are subject to environmental
laws and regulations, the lender will be required to operate the property in
accordance with those laws and regulations. This compliance may entail
substantial expense, especially in the case of industrial or manufacturing
properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers,
including prospective buyers at a foreclosure sale or following foreclosure.
This disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Some or all of the mortgage loans underlying a series of offered
certificates may contain due-on-sale and due-on-encumbrance clauses that purport
to permit the lender to accelerate the maturity of the loan if the borrower
transfers or encumbers the a mortgaged property. In recent years, court
decisions and legislative actions placed substantial restrictions on the right
of lenders to enforce these clauses in many states. However, the Garn-St Germain
Depository Institutions Act of 1982 generally preempts state laws that prohibit
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to the limitations prescribed in
that Act and the regulations promulgated thereunder.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
Any of our trusts may include mortgage loans secured by junior liens,
while the loans secured by the related senior liens may not be included in that
trust. 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 loans
and the junior 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 as
follows:
o FIRST, to the payment of court costs and fees in connection
with the foreclosure;
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o SECOND, to real estate taxes;
o 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; and
o LAST, in satisfaction of all principal, interest, prepayment
and acceleration penalties, if any, and any other sums due and
owing to the holder of the junior mortgage loan.
SUBORDINATE FINANCING
Some mortgage loans underlying a series of offered certificates may not
restrict the ability of the borrower to use the mortgaged property as security
for one or more additional loans, or the restrictions may be unenforceable.
Where a borrower encumbers a mortgaged property with one or more junior liens,
the senior lender is subjected to the following additional risks:
o the borrower may have difficulty servicing and repaying
multiple loans;
o if the subordinate financing permits recourse to the borrower,
as is frequently the case, and the senior loan does not, a
borrower may have more incentive to repay sums due on the
subordinate loan;
o acts of the senior lender that prejudice the junior lender or
impair the junior lender's security, such as the senior
lender's agreeing to an increase in the principal amount of or
the interest rate payable on the senior loan, may create a
superior equity in favor of the junior lender;
o if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of
action by the senior lender; and
o the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made.
They may also contain provisions that prohibit prepayments for a specified
period and/or condition prepayments upon the borrower's payment of prepayment
premium, fee or charge. In some states, there are or may be specific limitations
upon the late charges that a lender may collect from a borrower for delinquent
payments. Some states also limit the amounts that a lender may collect from a
borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment premiums, fees and
charges upon an involuntary prepayment is unclear under the laws of many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
various types of residential, including multifamily, first mortgage loans
originated by particular lenders after March 31, 1980. Title V authorized any
state to
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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 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. Some states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder, in order to protect individuals with disabilities,
owners of public accommodations, such as hotels, restaurants, shopping centers,
hospitals, schools and social service center establishments, must remove
architectural and communication barriers which are structural in nature from
existing places of public accommodation to the extent "readily achievable." In
addition, under the ADA, alterations to a place of public accommodation or a
commercial facility are to be made so that, to the maximum extent feasible, the
altered portions are readily accessible to and usable by disabled individuals.
The "readily achievable" standard takes into account, among other factors, the
financial resources of the affected property owner, landlord or other applicable
person. In addition to imposing a possible financial burden on the borrower in
its capacity as owner or landlord, the ADA may also impose requirements on a
foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, because the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender that is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements than those
to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, a borrower who enters military service after the origination of the
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 the borrower's active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to individuals who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to individuals who enter military
service, including reservists who are called to active duty, after origination
of the related mortgage loan, no information can be provided as to the number of
loans with individuals as borrowers that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of a master servicer or special
servicer to collect full amounts of interest on an affected mortgage loan. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts payable to the holders of
certificates of the related series, and would not be covered by advances or,
unless otherwise specified in the related prospectus supplement, any form of
credit support provided in connection with the certificates. In addition, the
Relief Act imposes limitations that would impair the ability of a master
servicer or special servicer to foreclose on an affected mortgage loan during
the borrower's period of active duty status and, under some circumstances,
during an additional three month period after the active duty status ceases.
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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, those 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--
o its mortgage was executed and recorded before commission of
the crime upon which the forfeiture is based, or
o the lender was, at the time of execution of the mortgage,
"reasonably without cause to believe" that the property was
used in, or purchased with the proceeds of, illegal drug or
RICO activities.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This is a general discussion of the material federal income tax
consequences of owning the offered certificates. This discussion is directed to
certificateholders that hold the offered certificates as capital assets within
the meaning of Section 1221 of the Internal Revenue Code of 1986. It does not
discuss all federal income tax consequences that may be relevant to owners of
offered certificates, particularly as to investors subject to special treatment
under the Internal Revenue Code, including:
o banks,
o insurance companies, and
o foreign investors.
Further, this discussion and any legal opinions referred to in this
discussion are based on authorities that can change, or be differently
interpreted, with possible retroactive effect. No rulings have been or will be
sought from the IRS with respect to any of the federal income tax consequences
discussed below. Accordingly, the IRS may take contrary positions.
Investors 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 is--
o given with respect to events that have occurred at the time
the advice is rendered, and
o is directly relevant to the determination of an entry on a tax
return.
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Accordingly, even if this discussion addresses an issue regarding the
tax treatment of the owner of the offered certificates, investors should consult
their own tax advisors regarding that issue. Investors should do so not only as
to federal taxes, but also state and local taxes. See "State and Other Tax
Consequences."
The following discussion addresses securities of three general types:
o REMIC certificates, representing interests in a trust, or a
portion of the assets of that trust, as to which a specified
person or entity will make a real estate mortgage investment
conduit, or REMIC, election under Sections 860A through 860G
of the Internal Revenue Code;
o FASIT certificates, representing interests in a trust, or a
portion of the assets of that trust, as to which a specified
person or entity will make a financial asset securitization
investment trust, or FASIT, election within the meaning of
Section 860L(a) of the Internal Revenue Code; and
o grantor trust certificates, representing interests in a trust,
or a portion of the assets of that trust, as to which no REMIC
or FASIT election will be made.
We will indicate in the prospectus supplement for each series of
offered certificates whether the related trustee, another party to the related
Governing Document or an agent appointed by that trustee or other party will act
as tax administrator for the related trust. If the related tax administrator is
required to make a REMIC or FASIT election, we also will identify in the related
prospectus supplement all regular interests, residual interests and/or ownership
interests, as applicable, in the resulting REMIC or FASIT.
The following discussion is limited to certificates offered under this
prospectus. In addition, this discussion applies only to the extent that the
related trust holds only mortgage loans. If a trust holds assets other than
mortgage loans, such as mortgage-backed securities, we will disclose in the
related prospectus supplement the tax consequences associated with those other
assets being included. In addition, if agreements other than guaranteed
investment contracts are included in a trust to provide interest rate protection
for the related offered certificates, the anticipated material tax consequences
associated with those agreements also will be discussed in the related
prospectus supplement. See "Description of the Trust Assets--Arrangements
Providing Reinvestment, Interest Rate and Currency Related Protection."
The following discussion is based in part on the rules governing
original issue discount in Sections 1271-1273 and 1275 of the Internal Revenue
Code and in the Treasury regulations issued under those sections. It is also
based in part on the rules governing REMICs in Sections 860A-860G of the
Internal Revenue Code and in the Treasury regulations issued under those
sections. The regulations relating to original issue discount do not adequately
address all issues relevant to, and in some instances provide that they are not
applicable to, securities such as the offered certificates.
REMICS
GENERAL. With respect to each series of offered certificates as to
which the related tax administrator will make a REMIC election, our counsel will
deliver its opinion generally to the effect
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that, assuming compliance with all provisions of the related Governing Document,
and subject to any other assumptions set forth in the opinion:
o the related trust, or the relevant designated portion of the
trust, will qualify as a REMIC, and
o those offered certificates will represent--
1. regular interests in the REMIC, or
2. residual interests in the REMIC.
Any and all offered certificates representing interests in a REMIC will
be either--
o REMIC regular certificates, representing regular interests in
the REMIC, or
o REMIC residual certificates, representing residual interests
in the REMIC.
If an entity electing to be treated as a REMIC fails to comply with the
ongoing requirements of the Internal Revenue Code for REMIC status, it may lose
its REMIC status. If so, the entity may become taxable as a corporation.
Therefore, the related certificates may not be given the tax treatment
summarized below. Although the Internal Revenue Code authorizes the Treasury
Department to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, the Treasury Department has not done so. Any relief
mentioned above, moreover, may be accompanied by sanctions. These sanctions
could include the imposition of a corporate tax on all or a portion of a trust's
income for the period in which the requirements for REMIC status are not
satisfied. The Governing Document with respect to each REMIC will include
provisions designed to maintain its status as a REMIC under the Internal Revenue
Code.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. Unless we state
otherwise in the related prospectus supplement, the offered certificates that
are REMIC certificates will be treated as--
o "real estate assets" within the meaning of Section
856(c)(5)(B) of the Internal Revenue Code in the hands of a
real estate investment trust, and
o "loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Internal
Revenue Code in the hands of a thrift institution,
in the same proportion that the assets of the related REMIC are so treated.
However, to the extent that the REMIC assets constitute mortgage loans
on property not used for residential or other prescribed purposes, the related
offered certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). If 95% or more of the assets of the REMIC qualify for any of the
foregoing characterizations at all times during a calendar year, the related
offered certificates will qualify for the corresponding status in their entirety
for that calendar year.
In addition, offered certificates that are REMIC regular certificates
will be:
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o "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Internal Revenue Code in the hands of another REMIC;
and
o "permitted assets" under Section 860L(c)(1)(G) for a FASIT.
Finally, interest, including original issue discount, on offered
certificates that are REMIC regular certificates, and income allocated to
offered certificates that are REMIC residual certificates, will be interest
described in Section 856(c)(3)(B) of the Internal Revenue Code if received by a
real estate investment trust, to the extent that these certificates are treated
as "real estate assets" within the meaning of Section 856(c)(5)(B) of the
Internal Revenue Code.
The related tax administrator will determine the percentage of the
REMIC's assets that constitute assets described in the above-referenced sections
of the Internal Revenue Code with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC during
that calendar quarter. The related tax administrator will report those
determinations to certificateholders in the manner and at the times required by
applicable Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans--
o collections on mortgage loans held pending payment on the
related offered certificates, and
o any property acquired by foreclosure held pending sale, and
may include amounts in reserve accounts.
It is unclear whether property acquired by foreclosure held pending
sale, and amounts in reserve accounts, would be considered to be part of the
mortgage loans, or whether these assets otherwise would receive the same
treatment as the mortgage loans for purposes of the above-referenced sections of
the Internal Revenue Code. In addition, in some instances, the mortgage loans
may not be treated entirely as assets described in those sections of the
Internal Revenue Code. If so, we will describe in the related prospectus
supplement those mortgage loans that are characterized differently. The Treasury
regulations do provide, however, that cash received from collections on mortgage
loans held pending payment is considered part of the mortgage loans for purposes
of Section 856(c)(5)(B) of the Internal Revenue Code, relating to real estate
investment trusts.
To the extent a REMIC certificate represents ownership of an interest
in a mortgage loan that is secured in part by the related borrower's interest in
a bank account, that mortgage loan is not secured solely by real estate.
Accordingly:
o a portion of that certificate may not represent ownership of
"loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Internal
Revenue Code;
o a portion of that certificate may not represent ownership of
"real estate assets" under Section 856(c)(5)(B) of the
Internal Revenue Code; and
o the interest on that certificate may not constitute "interest
on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Internal Revenue
Code.
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TIERED REMIC STRUCTURES. For some series of REMIC certificates, the
related tax administrator may make two or more REMIC elections as to the related
trust for federal income tax purposes. As to each of these series of REMIC
certificates, our counsel will opine that each portion of the related trust as
to which a REMIC election is to be made will qualify as a REMIC. Each of these
series will be treated as one REMIC solely for purposes of determining:
o whether the related REMIC certificates will be "real estate
assets" within the meaning of Section 856(c)(5)(B) of the
Internal Revenue Code,
o whether the related REMIC certificates will be "loans secured
by an interest in real property" under Section 7701(a)(19)(C)
of the Internal Revenue Code, and
o whether the interest/income on the related REMIC certificates
is interest described in Section 856(c)(3)(B) of the Internal
Revenue Code.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
GENERAL. Except as otherwise stated in this discussion, the Internal
Revenue Code treats REMIC regular certificates as debt instruments issued by the
REMIC and not as ownership interests in the REMIC or its assets. Holders of
REMIC regular certificates that otherwise report income under the cash method of
accounting must nevertheless report income with respect to REMIC regular
certificates under the accrual method.
ORIGINAL ISSUE DISCOUNT. Some REMIC regular certificates may be issued
with original issue discount within the meaning of Section 1273(a) of the
Internal Revenue Code. Any holders of REMIC regular certificates issued with
original issue discount generally will have to include original issue discount
in income as it accrues, in accordance with a constant yield method, prior to
the receipt of the cash attributable to that income. The IRS has issued
regulations under Section 1271 to 1275 of the Internal Revenue Code generally
addressing the treatment of debt instruments issued with original issue
discount. Section 1272(a)(6) of the Internal Revenue Code provides special rules
applicable to the accrual of original issue discount on, among other things,
REMIC regular certificates. The Treasury Department has not issued regulations
under that section. You should be aware, however, that Section 1272(a)(6) and
the regulations under Sections 1271 to 1275 of the Internal Revenue Code do not
adequately address all issues relevant to, or are not applicable to, prepayable
securities such as the offered certificates. We recommend that you consult with
your own tax advisor concerning the tax treatment of your offered certificates.
The Internal Revenue Code requires, in computing the accrual of
original issue discount on REMIC regular certificates, that a reasonable
assumption be used concerning the rate at which borrowers will prepay the
mortgage loans held by the related REMIC. Further, adjustments must be made in
the accrual of that original issue discount to reflect differences between the
prepayment rate actually experienced and the assumed prepayment rate. The
prepayment assumption is to be determined in a manner prescribed in Treasury
regulations that the Treasury Department has not yet issued. The Committee
Report indicates that the regulations should provide that the prepayment
assumption used with respect to a REMIC regular certificate is determined once,
at initial issuance, and must be the same as that used in pricing. The
prepayment assumption used in reporting original issue discount for each series
of REMIC regular certificates will be consistent with this standard and will be
disclosed in the related prospectus supplement. However, neither we nor any
other person will make any representation that the mortgage loans underlying any
series of REMIC regular certificates will in fact prepay at a rate
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conforming to the prepayment assumption or at any other rate or that the IRS
will not challenge on audit the prepayment assumption used.
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 those certificates
are sold, excluding sales to bond houses, brokers and underwriters. If less than
a substantial amount of a particular class of REMIC regular certificates is sold
for cash on or prior to the related date of initial issuance of those
certificates, the issue price for that class will be the fair market value of
that class on the date of initial issuance.
Under the Treasury regulations, the stated redemption price of a REMIC
regular certificate is equal to the total of all payments to be made on that
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:
o a single fixed rate,
o a "qualified floating rate,"
o an "objective rate,"
o a combination of a single fixed rate and one or more
"qualified floating rates,"
o a combination of a single fixed rate and one "qualified
inverse floating rate," or
o 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 of that discount will vary according to the
characteristics of those certificates. If the original issue discount rules
apply to those certificates, we will describe in the related prospectus
supplement the manner in which those rules will be applied with respect to those
certificates in preparing information returns to the certificateholders and the
IRS.
Some classes of REMIC regular certificates may provide that the first
interest payment with respect to those certificates be made more than one month
after the date of initial issuance, a period that is longer than the subsequent
monthly intervals between interest payments. Assuming the accrual period for
original issue discount is the monthly period that ends on each payment date,
then, as a result of this long first accrual period, some or all interest
payments may be required to be included in the stated redemption price of the
REMIC regular certificate and accounted for as original issue discount. Because
interest on REMIC regular certificates must in any event be accounted for under
an accrual method, applying this analysis would result in only a slight
difference in the timing of the inclusion in income of the yield on the REMIC
regular certificates.
In addition, if the accrued interest to be paid on the first payment
date is computed with respect to a period that begins prior to the date of
initial issuance, a portion of the purchase price paid for a
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REMIC regular certificate will reflect that accrued interest. In those cases,
information returns provided to the certificateholders and the IRS will be based
on the position that the portion of the purchase price paid for the interest
accrued prior to the date of initial issuance is treated as part of the overall
cost of the REMIC regular certificate. Therefore, the portion of the interest
paid on the first payment date in excess of interest accrued from the date of
initial issuance to the first payment date is included in the stated redemption
price of the REMIC regular certificate. However, the Treasury regulations state
that all or some portion of this accrued interest may be treated as a separate
asset, the cost of which is recovered entirely out of interest paid on the first
payment date. It is unclear how an election to do so would be made under these
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
certificate multiplied by its weighted average maturity. For this purpose, the
weighted average maturity of a REMIC regular certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the certificate, by multiplying:
o the number of complete years, rounding down for partial years,
from the date of initial issuance, until that payment is
expected to be made, presumably taking into account the
prepayment assumption, by
o a fraction--
1. the numerator of which is the amount of the payment,
and
2. the denominator of which is the stated redemption
price at maturity of the certificate.
Under the Treasury regulations, original issue discount of only a DE
MINIMIS amount, other than DE MINIMIS original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of:
o the total amount of the DE MINIMIS original issue discount,
and
o a fraction--
1. the numerator of which is the amount of the principal
payment, and
2. the denominator of which is the outstanding stated
principal amount of the subject REMIC regular
certificate.
The Treasury regulations also would permit you to elect to accrue DE
MINIMIS original issue discount into income currently based on a constant yield
method. See "--REMICs--Taxation of Owners of REMIC Regular Certificates--Market
Discount" below for a description of that election under the applicable Treasury
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 certificate, including the
purchase date but excluding the disposition date. In the case of an original
holder of a REMIC regular certificate,
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the daily portions of original issue discount will be determined as described
below in this "--Original Issue Discount" subsection.
As to each accrual period, the related tax administrator will calculate
the original issue discount that accrued during that accrual period. For these
purposes, an accrual period is, unless we otherwise state in the related
prospectus supplement, the period that begins on a date that corresponds to a
payment date, or in the case of the first accrual period, begins on the date of
initial issuance, and ends on the day preceding the immediately following
payment date. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of:
o the sum of:
1. the present value, as of the end of the accrual
period, of all of the payments remaining to be made
on the subject REMIC regular certificate, if any, in
future periods, presumably taking into account the
prepayment assumption, and
2. the payments made on that certificate during the
accrual period of amounts included in the stated
redemption price, over
o the adjusted issue price of the subject REMIC regular
certificate at the beginning of the accrual period.
The adjusted issue price of a REMIC regular certificate is:
o the issue price of the certificate, increased by
o the total amount of original issue discount previously accrued
on the certificate, reduced by
o the amount of all prior payments of amounts included in its
stated redemption price.
The present value of the remaining payments referred to in item 1. of the second
preceding sentence will be calculated:
o assuming that payments on the REMIC regular certificate will
be received in future periods based on the related mortgage
loans being prepaid at a rate equal to the prepayment
assumption;
o using a discount rate equal to the original yield to maturity
of the certificate, based on its issue price and the
assumption that the related mortgage loans will be prepaid at
a rate equal to the prepayment assumption; and
o taking into account events, including actual prepayments, that
have occurred before the close of the accrual period.
The original issue discount accruing during any accrual period,
computed as described above, will be allocated ratably to each day during the
accrual period to determine the daily portion of original issue discount for
that day.
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A subsequent purchaser of a REMIC regular certificate that purchases
the certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, that is less than its remaining stated
redemption price, will also be required to include in gross income the daily
portions of any original issue discount with respect to the certificate.
However, the daily portion will be reduced, if the cost is in excess of its
adjusted issue price, in proportion to the ratio that the excess bears to the
total original issue discount remaining to be accrued on the certificate. The
adjusted issue price of a REMIC regular certificate, as of any date of
determination, equals the sum of:
o 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 date of
determination, and
o the daily portions of original issue discount for all days
during that accrual period prior to that date of
determination.
If the foregoing method for computing original issue discount results
in a negative amount of original issue discount as to any accrual period with
respect to a REMIC regular certificate held by you, the amount of original issue
discount accrued for that accrual period will be zero. You may not deduct the
negative amount currently. Instead, you will only be permitted to offset it
against future positive original issue discount, if any, attributable to the
certificate. Although not free from doubt, it is possible that you may be
permitted to recognize a loss to the extent your basis in the certificate
exceeds the maximum amount of payments that you could ever receive with respect
to the certificate. However, the loss may be a capital loss, which is limited in
its deductibility. The foregoing considerations are particularly relevant to
certificates that have no, or a disproportionately small, amount of principal
because they can have negative yields if the mortgage loans held by the related
REMIC prepay more quickly than anticipated. See "Risk Factors--The Investment
Performance of Your Offered Certificate Will Depend Upon Payments, Defaults and
Losses on the Underlying Mortgage Loans."
The Treasury regulations in some circumstances permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that you may be able
to select a method for recognizing original issue discount that differs from
that used by the trust in preparing reports to you and the IRS. Prospective
purchasers of the REMIC regular certificates should consult their tax advisors
concerning the tax treatment of these certificates in this regard.
MARKET DISCOUNT. You will be considered to have purchased a REMIC
regular certificate at a market discount if--
o in the case of a certificate issued without original issue
discount, you purchased the certificate at a price less than
its remaining stated principal amount, or
o in the case of a certificate issued with original issue
discount, you purchased the certificate at a price less than
its adjusted issue price.
If you purchase a REMIC regular certificate with more than a DE MINIMIS
amount of market discount, you will recognize gain upon receipt of each payment
representing stated redemption price. Under Section 1276 of the Internal Revenue
Code, you generally will be required to allocate the portion of each payment
representing some or all of the stated redemption price first to accrued market
discount not previously included in income. You must recognize ordinary income
to that extent. You may elect
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to include market discount in income currently as it accrues rather than
including it on a deferred basis in accordance with the foregoing. If made, this
election will apply to all market discount bonds acquired by you on or after the
first day of the first taxable year to which this election applies.
The Treasury regulations also permit you to elect to accrue all
interest and discount, including DE MINIMIS market or original issue discount,
in income as interest, and to amortize premium, based on a constant yield
method. Your making this election with respect to a REMIC regular certificate
with market discount would be deemed to be an election to include currently
market discount in income with respect to all other debt instruments with market
discount that you acquire during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, your making this
election as to a certificate acquired at a premium would be deemed to be an
election to amortize bond premium, with respect to all debt instruments having
amortizable bond premium that you own or acquire. See "--REMICs --Taxation of
Owners of REMIC Regular Certificates--Premium" below.
Each of the elections described above to accrue interest and discount,
and to amortize 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 Internal
Revenue Code if the market discount is less than 0.25% of the remaining stated
redemption price of the 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 Treasury regulations refer to the weighted average maturity of
obligations. 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 "--REMICs--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 Internal Revenue 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 relevant rules described in the Committee Report apply. The
Committee Report indicates that in each accrual period, you may accrue market
discount on a REMIC regular certificate held by you, at your option:
o on the basis of a constant yield method,
o in the case of a 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 certificate as of the beginning of
the accrual period, or
o in the case of a 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 amount of
original issue discount remaining on the certificate at the
beginning of the accrual period.
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The prepayment assumption used in calculating the accrual of original
issue discount is also used in calculating the accrual of market discount.
To the extent that REMIC regular certificates provide for monthly or
other periodic payments 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 the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, Section 1277 of the Internal Revenue Code may require you to
defer a portion of your interest deductions for the taxable year attributable to
any indebtedness incurred or continued to purchase or carry a REMIC regular
certificate purchased with market discount. For these purposes, the DE MINIMIS
rule referred to above applies. Any deferred interest expense would not exceed
the market discount that accrues during the related taxable year and is, in
general, allowed as a deduction not later than the year in which the related
market discount is includible in income. If you have elected, however, to
include market discount in income currently as it accrues, the interest deferral
rule described above would not apply.
PREMIUM. A REMIC regular certificate purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, that is
greater than its remaining stated redemption price will be considered to be
purchased at a premium. You may elect under Section 171 of the Internal Revenue
Code to amortize the premium under the constant yield method over the life of
the certificate. If you elect to amortize bond premium, bond premium would be
amortized on a constant yield method and would be applied as an offset against
qualified stated interest. If made, this election will apply to all debt
instruments having amortizable bond premium that you own or subsequently
acquire. The IRS has issued regulations on the amortization of bond premium, but
they specifically do not apply to holders of REMIC regular certificates.
The Treasury regulations also permit you to elect to include all
interest, discount and premium in income based on a constant yield method,
further treating you 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 and require the use of a prepayment assumption in accruing market
discount with respect to REMIC regular certificates without regard to whether
those certificates have original issue discount, will also apply in amortizing
bond premium under Section 171 of the Internal Revenue Code.
Whether you will be treated as holding a REMIC regular certificate with
amortizable bond premium will depend on--
o the purchase price paid for your offered certificate, and
o the payments remaining to be made on your offered certificate
at the time of its acquisition by you.
If you acquire an interest in any class of REMIC regular certificates
issued at a premium, you should consider consulting your own tax advisor
regarding the possibility of making an election to amortize the premium.
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REALIZED LOSSES. Under Section 166 of the Internal Revenue Code, if you
are either a corporate holder of a REMIC regular certificate and or a
noncorporate holder of a REMIC regular certificate that acquires the certificate
in connection with a trade or business, you should be allowed to deduct, as
ordinary losses, any losses sustained during a taxable year in which your
offered certificate becomes wholly or partially worthless as the result of one
or more realized losses on the related mortgage loans. However, if you are a
noncorporate holder that does not acquire a REMIC regular certificate in
connection with a trade or business, it appears that--
o you will not be entitled to deduct a loss under Section 166 of
the Internal Revenue Code until your offered certificate
becomes wholly worthless, which is when its principal balance
has been reduced to zero, and
o the loss will be characterized as a short-term capital loss.
You will also have to accrue interest and original issue discount with
respect to your REMIC regular certificate, without giving effect to any
reductions in payments attributable to defaults or delinquencies on the related
mortgage loans, until it can be established that those payment reductions are
not recoverable. As a result, your taxable income in a period could exceed your
economic income in that period. If any of those amounts previously included in
taxable income are not ultimately received due to a loss on the related mortgage
loans, you should be able to recognize a loss or reduction in income. However,
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, the Internal Revenue Code does not subject a REMIC to entity-level
taxation, except with regard to prohibited transactions and the other
transactions described under "--REMICs--Prohibited Transactions Tax and Other
Taxes" below. Rather, a holder of REMIC residual certificates must generally
take in income the taxable income or net loss of the related REMIC. Accordingly,
the Internal Revenue Code treats the REMIC residual certificates much
differently than it would if they were direct ownership interests in the related
mortgage loans or as debt instruments issued by the related REMIC.
Holders of REMIC residual certificates generally will be required to
report their daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the related REMIC for each day during
a calendar quarter that they own those certificates. 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 we otherwise disclose in the related prospectus
supplement. These daily amounts then will be allocated among the holders of the
REMIC residual certificates in proportion to their respective ownership
interests on that day. Any amount included in the certificateholders' gross
income or allowed as a loss to them 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 "--REMICs--Taxation of Owners of REMIC
Residual Certificates--Taxable Income of the REMIC." Holders of REMIC residual
certificates must report the taxable income of the related REMIC without regard
to the timing or amount of cash payments by the REMIC until the REMIC's
termination. Income derived from the REMIC residual certificates will be
"portfolio income" for the purposes of the limitations under Section 469 of the
Internal Revenue Code on the deductibility of "passive losses."
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A holder of a REMIC residual certificate that purchased the certificate
from a prior holder 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 related REMIC for each day that it holds the REMIC residual certificate.
These daily amounts generally will equal the amounts of taxable income or net
loss determined as described above. The Committee Report indicates that
modifications of the general rules may be made, by regulations, legislation or
otherwise to reduce, or increase, the income of a holder of a REMIC residual
certificate. These modifications would occur when a holder purchases the REMIC
residual certificate from a prior holder at a price other than the adjusted
basis that the REMIC residual certificate would have had in the hands of an
original holder of that certificate. The Treasury regulations, however, do not
provide for these modifications.
Any payments that you receive from the seller of a REMIC residual
certificate in connection with the acquisition of that certificate will be
income to you. Although it is possible that these payments would be includible
in income immediately upon receipt, the IRS might assert that you should include
these payments in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, we recommend that you consult your tax advisor
concerning the treatment of these payments for income tax purposes.
Tax liability with respect to the amount of income that holders of
REMIC residual certificates will be required to report, will often exceed the
amount of cash payments received from the related REMIC for the corresponding
period. Consequently, you should have--
o other sources of funds sufficient to pay any federal income
taxes due as a result of your ownership of REMIC residual
certificates, or
o unrelated deductions against which income may be offset.
See, however, the rules discussed below relating to:
o excess inclusions,
o residual interests without significant value, and
o noneconomic residual interests.
The fact that the tax liability associated with this income allocated to you may
exceed the cash payments received by you for the corresponding period may
significantly and adversely affect their after-tax rate of return. This
disparity between income and payments may not be offset by corresponding losses
or reductions of income attributable to your REMIC residual certificates until
subsequent tax years. Even then, the extra income may not be completely offset
due to changes in the Internal Revenue Code, tax rates or character of the
income or loss. Therefore, REMIC residual certificates will ordinarily have a
negative value at the time of issuance. See "Risk Factors--`Residual Interests'
in a `Real Estate Mortgage Investment Conduit' Have Adverse Tax Consequences."
TAXABLE INCOME OF THE REMIC. The taxable income of a REMIC will equal:
o the income from the mortgage loans and other assets of the
REMIC; plus
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o any cancellation of indebtedness income due to the allocation
of realized losses to those REMIC certificates constituting
regular interests in the REMIC; less the following items--
1. the deductions allowed to the REMIC for interest,
including original issue discount but reduced by any
premium on issuance, on any class of REMIC
certificates constituting regular interests in the
REMIC, whether offered or not,
2. amortization of any premium on the mortgage loans
held by the REMIC,
3. bad debt losses with respect to the mortgage loans
held by the REMIC, and
4. except as described below in this "--Taxable Income
of the REMIC" subsection, servicing, administrative
and other expenses.
For purposes of determining its taxable income, a REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC certificates, or in the case of REMIC certificates 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 REMIC certificates offered
hereby will be determined in the manner described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." The issue price of a REMIC certificate received in exchange for an
interest in 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
related tax administrator may be required to estimate the fair market value of
these 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 a REMIC of original issue discount income and market discount income
with respect to mortgage loans that it holds will be equivalent to the method
for accruing original issue discount income for holders of REMIC regular
certificates. That method is a constant yield method taking into account the
prepayment assumption. However, a REMIC that acquires loans at a market discount
must include that market discount in income currently, as it accrues, on a
constant yield basis. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing the 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 REMIC will acquire a mortgage loan with discount, or premium, to the
extent that the REMIC's basis, determined as described in the preceding
paragraph, is different from its stated redemption price. Discount will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to that income, under a method similar to the method
described above for accruing original issue discount on the REMIC regular
certificates. A REMIC probably will elect under Section 171 of the Internal
Revenue Code to amortize any premium on the mortgage loans that it holds.
Premium on any mortgage loan to which this election applies may be amortized
under a constant yield method, presumably taking into account the prepayment
assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on all of the certificates that constitute regular interests in
the REMIC, whether or not offered hereby, as if those certificates were
indebtedness of the REMIC. Original issue discount will be considered to accrue
for
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this purpose as described above under "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount." However, the DE MINIMIS rule
described in that section will not apply in determining deductions.
If a class of REMIC regular certificates is issued at a price in excess
of the stated redemption price of that class, the net amount of interest
deductions that are allowed to the REMIC in each taxable year with respect to
those certificates will be reduced by an amount equal to the portion of that
excess that is considered to be amortized in that year. It appears that this
excess should be amortized under a constant yield method in a manner analogous
to the method of accruing original issue discount described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount."
As a general rule, the taxable income of a REMIC will be determined 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 "--REMICs--Prohibited Transactions Tax and Other Taxes" below. Further, the
limitation on miscellaneous itemized deductions imposed on individuals by
Section 67 of the Internal Revenue Code will not be applied at the REMIC level
so that the REMIC will be allowed full deductions for servicing, administrative
and other noninterest expenses in determining its taxable income. All those
expenses will be allocated as a separate item to the holders of the related
REMIC certificates, subject to the limitation of Section 67 of the Internal
Revenue Code. See "--REMICs--Taxation of Owners of REMIC Residual
Certificates--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 PAYMENTS. The adjusted basis of a REMIC
residual certificate will be equal to:
o the amount paid for that REMIC residual certificate,
o increased by, amounts included in the income of the holder of
that REMIC residual certificate, and
o decreased, but not below zero, by payments made, and by net
losses allocated, to the holder of that REMIC residual
certificate.
A holder of a REMIC residual certificate is not allowed to take into
account any net loss for any calendar quarter to the extent that the net loss
exceeds the adjusted basis to that holder as of the close of that calendar
quarter, determined without regard to that 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.
Any payment on a REMIC residual certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual certificate. To the extent a payment on a
REMIC residual certificate exceeds the holder's adjusted basis, it will be
treated as gain from the sale of that REMIC residual certificate.
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A holder's basis in a REMIC residual certificate will initially equal
the amount paid for the certificate and will be increased by that holder's
allocable share of taxable income of the related REMIC. However, these increases
in basis may not occur until the end of the calendar quarter, or perhaps the end
of the calendar year, with respect to which the related REMIC's taxable income
is allocated to that holder. To the extent the initial basis of the holder of a
REMIC residual certificate is less than the payments to that holder, and
increases in the initial basis either occur after these payments or, together
with the initial basis, are less than the amount of these payments, gain will be
recognized to that holder on these payments. This gain will be treated as gain
from the sale of its REMIC residual certificate.
The effect of these rules is that a holder of a REMIC residual
certificate may not amortize its basis in a REMIC residual certificate, but may
only recover its basis:
o through payments,
o through the deduction of any net losses of the REMIC, or
o upon the sale of its REMIC residual certificate. See
"--REMICs--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 see "--REMICs--Taxation of Owners of REMIC Residual
Certificates--General" above. These adjustments could require a holder of a
REMIC residual certificate to account for any difference between the cost of the
certificate to the holder and the adjusted basis of the certificate would have
been in the hands of an original holder.
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:
o the daily portions of REMIC taxable income allocable to that
certificate, over
o the sum of the daily accruals for each day during the quarter
that the certificate was held by that holder.
The daily accruals of a holder of a REMIC residual certificate will be
determined by allocating to each day during a calendar quarter its ratable
portion of a numerical calculation. That calculation is 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 date of
initial issuance. For this purpose, the adjusted issue price of a REMIC residual
certificate as of the beginning of any calendar quarter will be equal to:
o the issue price of the certificate, increased by
o the sum of the daily accruals for all prior quarters, and
decreased, but not below zero, by
o any payments made with respect to the certificate before the
beginning of that quarter.
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The issue price of a REMIC residual certificate is the initial offering
price to the public at which a substantial amount of the REMIC residual
certificates were sold, but excluding sales to bond houses, brokers and
underwriters or, if no sales have been made, their initial value. 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 Department has authority to
issue regulations that would treat the entire amount of income accruing on a
REMIC residual certificate as excess inclusions if the REMIC residual interest
evidenced by that certificate is considered not to have significant value.
For holders of REMIC residual certificates, excess inclusions:
o will not be permitted to be offset by deductions, losses or
loss carryovers from other activities,
o will be treated as unrelated business taxable income to an
otherwise tax-exempt organization, and
o 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 payments to holders of REMIC
residual certificates that are foreign investors. See,
however, "--REMICs--Foreign Investors in REMIC Certificates"
below.
Furthermore, for purposes of the alternative minimum tax:
o excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction, and
o alternative minimum taxable income may not be less than the
taxpayer's excess inclusions.
This last rule has the effect of preventing non-refundable 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, or REIT, the total excess inclusions with respect to these
REMIC residual certificates will be allocated among the shareholders of the REIT
in proportion to the dividends received by the shareholders from the REIT. 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. The total
excess inclusions referred to in the previous sentence will be reduced, but not
below zero, by any REIT taxable income, within the meaning of Section 857(b)(2)
of the Internal Revenue Code, other than any net capital gain. Treasury
regulations yet to be issued could apply a similar rule to:
o regulated investment companies,
o common trusts, and
o some cooperatives.
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The Treasury regulations, however, currently do not address this
subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the Treasury
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 a 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 Treasury 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 related Governing Document:
o the present value of the expected future payments on the REMIC
residual certificate equals at least the present value of the
expected tax on the anticipated excess inclusions, and
o the transferor reasonably expects that the transferee will
receive payments with respect to the REMIC residual
certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
The present value calculation referred to above is calculated 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. This rate is computed and published monthly by the
IRS.
Accordingly, all transfers of REMIC residual certificates that may
constitute noneconomic residual interests will be subject to restrictions under
the terms of the related Governing Document that are intended to reduce the
possibility of any transfer being disregarded. These restrictions will require
an affidavit:
o from each party to the transfer, stating that no purpose of
the transfer is to impede the assessment or collection of tax,
o from the prospective transferee, providing representations as
to its financial condition, and
o from the prospective transferor, stating that it has made 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.
The Treasury recently issued proposed regulations that would revise
this safe harbor. The proposed regulations would make the safe harbor
unavailable unless the present value of the anticipated tax liabilities
associated with holding the residual interest did not exceed the sum of:
o the present value of any consideration given to the transferee
to acquire the interest,
o the present value of the expected future distributions on the
interest, and
o the present value of the anticipated tax savings associated
with the holding of the interest as the REMIC generates
losses.
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Present values would be computed using a discount rate equal to an applicable
Federal rate, except that if a transferee could demonstrate that it borrowed
regularly in the course of its trade or business substantial funds at a lower
rate from unrelated third parties, that lower rate could be used as the discount
rate.
It is not clear when those regulations would be effective. Although the
text of the proposed regulations states that they would be effective on February
4, 2000, the preamble to the proposed regulations says that these regulations
will apply to transfers of REMIC residual interests made after the date the
final regulations are published in the Federal Register. The Treasury Department
is anticipated to issue clarification with regard to these conflicting
statements regarding the effective date of the proposed regulations shortly.
Prior to purchasing a REMIC residual certificate, prospective
purchasers should consider the possibility that a purported transfer of a REMIC
residual certificate to another party at some future date may be disregarded in
accordance with the above-described rules. This would result in the retention of
tax liability by the transferor with respect to that purported transfer.
We will disclose in the related prospectus supplement whether the
offered REMIC residual certificates may be considered noneconomic residual
interests under the Treasury regulations. However, we will base any disclosure
that a REMIC residual certificate will not be considered noneconomic upon
various assumptions. Further, we will make no representation that a REMIC
residual certificate will not be considered noneconomic for purposes of the
above-described rules.
See "--REMICs--Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of REMIC residual certificates
to foreign persons.
MARK-TO-MARKET RULES. Regulations under Section 475 of the Internal
Revenue Code require that a securities dealer mark to market securities held for
sale to customers. This mark-to-market requirement applies to all securities
owned by a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. These regulations provide that for
purposes of this mark-to-market requirement, a REMIC residual certificate is not
treated as a security for purposes of Section 475 of the Internal Revenue Code.
Thus, a REMIC residual certificate is not subject to the mark-to-market rules.
We recommend that prospective purchasers of a REMIC residual certificate consult
their tax advisors regarding these regulations.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO INVESTORS THAT ARE FOREIGN
PERSONS. Unless we otherwise state in the related prospectus supplement,
transfers of REMIC residual certificates to investors that are foreign persons
under the Internal Revenue Code will be prohibited under the related Governing
Documents.
If transfers of REMIC residual certificates to investors that are
foreign persons are permitted under the related Governing Documents, and such a
transfer takes place, then it is possible that the transfer will be disregarded
for all federal tax purposes. The applicable Treasury regulations provide that a
transfer of a REMIC residual certificate that has "tax avoidance potential" to a
non-U.S. Person will be disregarded for all federal tax purposes, unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A REMIC residual certificate is deemed to
have tax avoidance potential unless, at the time of the transfer--
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o the future value of expected distributions equals at least 30%
of the anticipated excess inclusions after the transfer, and
o the transferor reasonably expects that the transferee will
receive sufficient distributions from the REMIC at or after
the time at which the excess inclusions accrue and prior to
the end of the next succeeding taxable year for the
accumulated withholding tax liability to be paid.
If the non-U.S. Person transfers the REMIC residual certificate back
to a U.S. Person, the transfer will be disregarded and the foreign transferor
will continue to be treated as the owner unless arrangements are made so that
the transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
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. Unless we state otherwise in the related
prospectus supplement, however, 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.
If the holder of a REMIC certificate receives an allocation of fees and
expenses in accordance with the preceding discussion, and if that holder is:
o an individual,
o an estate or trust, or
o a Pass-Through Entity beneficially owned by one or more
individuals, estates or trusts,
then--
o an amount equal to this individual's, estate's or trust's
share of these fees and expenses will be added to the gross
income of this holder, and
o the individual's, estate's or trust's share of these fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the
Internal Revenue Code, which permits the deduction of these
fees and expenses only to the extent they exceed, in total, 2%
of a taxpayer's adjusted gross income.
In addition, Section 68 of the Internal Revenue 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:
o 3% of the excess of the individual's adjusted gross income
over the specified amount, or
o 80% of the amount of itemized deductions otherwise allowable
for the taxable year.
Furthermore, in determining the alternative minimum taxable income of a
holder of a REMIC certificate that is--
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o an individual,
o an estate or trust, or
o 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 these fees and other deductions will be included
in the holder's gross income.
The amount of additional taxable income reportable by holders of REMIC
certificates that are subject to the limitations of either Section 67 or Section
68 of the Internal Revenue Code, or the complete disallowance of the related
expenses for alternative minimum tax purposes, may be substantial.
Accordingly, REMIC certificates to which these expenses are allocated
will generally not be appropriate investments for:
o an individual,
o an estate or trust, or
o a Pass-Through Entity beneficially owned by one or more
individuals, estates or trusts.
We recommend that those prospective investors consult with their tax
advisors prior to making an investment in a REMIC certificate to which these
expenses are allocated.
SALES OF REMIC CERTIFICATES. If a REMIC certificate is sold, the
selling certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
certificate. The adjusted basis of a REMIC regular certificate generally will
equal:
o the cost of the certificate to that certificateholder,
increased by
o income reported by that certificateholder with respect to the
certificate, including original issue discount and market
discount income, and reduced, but not below zero, by
o payments on the certificate received by that certificateholder
and by that amortized premium.
The adjusted basis of a REMIC residual certificate will be determined
as described above under "--REMICs--Taxation of Owners of REMIC Residual
Certificates--Basis Rules, Net Losses and Distributions." Except as described
below in this "--Sales of REMIC Certificates" subsection, any gain or loss from
your sale of a REMIC certificate will be capital gain or loss, provided that you
hold the certificate as a capital asset within the meaning of Section 1221 of
the Internal Revenue Code, which is generally property held for investment.
In addition to the recognition of gain or loss on actual sales, the
Internal Revenue Code requires the recognition of gain, but not loss, upon the
constructive sale of an appreciated financial position. A constructive sale of
an appreciated financial position occurs if a taxpayer enters into a transaction
or
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series of transactions that have the effect of substantially eliminating the
taxpayer's risk of loss and opportunity for gain with respect to the financial
instrument. Debt instruments that--
o entitle the holder to a specified principal amount,
o pay interest at a fixed or variable rate, and
o are not convertible into the stock of the issuer or a related
party,
cannot be the subject of a constructive sale for this purpose. Because most
REMIC regular certificates meet this exception, Section 1259 will not apply to
most REMIC regular certificates. However, REMIC regular certificates that have
no, or a disproportionately small, amount of principal, can be the subject of a
constructive sale.
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. A taxpayer
would do so because 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.
As of the date of this prospectus, the Internal Revenue Code provides
for lower rates as to long-term capital gains than those applicable to the
short-term capital gains and ordinary income recognized or received by
individuals. No similar rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss is
relevant for other purposes to both individuals and corporations.
Gain from the sale of a REMIC regular certificate that might otherwise
be a capital gain will be treated as ordinary income to the extent that the gain
does not exceed the excess, if any, of:
o the amount that would have been includible in the seller's
income with respect to that REMIC regular certificate assuming
that income had accrued on the certificate at a rate equal to
110% of the applicable Federal rate determined as of the date
of purchase of the certificate, which is a rate based on an
average of current yields on Treasury securities having a
maturity comparable to that of the certificate based on the
application of the prepayment assumption to the certificate,
over
o the amount of ordinary income actually includible in the
seller's income prior to that sale.
In addition, gain recognized on the sale of a REMIC regular certificate
by a seller who purchased the certificate at a market discount will be taxable
as ordinary income in an amount not exceeding the portion of that discount that
accrued during the period the certificate was held by the seller, reduced by any
market discount included in income under the rules described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Market Discount"
and "--Premium."
REMIC certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC certificate by a bank or thrift institution
to which that section of the Internal Revenue Code applies will be ordinary
income or loss.
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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 a holder holds the certificate as part of a "conversion transaction" within
the meaning of Section 1258 of the Internal Revenue 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 that 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.
Except as may be provided in Treasury regulations yet to be issued, a
loss realized on the sale of a REMIC residual certificate will be subject to the
"wash sale" rules of Section 1091 of the Internal Revenue Code, if during the
period beginning six months before, and ending six months after, the date of
that sale the seller of that certificate:
o reacquires that same REMIC residual certificate,
o acquires any other residual interest in a REMIC, or
o acquires any similar interest in a taxable mortgage pool, as
defined in Section 7701(i) of the Internal Revenue Code.
In that event, any loss realized by the holder of a REMIC residual certificate
on the sale will not be recognized or deductible currently, but instead will be
added to that holder's adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES. The Internal Revenue Code
imposes a tax on REMICs equal to 100% of the net income derived from prohibited
transactions. In general, subject to specified exceptions, a prohibited
transaction includes:
o the disposition of a non-defaulted mortgage loan,
o the receipt of income from a source other than a mortgage loan
or other permitted investments,
o the receipt of compensation for services, or
o the gain from the disposition of an asset purchased with
collections on the mortgage loans for temporary investment
pending payment on the REMIC certificates.
It is not anticipated that any REMIC will engage in any prohibited
transactions as to which it would be subject to this tax.
In addition, some contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property. The related
Governing Document will include provisions designed to prevent the acceptance of
any contributions that would be subject to this tax.
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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 REITs. The related Governing Documents may permit the
special servicer to conduct activities with respect to a mortgaged property
acquired by one of our trusts in a manner that causes the trust to incur this
tax, if doing so would, in the reasonable discretion of the special servicer,
maximize the net after-tax proceeds to certificateholders. However, under no
circumstance may the special servicer allow the acquired mortgaged property to
cease to be a "permitted investment" under Section 860G(a)(5) of the Internal
Revenue Code.
Unless we otherwise disclose in the related prospectus supplement, it
is not anticipated that any material state or local income or franchise tax will
be imposed on any REMIC.
Unless we state otherwise in the related prospectus supplement, and to
the extent permitted by then applicable laws, any tax on prohibited
transactions, particular contributions or Net Income From Foreclosure Property,
and any state or local income or franchise tax, that may be imposed on the REMIC
will be borne by the related trustee, tax administrator, master servicer,
special servicer or manager, in any case out of its own funds, provided that--
o the person has sufficient assets to do so, and
o the tax arises out of a breach of that person's obligations
under the related Governing Document.
Any tax not borne by one of these persons would be charged against the
related trust resulting in a reduction in amounts payable to holders of the
related REMIC certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
PARTICULAR ORGANIZATIONS. If a REMIC residual certificate is transferred to a
Disqualified Organization, a tax will be imposed in an amount equal to the
product of:
o the present value 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 value of the anticipated excess inclusions is 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.
The anticipated excess inclusions must be determined as of the date
that the REMIC residual certificate is transferred and must be based on:
o events that have occurred up to the time of the transfer,
o the prepayment assumption, and
o any required or permitted clean up calls or required
liquidation provided for in the related Governing Document.
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The tax on transfers to Disqualified Organizations generally would be
imposed on the transferor of the REMIC residual certificate, except when the
transfer is through an agent for a Disqualified Organization. In that case, 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:
o the transferee furnishes to the transferor an affidavit that
the transferee is not a Disqualified Organization, and
o as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false.
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 that entity, then a tax will
be imposed on that entity equal to the product of:
o the amount of excess inclusions on the certificate that are
allocable to the interest in the Pass-Through Entity held by
the Disqualified Organization, and
o 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 that Pass-Through Entity
furnishes to that Pass-Through Entity:
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.
For taxable years beginning on or after January 1, 1998, if an Electing
Large Partnership holds a REMIC residual certificate, all interests in the
Electing Large Partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed on pass-through entities described in the second
preceding paragraph. This tax on Electing Large Partnerships must be paid even
if each record holder of an interest in that partnership provides a statement
mentioned in the prior paragraph.
In addition, a person holding an interest in a Pass-Through Entity as a
nominee for another person will, with respect to that interest, be treated as a
Pass-Through Entity.
Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that:
o the residual interests in the entity are not held by
Disqualified Organizations, and
o the information necessary for the application of the tax
described in this prospectus will be made available.
We will include in the related Governing Document restrictions on the
transfer of REMIC residual certificates and other provisions that are intended
to meet this requirement, and we will discuss
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those restrictions and provisions in any prospectus supplement relating to the
offering of any REMIC residual certificate.
The Clinton Administration recently proposed in its budget amendments
to the REMIC provisions designed to ensure that income taxes imposed on the
holder of a REMIC residual interest are paid when due. Those provisions would
impose secondary liability on the REMIC itself for any tax required to be paid
with respect to the income allocated to a REMIC residual interest if the holder
does not pay its taxes on that income when they are due. If adopted, the
amendments would be effective for REMICs created after the date of enactment. It
is not possible to predict whether the legislation will be adopted or, if so, in
what form.
TERMINATION. A REMIC will terminate immediately after the payment date
following receipt by the REMIC of the final payment with respect to the related
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 payment 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 payment on that
certificate is less than the REMIC residual certificateholder's adjusted basis
in the certificate, that holder should, but may not, be treated as realizing a
capital loss equal to the amount of that difference.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Internal Revenue Code, a REMIC will be treated
as a partnership and holders of the related REMIC residual certificates will be
treated as partners. Unless we otherwise state in the related prospectus
supplement, the related tax administrator will file REMIC federal income tax
returns on behalf of the REMIC, and will be designated as and will act as or on
behalf of the tax matters person with respect to the REMIC in all respects. The
related tax administrator may hold at least a nominal amount of REMIC residual
certificates.
As, or as agent for, the tax matters person, the related tax
administrator, subject to applicable notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the holders of the REMIC residual certificates in connection
with the administrative and judicial review of the REMIC's--
o income,
o deductions
o gains,
o losses, and
o classification as a REMIC.
Holders of REMIC residual certificates generally will be required to
report these REMIC items consistently with their treatment on the related
REMIC's tax return. In addition, these holders may in some circumstances be
bound by a settlement agreement between the related tax administrator, as, or as
agent for, the tax matters person, and the IRS concerning any REMIC item.
Adjustments made to the REMIC's tax return may require these holders to make
corresponding adjustments on their returns. An audit of the REMIC's tax return,
or the adjustments resulting from that audit, could result in an audit of a
holder's return.
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No REMIC will be registered as a tax shelter under Section 6111 of the
Internal Revenue Code. Any person that holds a REMIC residual certificate as a
nominee for another person may be required to furnish to the related REMIC, in a
manner to be provided in Treasury regulations, the name and address of that
other person, as well as 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 or made readily available through electronic
means to individual holders of REMIC regular certificates and the IRS. Holders
of REMIC regular certificates that are--
o corporations,
o trusts,
o securities dealers, and
o various other non-individuals,
will be provided interest and original issue discount income information and the
information set forth in the following paragraphs. This information will be
provided upon request in accordance with the requirements of the applicable
regulations. The information must be provided by the later of:
o 30 days after the end of the quarter for which the information
was requested, or
o 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 that
information to be reported to the IRS. Reporting with respect to REMIC residual
certificates, including--
o income,
o excess inclusions,
o investment expenses, and
o relevant information regarding qualification of the REMIC's
assets,
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC regular certificate information reports will
include a statement of the adjusted issue price of the REMIC regular certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, the regulations only require that
information pertaining to the appropriate proportionate
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method of accruing market discount be provided. See "--REMICs--Taxation of
Owners of REMIC Regular Certificates--Market Discount."
Unless we otherwise specify in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the related tax administrator for the subject REMIC.
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 Internal Revenue Code at a rate of 31% if recipients of these payments:
o fail to furnish to the payor information regarding, among
other things, their taxpayer identification numbers, or
o otherwise fail to establish an exemption from this tax.
Any amounts deducted and withheld from a payment 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. Unless we otherwise disclose
in the related prospectus supplement, a holder of a REMIC regular certificate
that is--
o a foreign person, and
o 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 that certificate,
will normally not be subject to United States federal income or withholding tax
with respect to a payment on a REMIC regular certificate. To avoid withholding
or tax, that holder must comply with applicable identification requirements.
These requirements include delivery of a statement, signed by the
certificateholder under penalties of perjury, certifying that the
certificateholder is a foreign person and providing the name and address of the
certificateholder.
On October 6, 1997, the Treasury Department issued new regulations that
modify the withholding, backup withholding and information reporting rules
described above. These regulations, as modified by Treasury Decision 8856, will
generally be effective for investments made after December 31, 2000, subject to
applicable transition rules. Prospective investors are urged to consult their
own tax advisors regarding these regulations.
For these purposes, a foreign person is anyone other than a U.S.
Person.
It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC regular certificate held by a person or
entity that owns directly or indirectly a 10% or greater interest in the related
REMIC residual certificates. If the holder does not qualify for exemption,
payments of interest, including payments in respect of accrued original issue
discount, to that holder may be subject to a tax rate of 30%, subject to
reduction under any applicable tax treaty.
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It is possible, under regulations promulgated under Section 881 of the
Internal Revenue Code concerning conduit financing transactions, that the
exemption from withholding taxes described above may also not be available to a
holder who is a foreign person and either--
o owns 10% or more of one or more underlying mortgagors, or
o if the holder is a controlled foreign corporation, is related
to one or more mortgagors in the applicable trust.
Further, it appears that a REMIC regular certificate would not be
included in the estate of a nonresident alien individual and would not be
subject to United States estate taxes. However, it is recommended that
certificateholders who are nonresident alien individuals consult their tax
advisors concerning this question.
Unless we otherwise state in the related prospectus supplement, the
related Governing Document will prohibit transfers of REMIC residual
certificates to investors that are:
o foreign persons, or
o United States persons, if classified as a partnership under
the Internal Revenue Code, unless all of their beneficial
owners are United States persons.
FASITS
GENERAL. An election may be made to treat the trust for a series of
offered certificates or specified assets of that trust, as a financial asset
securitization investment trust, or FASIT, within the meaning of Section 860L(a)
of the Internal Revenue Code. The election would be noted in the applicable
prospectus supplement. If a FASIT election is made, the offered certificates
will be designated as classes of regular interests in that FASIT, and there will
be one class of ownership interest in the FASIT. With respect to each series of
offered certificates as to which the related tax administrator makes a FASIT
election, and assuming, among other things--
o the making of an appropriate election, and
o compliance with the related Governing Document,
our counsel will deliver its opinion generally to the effect that:
o the relevant assets will qualify as a FASIT,
o those offered certificates will be FASIT regular certificates,
representing FASIT regular interests in the FASIT, and
o one class of certificates of the same series will be the FASIT
ownership certificates, representing the sole class of
ownership interest in the FASIT.
Only FASIT regular certificates are offered by this prospectus. If so
specified in the applicable prospectus supplement, a portion of the trust for a
series of certificates as to no FASIT election is made may be treated as a
grantor trust for federal income tax purposes. See "--Grantor Trusts."
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On February 4, 2000, the Treasury Department issued proposed
regulations relating to FASITs. References to the "FASIT proposed regulations"
in this discussion refer to those proposed regulations. The proposed regulations
have not been adopted as final and, in general, are not proposed to be effective
as of the date of this prospectus. They nevertheless are indicative of the rules
the Treasury Department currently views as appropriate with regard to the FASIT
provisions.
CHARACTERIZATION OF INVESTMENTS IN FASIT REGULAR CERTIFICATES. FASIT
regular certificates held by a real estate investment trust will constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Internal
Revenue Code and interest on the FASIT regular certificates will 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 Internal
Revenue Code in the same proportion, for both purposes, that the assets and
income of the FASIT would be so treated. FASIT regular certificates held by a
domestic building and loan association will be treated as "regular interest[s]
in a FASIT" under Section 7701(a)(19)(C)(xi) of the Internal Revenue Code, but
only in the proportion that the FASIT holds "loans secured by an interest in
real property which is . . . residential real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Internal Revenue Code. For this purpose,
mortgage loans secured by multifamily residential housing should qualify. It is
also likely that mortgage loans secured by health care related facilities would
qualify as "loans secured by an interest in . . . health institutions or
facilities, including structures designed or used primarily for residential
purposes for . . . persons under care" within the meaning of Section
7701(a)(19)(C)(vii) of the Internal Revenue Code. If at all times 95% or more of
the assets of the FASIT or the income on those assets qualify for the foregoing
treatments, the FASIT regular certificates will qualify for the corresponding
status in their entirety. Mortgage loans which have been defeased with Treasury
obligations and the income from those loans will not qualify for the foregoing
treatments. Accordingly, the FASIT regular certificates may not be a suitable
investment for you if you require a specific amount or percentage of assets or
income meeting the foregoing treatments. For purposes of Section 856(c)(4)(A) of
the Internal Revenue Code, payments of principal and interest on a mortgage loan
that are reinvested pending distribution to holders of FASIT regular
certificates should qualify for that treatment. FASIT regular certificates held
by a regulated investment company will not constitute "government securities"
within the meaning of Section 851(b)(4)(A)(i) of the Internal Revenue Code.
FASIT regular certificates held by various financial institutions will
constitute an "evidence of indebtedness" within the meaning of Section 582(c)(1)
of the Internal Revenue Code.
QUALIFICATION AS A FASIT.
GENERAL. In order to qualify as a FASIT, the trust for a series of
offered certificates or specified assets of that trust must comply with the
requirements set forth in the Internal Revenue Code on an ongoing basis. The
FASIT must fulfill an asset test, which requires that substantially all of the
assets of the FASIT, as of, and at all times following, the close of the third
calendar month beginning after the FASIT's startup day, which for purposes of
this discussion is the date of the initial issuance of the FASIT regular
certificates, be permitted assets for a FASIT.
Permitted assets for a FASIT include--
o cash or cash equivalents,
o specified types of debt instruments, other than debt
instruments issued by the owner of the FASIT or a related
party, and contracts to acquire those debt instruments,
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o hedges and contracts to acquire hedges,
o foreclosure property, and
o regular interests in another FASIT or in a REMIC.
As discussed below in this "--Qualification as a FASIT" subsection, specified
restrictions apply to each type of permitted asset.
Under the FASIT proposed regulations, the "substantially all"
requirement would be met if at all times the aggregate adjusted basis of the
permitted assets is more than 99 percent of the aggregate adjusted basis of all
the assets held by the FASIT, including assets deemed to be held by the FASIT
under Section 860I(b)(2) of the Internal Revenue Code because they support a
regular interest in the FASIT.
The FASIT provisions also require the FASIT ownership interest to be
held only by some fully taxable domestic corporations and do not recognize
transfers of high-yield regular interests to taxpayers other than fully taxable
domestic corporations or other FASITs. The related Governing Document will
provide that no legal or beneficial interest in the ownership interest or in any
class or classes of certificates that we determine to be high-yield regular
interests may be transferred or registered unless all applicable conditions
designed to prevent violation of this requirement, are met.
PERMITTED ASSETS. The proposed regulations enumerate the types of debt
that qualify as permitted assets for a FASIT. The FASIT provisions provide that
permitted debt instruments must bear interest, if any, at a fixed or qualified
variable rate. Under the FASIT proposed regulations, the definition of debt
permitted to be held by a FASIT, would include--
o REMIC regular interests,
o regular interests of other FASITs,
o inflation indexed debt instruments,
o credit card receivables, and
o some stripped bonds and coupons.
However, under the FASIT proposed regulations, equity linked debt instruments
and defaulted debt instruments would not be permitted assets for a FASIT. In
addition, a FASIT may not hold--
o debt of the owner of the FASIT ownership interest,
o debt guaranteed by the owner of the FASIT ownership interest
in circumstances such that the owner is in substance the
primary obligor on the debt instrument, or
o debt issued by third parties that is linked to the performance
or payments of debt instruments issued by the owner or a
related person, are not permitted assets.
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Finally, debt that is traded on an established securities market and subject to
a foreign withholding tax is not a permitted asset for a FASIT.
Permitted hedges include interest rate or foreign currency notional
principal contracts, letters of credit, insurance, guarantees of payment default
and similar instruments. These hedges must be reasonably required to guarantee
or hedge against the FASIT's risks associated with being the obligor on
interests issued by the FASIT. The FASIT proposed regulations do not include a
list of specified permitted hedges or guarantees, but rather focus on the
intended function of a hedge and permit the contract to offset the following
risk factors:
o fluctuations in market interest rates;
o fluctuations in currency exchange rates;
o the credit quality of, or default on, the FASIT's assets or
debt instruments underlying the FASIT's assets; and
o the receipt of payments on the FASIT's assets earlier or later
than originally anticipated.
The FASIT proposed regulations prohibit a hedge or guarantee from
referencing assets other than permitted assets, indices, economic indicators or
financial averages that are not both widely disseminated and designed to
correlate closely with the changes in one or more of the risk factors described
above. However, under the FASIT proposed regulations, FASIT owners will be able
to hold hedges or guarantees inside a FASIT that do not relate to the already
issued regular interests, or to assets the FASIT already holds, if the FASIT
expects to issue regular interests, or expects to hold assets, that are related
to the hedge or guarantee in question. The proposed regulations also place
restrictions on hedges and guarantees entered into with the holder of the FASIT
ownership interest or a related party.
Property acquired in connection with the default or imminent default of
a debt instrument held by a FASIT may qualify both as foreclosure property and
as a type of permitted asset under the FASIT provisions. It will in general
continue to qualify as foreclosure property during a grace period that runs
until the end of the third taxable year beginning after the taxable year in
which the FASIT acquires the foreclosure property. Under the FASIT proposed
regulations, if the foreclosure property also would qualify as another type of
permitted asset, it may be held beyond the close of that grace period. However,
at the close of the grace period, gain, if any, on the property must be
recognized as if the property had been contributed by the owner of the FASIT on
that date. In addition, the FASIT proposed regulations provide that, after the
close of the grace period, disposition of the foreclosure property is
potentially subject to a 100% prohibited transactions tax, without the benefit
of an exception to this tax applicable to sales of foreclosure property.
PERMITTED INTERESTS. In addition to the foregoing, interests in a FASIT
also must meet specified requirements. All of the interests in a FASIT must be
either of the following:
o a single class of ownership interest, or
o one or more classes of regular interests.
An ownership interest is an interest in a FASIT other than a regular
interest that is issued on the startup day, is designated an ownership interest
and is held by a single, fully-taxable, domestic
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corporation. A regular interest is an interest in a FASIT that is issued on or
after the startup day with fixed terms, is designated as a regular interest,
and--
1. unconditionally entitles the holder to receive a specified
principal amount or other similar amount,
2. provides that interest payments or other similar amounts, if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate,
3. has a stated maturity of not longer than 30 years,
4. has an issue price not greater than 125% of its stated
principal amount, and
5. has a yield to maturity not greater than 5 percentage points
higher than the applicable Federal rate, as defined in Section
1274(d) of the Internal Revenue Code, for Treasury obligations
of a similar maturity.
A regular interest that is described in the preceding sentence except
that it fails to meet one or more of requirements 1, 4 or 5, is a high-yield
regular interest. Further, to be a high-yield regular interest, an interest that
fails requirement 2 must consist of a specified portion of the interest payments
on the permitted assets, determined by reference to the rules related to
permitted rates for REMIC regular interests that have no, or a
disproportionately small, amount of principal. An interest in a FASIT may be
treated as a regular interest even if payments of principal with respect to that
interest are subordinated to payments on other regular interests or the
ownership interest in the FASIT, and are contingent on--
o the absence of defaults or delinquencies on permitted assets,
o lower than reasonably expected returns on permitted assets,
o unanticipated expenses incurred by the FASIT, or
o prepayment interest shortfalls.
CESSATION OF FASIT. If an entity fails to comply with one or more of
the ongoing requirements of the Internal Revenue Code for status as a FASIT
during any taxable year, the Internal Revenue Code provides that the entity or
applicable portion of that entity, will not be treated as a FASIT thereafter. In
this event, any entity that holds mortgage loans and is the obligor with respect
to debt obligations with two or more maturities will be classified, presumably,
as a taxable mortgage pool under general federal income tax principles, and the
FASIT regular certificates may be treated as equity interests in the entity.
Under the FASIT proposed regulations, the underlying arrangement generally
cannot reelect FASIT status and any election a FASIT owner made, other than the
FASIT election, and any method of accounting adopted with respect to the FASIT
assets, binds the underlying arrangement as if the underlying arrangement itself
had made those elections or adopted that method. In the case of an inadvertent
cessation of a FASIT, under the FASIT proposed regulations, the Commissioner of
the IRS may grant relief from the adverse consequences of that cessation,
subject to those adjustments as the Commissioner may require the FASIT and all
holders of interests in the FASIT to accept with respect to the period in which
the FASIT failed to qualify as such.
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Under the proposed FASIT regulation, apart from failure to qualify as a
FASIT, a FASIT may not revoke its election or cease to be a FASIT without the
consent of the Commissioner of the IRS.
Regular interest holders, in the case of cessation of a FASIT, are
treated as exchanging their FASIT regular interests for new interests in the
underlying arrangement. The FASIT proposed regulations would classify the new
interests under general principles of Federal income tax law, for example, as
interests in debt instruments, as interest in a partnership or interests in an
entity subject to corporate taxation, depending on what the classification of
those interests would have been in the absence of a FASIT election. On the
deemed receipt of that new interest, under the FASIT proposed regulations, you
would be required to mark the new interests to market and to recognize gain, but
would not be permitted to recognize loss, as though the old interest had been
sold for an amount equal to the fair market value of the new interest. Your
basis in the new interest deemed received in the underlying arrangement would
equal your basis in the FASIT regular interest exchanged for it, increased by
any gain you recognized on the deemed exchange.
TAXATION OF FASIT REGULAR CERTIFICATES. The FASIT regular certificates
generally will be treated for federal income tax purposes as newly-originated
debt instruments. In general, subject to the discussion below concerning
high-yield interests:
o interest, original issue discount and market discount on a
FASIT regular certificate will be treated as ordinary income
to the holder of that certificate, and
o principal payments, other than principal payments that do not
exceed accrued market discount, on a FASIT regular certificate
will be treated as a return of capital to the extent of the
holder's basis allocable thereto.
You must use the accrual method of accounting with respect to FASIT
regular certificate, regardless of the method of accounting you otherwise use.
Except as set forth in the applicable prospectus supplement and in the
immediately following discussion concerning high-yield interests, the
discussions above under the headings "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount," "--Market Discount,"
"--Premium," and "--Realized Losses" will apply to the FASIT regular
certificates. The discussion under the headings "--REMICs--Sale of REMIC regular
certificates" will also apply to the FASIT regular certificates, except that the
treatment of a portion of the gain on a REMIC regular interest as ordinary
income to the extent the yield on those certificates did not exceed 110% of the
applicable Federal rate will not apply.
HIGH YIELD INTERESTS; ANTI-AVOIDANCE EXCISE TAXES ON TIERED
ARRANGEMENTS. The taxable income, and the alternative minimum taxable income, of
any holder of a high-yield interest may not be less than the taxable income from
all high-yield interests and FASIT ownership interests that it holds, together
with any excess inclusions with respect to REMIC residual interests that it
owns.
High yield interests may only be held by fully taxable, domestic C
corporations or another FASIT. Any attempted transfer of a high-yield interest
to any other type of taxpayer will be disregarded, and the transferor will be
required to include in its gross income the amount of income attributable to the
high-yield interest notwithstanding its attempted transfer. The related
Governing Document will contain provisions and procedures designed to assure
that, in general, only domestic C corporations or other FASITs may acquire
high-yield interests. There is an exception allowing non-
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corporate taxpayers that hold high-yield interest exclusively for sale to
customers in the ordinary course of business to do so, subject to an excise tax
imposed at the corporate income tax rate if the holder ceases to be a dealer or
begins to hold the high-yield interest for investment. Unless otherwise
specified in the prospectus supplement, the related Governing Document will also
allow those holders to hold high-yield interests.
To prevent the avoidance of these rules through tiered arrangements, an
excise tax is imposed on any Pass-Through Entity, which, under the FASIT
proposed regulations, includes a REMIC, that:
o holds any FASIT regular interest, whether or not that FASIT
regular interest is a high-yield interest; and
o issues a debt or equity interest that is--
1. supported by that FASIT regular interest, and
2. has a yield, higher than the yield on that FASIT
regular interest, that would cause that debt or
equity interest to be a high yield interest if it had
been issued by a FASIT.
Under the statute, the amount of that tax, which is imposed on the Pass-Through
Entity, is the highest corporate income tax rate applied to the income of the
holder of the debt or equity interest properly attributable to the FASIT regular
interest that supports it. The proposed FASIT regulations provide that the tax
is an excise tax that must be paid on or before the due date of the Pass-Through
Entity's tax return for the taxable year in which it issues that debt or equity
interest. This appears to contemplate a one-time payment on all future income
from the FASIT regular interest that is projected to be properly attributable to
the debt or equity interest it supports. It is not clear how this amount is to
be determined.
PROHIBITED TRANSACTIONS AND OTHER TAXES. Income or gain from prohibited
transactions by a FASIT are taxable to the holder of the ownership interest in
that FASIT at a 100% rate. Prohibited transactions generally include, under the
FASIT statutory provisions and proposed FASIT regulations:
o the receipt of income from other than permitted assets;
o the receipt of compensation for services;
o the receipt of any income derived from a loan originated by
the FASIT; or
o the disposition of a permitted asset, including disposition in
connection with a cessation of FASIT status, other than for--
1. foreclosure, default, or imminent default of a
qualified mortgage,
2. bankruptcy or insolvency of the FASIT,
3. substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of
the ownership interest to reduce
overcollateralization, but only if a principal
purpose of acquiring the debt instrument which is
disposed of was not the recognition of gain, or the
reduction of a loss, on the withdrawn
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asset as a result of an increase in the market value
of the asset after its acquisition by the FASIT, or
4. the retirement of a class of FASIT regular interests.
The proposed regulations presume that some transactions will be loan
originations, but also provide safe harbors for loans originated by the FASIT.
The proposed safe harbors apply in the following circumstances:
o if the FASIT acquires the loan from an established securities
market as described in Treasury regulation Sections
1.1273-2(f)(2) through (4),
o if the FASIT acquires the loan more than one year after the
loan was issued,
o if the FASIT acquires the loan from a person that regularly
originates similar loans in the ordinary course of business,
o if the FASIT receives any new loan from the same obligor in
exchange for the obligor's original loan in the context of a
work out, and
o when the FASIT makes a loan under a contract or agreement in
the nature of a line of credit the FASIT is permitted to hold.
The FASIT provisions generally exclude from prohibited transactions the
substitution of a debt instruments for another debt instrument which is a
permitted asset and the distribution of a debt instrument contributed by the
holder of the ownership interest to that holder in order to reduce
over-collateralization of the FASIT. In addition, the FASIT proposed regulations
also exclude transactions involving the disposition of hedges from the category
of prohibited transactions. However, the proposed regulations deem a
distribution of debt to be carried out principally to recognize gain, and to be
a prohibited transaction, if the owner or related person sells the substituted
or distributed debt instrument at a gain within 180 days of the substitution or
distribution. It is unclear the extent to which tax on those transactions could
be collected from the FASIT directly under the applicable statutes rather than
from the holder of the ownership interest. However, under the related Governing
Document, any prohibited transactions tax that is not payable by a party thereto
as a result of its own actions will be paid by the FASIT. It is not anticipated
that the FASIT will engage in any prohibited transactions.
The Clinton Administration recently proposed in its budget amendments
to the FASIT provisions designed to ensure that income taxes imposed on the
holder of a FASIT ownership interest are paid when due. These provisions would
impose secondary liability on the FASIT itself for any tax required to be paid
with respect to the income allocated to the FASIT ownership interest if that
holder does not pay its taxes on that income when they are due. If adopted, the
amendments would be effective for FASITs created after the date of enactment. It
is not possible to predict whether the legislation will be adopted or, if so, in
what form.
TAXATION OF FOREIGN INVESTORS. The federal income tax treatment of
non-U.S. Persons who own FASIT regular certificates that are not high-yield
interests is the same as that described above under "--REMICs--Foreign Investors
in REMIC Regular Certificates." However, if you are a non-U.S. Person and you
hold a regular interest, either directly or indirectly, in a FASIT, you should
note that under the FASIT proposed regulations, interest paid or accrued on a
debt instrument held by the FASIT is treated
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as being received by you directly from a conduit debtor for purposes of Subtitle
A of the Internal Revenue Code and the regulations thereunder if:
o you are a 10% shareholder of an obligor on a debt instrument
held by the FASIT;
o you are a controlled foreign corporation to which an obligor
on a debt instrument held by the FASIT is a related person; or
o you are related to such an obligor that is a corporation or
partnership, in general, having common ownership to a greater
than 50% extent.
If you believe you may be in one of these categories, you should
consult with your tax advisors, in particular concerning the possible imposition
of United States withholding taxes at a 30% rate on interest paid with respect
to a FASIT regular interest under these circumstances.
High-yield FASIT regular certificates may not be sold to or
beneficially owned by non-U.S. Persons. Any purported transfer to a non-U.S.
Person will be null and void and, upon the related trustee's discovery of any
purported transfer in violation of this requirement, the last preceding owner of
those FASIT regular certificates will be restored to ownership as completely as
possible. The last preceding owner will, in any event, be taxable on all income
with respect to those FASIT regular certificates for federal income tax
purposes. The related Governing Document will provide that, as a condition to
transfer of a high-yield FASIT regular certificate, the proposed transferee must
furnish an affidavit as to its status as a U.S. Person and otherwise as a
permitted transferee.
BACKUP WITHHOLDING. Payments made on the FASIT regular certificates,
and proceeds from the sale of the FASIT regular certificates to or through some
brokers, may be subject to a backup withholding tax under Section 3406 of the
Internal Revenue Code in the same manner as described under "--REMICs--Backup
Withholding with Respect to REMIC Certificates" above.
REPORTING REQUIREMENTS. Reports of accrued interest, OID, if any, and
information necessary to compute the accrual of any market discount on the FASIT
regular certificates will be made annually to the IRS and to investors in the
same manner as described above under "--REMICs--Reporting and Other
Administrative Matters" above.
GRANTOR TRUSTS
CLASSIFICATION OF GRANTOR TRUSTS. With respect to each series of
grantor trust certificates, our counsel will deliver its opinion to the effect
that, assuming compliance with all provisions of the related Governing Document,
the related trust, or relevant portion of that trust, will be classified as a
grantor trust under subpart E, part I of subchapter J of the Internal Revenue
Code and not as a partnership or an association taxable as a corporation.
A grantor trust certificate may be classified as either of the
following types of certificate:
o a grantor trust fractional interest certificate representing
an undivided equitable ownership interest in the principal of
the mortgage loans constituting the related grantor trust,
together with interest on those loans at a pass-through rate;
or
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o a grantor trust strip certificate representing ownership of
all or a portion of the difference between--
1. interest paid on the mortgage loans constituting the
related grantor trust, minus
2. the sum of:
o normal administration fees, and
o interest paid to the holders of grantor
trust fractional interest certificates
issued with respect to that grantor trust
A grantor trust strip certificate may also evidence a nominal ownership
interest in the principal of the mortgage loans constituting the related grantor
trust.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. Unless we otherwise
disclose in the related prospectus supplement, any offered certificates that are
grantor trust fractional interest certificates will generally represent
interests in:
o "loans . . . secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Internal
Revenue Code, but only to the extent that the underlying
mortgage loans have been made with respect to property that is
used for residential or other prescribed purposes;
o "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 Internal Revenue Code;
o "permitted assets" within the meaning of Section 860L(a)(1)(C)
of the Internal Revenue Code; and
o "real estate assets" within the meaning of Section
856(c)(5)(B) of the Internal Revenue Code.
In addition, interest on offered certificates that are 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 Internal
Revenue Code.
GRANTOR TRUST STRIP CERTIFICATES. Even if grantor trust strip
certificates evidence an interest in a grantor trust--
o 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 Internal Revenue Code,
o consisting of mortgage loans that are "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Internal
Revenue Code, and
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o the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section
856(c)(3)(A) of the Internal Revenue Code,
it is unclear whether the grantor trust strip certificates, and the income from
those certificates, will be so characterized. We recommend 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 from those certificates, will
be so characterized.
The grantor trust strip certificates will be:
o "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 Internal Revenue Code, and
o in general, "permitted assets" within the meaning of Section
860L(a)(1)(C) of the Internal Revenue Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
GENERAL. Holders of a particular series of grantor trust fractional
interest certificates generally:
o will be required to report on their federal income tax returns
their shares of the entire income from the underlying mortgage
loans, including amounts used to pay reasonable servicing fees
and other expenses, and
o 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 interest paid or
accrued on the underlying mortgage loans.
Section 67 of the Internal Revenue Code allows an individual, estate or
trust holding a grantor trust fractional interest certificate directly or
through some types of pass-through entities a deduction for any reasonable
servicing fees and expenses only to the extent that the total of the holder's
miscellaneous itemized deductions exceeds two percent of the holder's adjusted
gross income.
Section 68 of the Internal Revenue Code reduces the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount by the lesser of:
o 3% of the excess of the individual's adjusted gross income
over that amount, and
o 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 Internal Revenue Code may
be substantial. Further, certificateholders, other than corporations, subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining their alternative minimum taxable income.
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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, any fees and expenses should be allocated among
those classes of grantor trust certificates. The method of this allocation
should recognize that each class benefits from the related services. In the
absence of statutory or administrative clarification as to the method to be
used, we currently expect that information returns or reports to the IRS and
certificateholders will be based on a method that allocates these fees and
expenses among classes of grantor trust certificates with respect to each period
based on the payments 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 Internal Revenue Code. Grantor trust
fractional interest certificates may be subject to those rules if:
o a class of grantor trust strip certificates is issued as part
of the same series, or
o we or any of our affiliates retain, for our or its own account
or for purposes of resale, a right to receive a specified
portion of the interest payable on an underlying mortgage
loan.
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 mortgage loans that constitutes a stripped coupon. We will include
in the related prospectus supplement information regarding servicing fees paid
out of the assets of the related trust to:
o a master servicer,
o a special servicer,
o any sub-servicer, or
o their respective affiliates.
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
Internal Revenue Code. This is subject, however, to the discussion below
regarding:
o the treatment of some stripped bonds as market discount bonds,
and
o DE MINIMIS market discount.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--Market Discount" below.
Under the stripped bond rules, the holder of a grantor trust fractional
interest certificate, whether a cash or accrual method taxpayer, will be
required to report interest income from its grantor trust fractional interest
certificate for each month. The amount of reportable interest income must equal
the income that accrues on the certificate in that month calculated under a
constant yield method, in accordance with the rules of the Internal Revenue Code
relating to original issue discount.
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The original issue discount on a grantor trust fractional interest
certificate will be the excess of 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 that
purchaser of the grantor trust fractional interest certificate. The stated
redemption price of a grantor trust fractional interest certificate will be the
sum of all payments to be made on that certificate, other than qualified stated
interest, if any, and the certificate's share of reasonable servicing fees and
other expenses.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" for a
definition of "qualified stated interest." In general, the amount of that income
that accrues in any month would equal the product of:
o the holder's adjusted basis in the grantor trust fractional
interest certificate at the beginning of the related month, as
defined in "--Grantor Trust Funds--Sales of Grantor Trust
Certificates," and
o the yield of that grantor trust fractional interest
certificate to the holder.
The yield would be computed as the rate, that, if used to discount the
holder's share of future payments on the related mortgage loans, would cause the
present value of those future payments to equal the price at which the holder
purchased the certificate. This rate is compounded based on the regular interval
between payment dates. In computing yield under the stripped bond rules, a
certificateholder's share of future payments on the related mortgage loans will
not include any payments made with respect to any ownership interest in those
mortgage loans retained by us, a master servicer, a special servicer, a
sub-servicer or our or their respective affiliates, but will include the
certificateholder's share of any reasonable servicing fees and other expenses.
With respect to some categories of debt instruments, Section 1272(a)(6)
of the Internal Revenue Code requires the use of a reasonable prepayment
assumption in accruing original issue discount, and adjustments in the accrual
of original issue discount when prepayments do not conform to the prepayment
assumption.
Legislation enacted in 1997 extended the scope of that section to any
pool of debt instruments the yield on which may be affected by reason of
prepayments, effective for taxable years beginning after enactment. The precise
application of this legislation is unclear in some respects. For example, it is
uncertain whether a prepayment assumption will be applied collectively to all a
taxpayer's investments in pools of debt instruments, or on an
investment-by-investment basis. Similarly, it is not clear whether the assumed
prepayment rate as to investments in grantor trust fractional interest
certificates is to be determined based on conditions at the time of the first
sale of the certificate or, with respect to any holder, at the time of purchase
of the certificate by that holder.
We recommend that certificateholders consult their tax advisors
concerning reporting original issue discount with respect to grantor trust
fractional interest certificates.
In the case of a grantor trust fractional interest certificate acquired
at a price equal to the principal amount of the related mortgage loans allocable
to that 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,
respectively, the use of a reasonable prepayment
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assumption would increase or decrease the yield. Therefore, the use of this
prepayment assumption would accelerate or decelerate, respectively, the
reporting of income.
In the absence of statutory or administrative clarification, we
currently expect that information reports or returns to the IRS and
certificateholders will be based on:
o a prepayment assumption determined when certificates are
offered and sold hereunder, which we will disclose in the
related prospectus supplement, and
o a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
o the mortgage loans in any of our trusts will in fact prepay at
a rate conforming to the prepayment assumption used or any
other rate, or
o the prepayment assumption will not be challenged by the IRS on
audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports that we send, 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, some stripped bonds are to
be treated as market discount bonds. Accordingly, any purchaser of that 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:
o there is no original issue discount or only a DE MINIMIS
amount of original issue discount, or
o 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 related mortgage loans, 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 related mortgage loans, we will disclose that fact in the related prospectus
supplement. If the original issue discount or market discount on a grantor trust
fractional interest certificate determined under the stripped bond rules is less
than the product of:
o 0.25% of the stated redemption price, and
o the weighted average maturity of the related mortgage loans,
then the 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
discount and market discount described in "--Grantor Trust Funds--
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Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply" and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a grantor
trust fractional interest certificate, the certificateholder will be required to
report its share of the interest income on the related mortgage loans in
accordance with the certificateholder's normal method of accounting. In that
case, the original issue discount rules will apply, even if the stripped bond
rules do not apply, to a grantor trust fractional interest certificate to the
extent it evidences an interest in mortgage loans issued with original issue
discount.
The original issue discount, if any, on mortgage loans will equal the
difference between:
o the stated redemption price of the mortgage loans, and
o their issue price.
For a definition of "stated redemption price," see "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above. In
general, the issue price of a mortgage loan will be the amount received by the
borrower from the lender under the terms of the mortgage loan. If the borrower
separately pays points to the lender that are not paid for services provided by
the lender, such as commitment fees or loan processing costs, the amount of
those points paid reduces the issue price.
The stated redemption price of a mortgage loan will generally equal its
principal amount. The determination as to whether original issue discount will
be considered to be DE MINIMIS will be calculated using the same test as in the
REMIC discussion. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest
rates, we will describe in the related prospectus supplement the manner in which
these rules will be applied with respect to the mortgage loans by the related
trustee or master servicer, as applicable, in preparing information returns to
certificateholders and the IRS.
If original issue discount is in excess of a DE MINIMIS amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Under
legislation enacted in 1997, Section 1272(a)(6) of the Internal Revenue Code
requires that a prepayment assumption be used in computing yield with respect to
any pool of debt instruments, the yield on which may be affected by prepayments.
The precise application of this legislation is unclear in some respects. For
example, it is uncertain whether a prepayment assumption will be applied
collectively to all a taxpayer's investments in pools of debt instruments, or
will be applied on an investment-by-investment basis. Similarly, it is not clear
whether the assumed prepayment rate as to investments in grantor trust
fractional interest certificates is to be determined based on conditions at the
time of the first sale of the certificate or, with respect to any holder, at the
time of purchase of the certificate by that holder. We recommend that
certificateholders consult their own tax advisors concerning reporting original
issue discount with respect to grantor trust fractional interest certificates.
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A purchaser of a grantor trust fractional interest certificate may
purchase the grantor trust fractional interest certificate at a cost less than
the certificate's allocable portion of the total remaining stated redemption
price of the underlying mortgage loans. In that case, the purchaser will also be
required to include in gross income the certificate's daily portions of any
original issue discount with respect to those mortgage loans. However, each
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 underlying
mortgage loans. The reduction will be approximately in proportion to the ratio
that the excess bears to the certificate's allocable portion of the total
original issue discount remaining to be accrued on those mortgage loans.
The adjusted issue price of a mortgage loan on any given day equals the
sum of:
o the adjusted issue price or the issue price, in the case of
the first accrual period, of the mortgage loan at the
beginning of the accrual period that includes that day, and
o 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:
o the issue price of the mortgage loan, increased by
o the total amount of original issue discount with respect to
the mortgage loan that accrued in prior accrual periods, and
reduced by
o the amount of any payments made on the mortgage loan in prior
accrual periods of amounts included in its stated redemption
price.
In the absence of statutory or administrative clarification, we
currently expect that information reports or returns to the IRS and
certificateholders will be based on:
o a prepayment assumption determined when the certificates are
offered and sold hereunder and disclosed in the related
prospectus supplement, and
o a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
o the mortgage loans will in fact prepay at a rate conforming to
the prepayment assumption or any other rate, or
o the prepayment assumption will not be challenged by the IRS on
audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that 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.
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MARKET DISCOUNT. If the stripped bond rules do not apply to a grantor
trust fractional interest certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Internal Revenue Code
to the extent an interest in a mortgage loan is considered to have been
purchased at a market discount. A mortgage loan is considered to have been
purchased at a market discount if--
o in the case of a mortgage loan issued without original issue
discount, it is purchased at a price less than its remaining
stated redemption price, or
o in the case of a mortgage loan issued with original issue
discount, it is purchased at a price less than its adjusted
issue price.
If market discount is in excess of a DE MINIMIS amount, the holder
generally must include in income in each month the amount of the discount that
has accrued, under the rules described in the next paragraph, through that month
that has not previously been included in income. The inclusion will be 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, for accrual method certificateholders, due to the trust 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 in
accordance with the foregoing under rules similar to those described in
"--REMICs--Taxation of Owners of REMIC Regular Interests--Market Discount"
above.
Section 1276(b)(3) of the Internal Revenue Code 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 the time that regulations are issued by the Treasury
Department, the relevant rules described in the Committee Report apply. Under
those rules, in each accrual period, you may accrue market discount on the
underlying mortgage loans, at your option:
o on the basis of a constant yield method,
o 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
o in the case of a mortgage loan issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount
accrued in the accrual period bears to the total original
issue discount remaining at the beginning of the accrual
period.
Under legislation enacted in 1997, Section 1272(a)(6) of the Internal
Revenue Code requires that a prepayment assumption be used in computing the
accrual of original issue discount with respect to any pool of debt instruments,
the yield on which may be affected by prepayments. Because the mortgage loans
will be a pool described in that section, it appears that the prepayment
assumption used, or that would be used, in calculating the accrual of original
issue discount, if any, is also to be used in calculating the accrual of market
discount. However, the precise application of the new legislation is unclear in
some respects. For example, it is uncertain whether a prepayment assumption will
be applied collectively to all of a taxpayer's investments in pools of debt
instruments, or on an investment-by-
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investment basis. Similarly, it is not clear whether the assumed prepayment rate
is to be determined at the time of the first sale of the grantor trust
fractional interest certificate, or with respect to any holder, at the time of
that holder's purchase of the grantor trust fractional interest certificate.
We recommend that certificateholders consult their own tax advisors
concerning accrual of market discount with respect to grantor trust fractional
interest certificates. Certificateholders should also refer to the related
prospectus supplement to determine whether and in what manner the market
discount will apply to the underlying mortgage loans purchased at a market
discount.
To the extent that the underlying mortgage loans provide for periodic
payments of stated redemption price, you may be required to include market
discount in income at a rate that is not significantly slower than the rate at
which that 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 under "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
Further, under the rules described under "--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 underlying mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, which is a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Internal Revenue Code to amortize the portion of that premium allocable to
mortgage loans originated after September 27, 1985 using a constant yield
method. 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:
o be allocated among the payments of stated redemption price on
the mortgage loan, and
o be allowed as a deduction as those payments are made or, for
an accrual method certificateholder, due.
It appears that a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Internal Revenue Code
similar to that described for calculating the accrual of market discount of
grantor trust fractional interest certificates. See "--Grantor Trust
Funds--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" above.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The stripped
coupon rules of Section 1286 of the Internal Revenue Code will apply to the
grantor trust strip certificates. Except as described above under "--Grantor
Trust Funds--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Apply," no regulations or published rulings
under Section 1286 of the Internal Revenue Code have been issued and some
uncertainty exists as to how it will be applied to securities, such as the
grantor trust strip certificates. Accordingly, we recommend that you consult
your
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tax advisors concerning the method to be used in reporting income or loss with
respect to those certificates.
The Treasury regulations promulgated under the original discount rules
do not apply to stripped coupons, although they provide general guidance as to
how the original issue discount sections of the Internal Revenue Code will be
applied.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the grantor trust strip
certificates based on a constant yield method. In effect, you would include as
interest income in each month an amount equal to the product of your adjusted
basis in the grantor trust strip certificate at the beginning of that month and
the yield of the grantor trust strip certificate to you. This yield would be
calculated based on:
o the price paid for that grantor trust strip certificate by
you, and
o the projected payments remaining to be made on that grantor
trust strip certificate at the time of the purchase, plus
o an allocable portion of the projected servicing fees and
expenses to be paid with respect to the underlying mortgage
loans.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Internal Revenue Code
requires that a prepayment assumption be used in computing the accrual of
original issue discount with respect to some categories of debt instruments. The
Internal Revenue Code also requires adjustments be made in the amount and rate
of accrual of that discount when prepayments do not conform to the prepayment
assumption. It appears that those provisions would apply to grantor trust strip
certificates. It is uncertain whether the assumed prepayment rate would be
determined based on:
o conditions at the time of the first sale of the grantor trust
strip certificate or,
o with respect to any subsequent holder, at the time of purchase
of the grantor trust strip certificate by that holder.
If the method for computing original issue discount under Section
1272(a)(6) results in a negative amount of original issue discount as to any
accrual period with respect to a grantor trust strip certificate, the amount of
original issue discount allocable to that accrual period will be zero. That is,
no current deduction of the negative amount will be allowed to you. You will
instead only be permitted to offset that negative amount against future positive
original issue discount, if any, attributable to that certificate. Although not
free from doubt, it is possible that you may be permitted to deduct a loss to
the extent his or her basis in the certificate exceeds the maximum amount of
payments you could ever receive with respect to that certificate. However, the
loss may be a capital loss, which is limited in its deductibility. The foregoing
considerations are particularly relevant to grantor trust certificates with no,
or disproportionately small, amounts of principal, which can have negative
yields under circumstances that are not default related. See "Risk Factors--The
Investment Performance of Your Offered Certificates Depend Upon Payments,
Defaults and Losses on the Underlying Mortgage Loans".
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The accrual of income on the grantor trust strip certificates will be
significantly slower using a prepayment assumption than if yield is computed
assuming no prepayments. In the absence of statutory or administrative
clarification, we currently expect that information returns or reports to the
IRS and certificateholders will be based on:
o the prepayment assumption we will disclose in the related
prospectus supplement, and o a constant yield computed using a
representative initial offering price for each class of
certificates.
However, neither we nor any other person will make any representation
that--
o the mortgage loans in any of our trusts will in fact prepay at
a rate conforming to the prepayment assumption or at any other
rate or
o the prepayment assumption will not be challenged by the IRS on
audit.
We recommend that prospective purchasers of the grantor trust strip
certificates consult their tax advisors regarding the use of the prepayment
assumption.
Certificateholders also 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.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss recognized on the
sale or exchange of a grantor trust certificate by an investor who holds that
certificate as a capital asset, will be capital gain or loss, except as
described below in this "--Sales of Grantor Trust Certificates" subsection. The
amount recognized equals the difference between:
o the amount realized on the sale or exchange of a grantor trust
certificate, and
o its adjusted basis.
The adjusted basis of a grantor trust certificate generally will equal:
o its cost, increased by
o any income reported by the seller, including original issue
discount and market discount income, and reduced, but not
below zero, by
o any and all previously reported losses, amortized premium, and
payments with respect to that grantor trust certificate.
As of the date of this prospectus, the Internal Revenue Code provides
for lower rates as to long-term capital gains, than those applicable to the
short-term capital gains and ordinary income realized or received by
individuals. No similar rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss
remains relevant for other purposes.
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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. Gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Internal Revenue Code will be
treated as ordinary income.
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 Internal Revenue 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 interest and other ordinary income items from the
transaction.
The Internal Revenue Code requires the recognition of gain upon the
constructive sale of an appreciated financial position. A constructive sale of
an appreciated financial position occurs if a taxpayer enters into a transaction
or series of transactions that have the effect of substantially eliminating the
taxpayer's risk of loss and opportunity for gain with respect to the financial
instrument. Debt instruments that--
o entitle the holder to a specified principal amount,
o pay interest at a fixed or variable rate, and
o are not convertible into the stock of the issuer or a related
party,
cannot be the subject of a constructive sale for this purpose. Because most
grantor trust certificates meet this exception, this Section will not apply to
most grantor trust certificates. However, some grantor trust certificates have
no, or a disproportionately small amount of, principal and these certificates
can be the subject of a constructive sale.
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 relevant taxable year.
This election would be done 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. Unless otherwise provided in the related
prospectus supplement, the related tax administrator will furnish or make
readily available through electronic means to each holder of a grantor trust
certificate with each payment a statement setting forth the amount of the
payment allocable to principal on the underlying mortgage loans and to interest
on those loans at the related pass-through rate. In addition, the related tax
administrator will furnish, within a reasonable time after the end of each
calendar year, to each person or entity that was the holder of a grantor trust
certificate at any time during that year, information regarding:
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o the amount of servicing compensation received by a master
servicer or special servicer, and
o all other customary factual information the reporting party
deems necessary or desirable to enable holders of the related
grantor trust certificates to prepare their tax returns.
The reporting party 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 grantor trust certificates are uncertain in various respects, there
is no assurance the IRS will agree with the information reports of those items
of income and expense. Moreover, those 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.
On August 13, 1998, the Service published proposed regulations, which
will, when effective, establish a reporting framework for interests in "widely
held fixed investment trusts" similar to that for regular interests in REMICs. A
widely-held fixed investment trust is defined as any entity classified as a
"trust" under Treasury Regulation Section 301.7701-4(c) in which any interest is
held by a middleman, which includes, but is not limited to:
o a custodian of a person's account,
o a nominee, and
o a broker holding an interest for a customer in street name.
These regulations are proposed to be effective for calendar years
beginning on or after the date that the final regulations are published in the
Federal Register.
BACKUP WITHHOLDING. In general, the rules described under
"--REMICs--Backup Withholding with Respect to REMIC Certificates" above will
also apply to grantor trust certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
regular certificates under "--REMICs--Foreign Investors in REMIC Certificates"
above applies to grantor trust certificates. However, unless we otherwise
specify in the related prospectus supplement, grantor trust certificates will be
eligible for exemption from U.S. withholding tax, subject to the conditions
described in the discussion above, only to the extent the related mortgage loans
were originated after July 18, 1984.
To the extent that interest on a grantor trust certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Internal Revenue Code from
United States withholding tax, and the certificate is not held in connection
with a certificateholder's trade or business in the United States, the
certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences concerning the offered certificates. State tax law
may differ substantially from the corresponding federal law, and the discussion
above does not purport to describe any aspect of the tax laws of any state or
other jurisdiction. Therefore, we recommend that prospective investors consult
their tax advisors with respect to the various tax consequences of investments
in the offered certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended, and
the Internal Revenue Code of 1986 impose various requirements on--
o ERISA Plans, and
o persons that are fiduciaries with respect to ERISA Plans,
in connection with the investment of the assets of an ERISA Plan. For purposes
of this discussion, ERISA Plans may include individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts,
including as applicable, insurance company general accounts, in which other
ERISA Plans are invested.
Governmental plans and, if they have not made an election under Section
410(d) of the Internal Revenue Code of 1986, church plans are not subject to
ERISA requirements. Accordingly, assets of those plans may be invested in the
offered certificates without regard to the considerations described below in
this "ERISA Considerations" section, subject to the provisions of other
applicable federal and state law. Any of those plans which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue
Code of 1986, however, is subject to the prohibited transaction rules in Section
503 of that Code.
ERISA imposes general fiduciary requirements on a fiduciary that is
investing the assets of an ERISA Plan, including--
o investment prudence and diversification, and
o compliance with the investing ERISA Plan's governing the
documents.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code of
1986 also prohibit a broad range of transactions involving the assets of an
ERISA Plan and a Party in Interest with respect to that ERISA Plan, unless a
statutory or administrative exemption exists.
The types of transactions between ERISA Plans and Parties in Interest
that are prohibited include:
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o sales, exchanges or leases of property;
o loans or other extensions of credit; and
o the furnishing of goods and services.
Parties in Interest that participate in a prohibited transaction may be
subject to an excise tax imposed under Section 4975 of the Internal Revenue Code
of 1986 or a penalty imposed under Section 502(i) of ERISA, unless a statutory
or administrative exemption is available. In addition, the persons involved in
the prohibited transaction may have to cancel the transaction and pay an amount
to the affected ERISA Plan for any losses realized by that ERISA Plan or profits
realized by those persons. In addition, individual retirement accounts involved
in the prohibited transaction may be disqualified which would result in adverse
tax consequences to the owner of the account.
PLAN ASSET REGULATIONS
An ERISA Plan's investment in offered certificates may cause the
underlying mortgage assets and other assets of the related trust to be deemed
assets of that ERISA Plan. Section 2510.3-101 of the Plan Asset Regulations
provides that when an ERISA Plan acquires an equity interest in an entity, the
assets that ERISA Plan or arrangement include both that equity interest and an
undivided interest in each of the underlying assets of the entity, unless an
exception applies. One exemption is that the equity participation in the entity
by benefit plan investors, which include both ERISA Plans and some employee
benefit plans not subject to ERISA, is not significant. The equity participation
by benefit plan investors will be significant on any date if 25% or more of the
value of any class of equity interests in the entity is held by benefit plan
investors. The percentage owned by benefit plan investors is determined by
excluding the investments of the following persons:
1. those with discretionary authority or control over the assets
of the entity,
2. those who provide investment advice directly or indirectly for
a fee with respect to the assets of the entity, and
3. those who are affiliates of the persons described in the
preceding clauses 1. and 2.
In the case of one of our trusts, investments by us, by the related
trustee, the related master servicer, the related special servicer or any other
party with discretionary authority over the related trust assets, or by the
affiliates of these persons, will be excluded.
A fiduciary of an investing ERISA Plan is any person who--
o has discretionary authority or control over the management or
disposition of the assets of that ERISA Plan, or
o provides investment advice with respect to the assets of that
ERISA Plan for a fee.
If the mortgage and other assets included in one of our trusts are
ERISA Plan assets, then any party exercising management or discretionary control
regarding those assets, such as the related trustee, master servicer or special
servicer, or affiliates of any of these parties, may be--
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o deemed to be a fiduciary with respect to the investing ERISA
Plan, and
o subject to the fiduciary responsibility provisions of ERISA.
In addition, if the mortgage and other assets included in one of our trusts are
ERISA Plan assets, then the operation of that trust may involve prohibited
transactions under ERISA or the Internal Revenue Code of 1986. For example, if a
borrower with respect to a mortgage loan in that trust is a Party in Interest to
an investing ERISA Plan, then the purchase by that ERISA Plan of offered
certificates evidencing interests in that trust, could be a prohibited loan
between that ERISA Plan and the Party in Interest.
The Plan Asset Regulations provide that where an ERISA Plan purchases a
"guaranteed governmental mortgage pool certificate," the assets of that ERISA
Plan include the certificate but do not include any of the mortgages underlying
the certificate. The Plan Asset Regulations include in the definition of a
"guaranteed governmental mortgage pool certificate" some certificates issued
and/or guaranteed by Freddie Mac, Ginnie Mae and Fannie Mae, but do not include
certificates issued or guaranteed by Farmer Mac. Accordingly, even if these
types of mortgaged-backed securities, other than the Farmer Mac certificates,
were deemed to be assets of an ERISA Plan, the underlying mortgages would not be
treated as assets of that ERISA Plan. Private label mortgage participations,
mortgage pass-through certificates, Farmer Mac certificates or other
mortgage-backed securities are not "guaranteed governmental mortgage pool
certificates" within the meaning of the Plan Asset Regulations.
In addition, the acquisition or holding of offered certificates by or
on behalf of an ERISA Plan could give rise to a prohibited transaction if we or
the related trustee, master servicer or special servicer or any related
underwriter, sub-servicer, tax administrator, manager, borrower or obligor under
any credit enhancement mechanism, or one of their affiliates, is or becomes a
Party in Interest with respect to an investing ERISA Plan.
If you are the fiduciary of an ERISA Plan, you should consult your
counsel and review the ERISA discussion in the related prospectus supplement
before purchasing any offered certificates.
PROHIBITED TRANSACTION EXEMPTIONS
If you are an ERISA Plan fiduciary, then, in connection with your
deciding whether to purchase any of the offered certificates on behalf of an
ERISA Plan, you should consider the availability of one of the following
prohibited transaction class exemptions issued by the U.S. Department of Labor:
o Prohibited Transaction Class Exemption 75-1, which exempts
particular transactions involving ERISA Plans and
broker-dealers, reporting dealers and banks;
o Prohibited Transaction Class Exemption 90-1, which exempts
particular transactions between insurance company separate
accounts and Parties in Interest;
o Prohibited Transaction Class Exemption 91-38, which exempts
particular transactions between bank collective investment
funds and Parties in Interest;
o Prohibited Transaction Class Exemption 84-14, which exempts
particular transactions effected on behalf of an ERISA Plan by
a "qualified professional asset manager;"
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o Prohibited Transaction Class Exemption 95-60, which exempts
particular transactions between insurance company general
accounts and Parties in Interest; and
o Prohibited Transaction Class Exemption 96-23, which exempts
particular transactions effected on behalf of an ERISA Plan by
an "in-house asset manager."
We cannot provide any assurance that any of these class exemptions will
apply with respect to any particular investment by or on behalf of an ERISA Plan
in any class of offered certificates. Furthermore, even if any of them were
deemed to apply, that particular class exemption may not apply to all
transactions that could occur in connection with the investment. The prospectus
supplement with respect to the offered certificates of any series may contain
additional information regarding the availability of other exemptions, with
respect to those certificates.
UNDERWRITER'S EXEMPTION
It is expected that Salomon Smith Barney Inc. will be the sole, lead or
co-lead underwriter in each underwritten offering of certificates made by this
prospectus. The U.S. Department of Labor issued Prohibited Transaction Exemption
91-23 to a predecessor in interest to Salomon Smith Barney Inc. Subject to the
satisfaction of the conditions specified in that exemption, PTE 91-23, as
amended, including by PTE 97-34, generally exempts from the application of the
prohibited transaction provisions of ERISA and the Internal Revenue Code of
1986, various transactions relating to, among other things--
o the servicing and operation of some mortgage assets pools,
such as the types of mortgage asset pools that will be
included in our trusts, and
o the purchase, sale and holding of some certificates evidencing
interests in those pools that are underwritten by Salomon
Smith Barney Inc. or any person affiliated with Salomon Smith
Barney Inc., such as particular classes of the offered
certificates.
The related prospectus supplement will state whether PTE 91-23 is or
may be available with respect to any offered certificates underwritten by
Salomon Smith Barney Inc.
INSURANCE COMPANY GENERAL ACCOUNTS
The Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides relief from the fiduciary and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 for
transactions involving an insurance company general account. This exemption is
in addition to any exemption that may be available under prohibited transaction
class exemption 95-60 for the purchase and holding of offered certificates by an
insurance company general account.
Under Section 401(c) of ERISA, the U.S. Department of Labor issued a
final regulation on January 5, 2000, providing guidance for determining, in
cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of an ERISA Plan on or before December 31, 1998,
which general account assets are ERISA Plan assets. That regulation generally
provides that, if the specified requirements are satisfied with respect to
insurance policies issued on or before December 31, 1998, the assets of an
insurance company general account will not be ERISA Plan assets.
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Any assets of an insurance company general account which support
insurance policies issued to an ERISA Plan after December 31, 1998, or issued to
an ERISA Plan on or before December 31, 1998 for which the insurance company
does not comply with the requirements set forth in the final regulation under
Section 401(c) of ERISA, may be treated as ERISA Plan assets. In addition,
because Section 401(c) of ERISA and the regulation issued under Section 401(c)
of ERISA do not relate to insurance company separate accounts, separate account
assets are still treated as ERISA Plan assets, invested in the separate account.
If you are an insurance company are contemplating the investment of general
account assets in offered certificates, you should consult your legal counsel as
to the applicability of Section 401(c) of ERISA.
CONSULTATION WITH COUNSEL
If you are a fiduciary for an ERISA Plan and you intend to
purchase offered certificates on behalf of or with assets of that ERISA Plan,
you should:
o consider your general fiduciary obligations under
ERISA, and
o consult with your legal counsel as to--
1. the potential applicability of ERISA and the
Internal Revenue Code of 1986 to investment,
and
2. the availability of any prohibited
transaction exemption in connection with
investment.
TAX EXEMPT INVESTORS
An ERISA Plan that is exempt from federal income taxation under Section
501 of the Internal Revenue Code of 1986 will be subject to federal income
taxation to the extent that its income is "unrelated business taxable income"
within the meaning of Section 512 of the Internal Revenue Code of 1986. All
excess inclusions of a REMIC allocated to a REMIC residual certificate held by a
tax-exempt ERISA Plan will be considered unrelated business taxable income and
will be subject to federal income tax.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" in this prospectus.
LEGAL INVESTMENT
If and to the extent specified in the related prospectus supplement,
the offered certificates of any series may constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984. Mortgage related securities are legal investments for entities--
o that are created or existing under the laws of the United
States or any state, including the District of Columbia and
Puerto Rico, and
o whose authorized investments are subject to state regulations,
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to the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any of its
agencies or instrumentalities are legal investments for those entities.
Prior to December 31, 1996, classes of offered certificates would be
mortgage related securities for purposes of SMMEA only if they:
o were rated in one of the two highest rating categories by at
least one nationally recognized statistical rating
organization; and
o evidenced interests in a trust consisting of loans directly
secured by a first lien on a single parcel of real estate upon
which is located a dwelling or mixed residential and
commercial structure, which loans had been originated by the
types of originators specified in SMMEA.
Further, under SMMEA as originally enacted, if a state enacted
legislation on or before October 3, 1991 that specifically limited the legal
investment authority of any entities referred to in the preceding paragraph with
respect to mortgage related securities under that definition, offered
certificates would constitute legal investments for entities subject to the
legislation only to the extent provided in that legislation.
Effective December 31, 1996, the definition of "mortgage related
securities" was modified to include among the types of loans to which the
securities may relate, loans secured by "one or more parcels of real estate upon
which is located one or more commercial structures." In addition, the related
legislative history states that this expanded definition includes multifamily
loans secured by more than one parcel of real estate upon which is located more
than one structure. Until September 23, 2001, any state may enact legislation
limiting the extent to which mortgage related securities under this expanded
definition would constitute legal investments under that state's laws.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows:
o 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 by those securities; and
o federal credit unions may invest in mortgage related
securities and national banks may purchase mortgage related
securities for their own account without regard to the
limitations generally applicable to investment securities
prescribed in 12 U.S.C. 24 (Seventh),
subject in each case to the regulations that the applicable federal regulatory
authority may prescribe.
Effective December 31, 1996, the OCC amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus, but subject to
compliance with general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. ss. 1.5, some Type IV securities,
which are defined in 12 C.F.R. ss. 1.2(1) to include some commercial
mortgage-related securities and residential mortgage-related securities. As
defined, "commercial mortgage-related security" and "residential
mortgage-related
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security" mean, in relevant part, a mortgage related security within the meaning
of SMMEA, provided that, in the case of a commercial mortgage-related security,
it "represents ownership of a promissory note or certificate of interest or
participation that is directly secured by a first lien on one or more parcels of
real estate upon which one or more commercial structures are located and that is
fully secured by interests in a pool of loans to numerous obligors." In the
absence of any rule or administrative interpretation by the OCC defining the
term "numerous obligors," we make no representation as to whether any class of
offered certificates will qualify as commercial mortgage-related securities, and
thus as Type IV securities, for investment by national banks.
The NCUA has adopted rules, codified at 12 C.F.R. Part 703, which
permit federal credit unions to invest in mortgage related securities under
limited circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the investment pilot program described in 12 C.F.R. ss.
703.140.
The OTS has issued Thrift Bulletin 13a (December 1, 1998), "Management
of Interest Rate Risk, Investment Securities, and Derivatives Activities," which
thrift institutions subject to the jurisdiction of the OTS should consider
before investing in any of the offered certificates.
All depository institutions considering an investment in the offered
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the FDIC, the OCC and the OTS effective
May 26, 1998, and by the NCUA effective October 1, 1998. That statement sets
forth general guidelines which depository institutions must follow in managing
risks, including market, credit, liquidity, operational (transaction), and legal
risks, applicable to all securities, including mortgage pass-through securities
and mortgage-derivative products used for investment purposes.
There may be other restrictions on your ability either to purchase one
or more classes of offered certificates of any series or to purchase offered
certificates representing more than a specified percentage of your assets. We
make no representations as to the proper characterization of any class of
offered certificates for legal investment or other purposes. Also, we make no
representations 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, if your investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities, you should consult with your legal advisor in
determining whether and to what extent--
o the offered certificates of any class and series constitute
legal investments or are subject to investment, capital or
other restrictions; and
o if applicable, SMMEA has been overridden in your State.
USE OF PROCEEDS
Unless otherwise specified in the related prospectus supplement, the
net proceeds to be received from the sale of the offered certificates of any
series will be applied by us to the purchase of assets for
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the related trust or will be used by us to cover expenses related to that
purchase and the issuance of those certificates. We expect to sell the offered
certificates from time to time, but the timing and amount of offerings of those
certificates will depend on a number of factors, including the volume of
mortgage assets acquired by us, prevailing interest rates, availability of funds
and general market conditions.
METHOD OF DISTRIBUTION
The certificates offered by this prospectus and the related prospectus
supplements will be offered in series through one or more of the methods
described in the next paragraph. The prospectus supplement prepared for the
offered certificates of each series will describe the method of offering being
utilized for those certificates and will state the net proceeds to us from the
sale of those certificates.
We intend that offered certificates will be offered through the
following methods from time to time. We further intend that offerings may be
made concurrently through more than one of these methods or that an offering of
the offered certificates of a particular series may be made through a
combination of two or more of these methods. The methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public offering by one or more underwriters specified in the
related prospectus supplement;
2. by placements by us with institutional investors through
dealers; and
3. by direct placements by us with institutional investors.
In addition, if specified in the related prospectus supplement, the
offered certificates of a series may be offered in whole or in part to the
seller of the mortgage assets that would back those certificates. Furthermore,
the related trust assets for any series of offered certificates may include
other securities, the offering of which was registered under the registration
statement of which this prospectus is a part.
If underwriters are used in a sale of any offered certificates, other
than in connection with an underwriting on a best efforts basis, the offered
certificates will be acquired by the underwriters for their own account. These
certificates may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. The managing underwriter or underwriters with respect to the offer and
sale of offered certificates of a particular series will be described on the
cover of the prospectus supplement relating to the series and the members of the
underwriting syndicate, if any, will be named in the relevant prospectus
supplement.
Underwriters may receive compensation from us or from purchasers of the
offered certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the payment of the offered
certificates may be deemed to be underwriters in connection with those
certificates. In addition, any discounts or commissions received by them from us
and any profit on the resale of those offered certificates by them may be deemed
to be underwriting discounts and commissions under the Securities Act of 1933,
as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of the offered certificates of any series will provide that--
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o the obligations of the underwriters will be subject to various
conditions precedent,
o the underwriters will be obligated to purchase all the
certificates if any are purchased, other than in connection
with an underwriting on a best efforts basis, and
o in limited circumstances, we will indemnify the several
underwriters and the underwriters will indemnify us against
civil liabilities relating to disclosure in our registration
statement, this prospectus or any of the related prospectus
supplements, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to
be made with respect to any liabilities.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between us and purchasers of
offered certificates of that series.
We anticipate that the offered certificates will be sold primarily to
institutional investors. Purchasers of offered certificates, including dealers,
may, depending on the facts and circumstances of the purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with reoffers and sales by them of offered certificates. Holders of
offered certificates should consult with their legal advisors in this regard
prior to any reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement,
particular legal matters in connection with the certificates of each series,
including some federal income tax consequences, will be passed upon for us by--
o Sidley & Austin; or
o Thacher, Proffitt & Wood.
FINANCIAL INFORMATION
A new trust will be formed with respect to each series of offered
certificates. None of those trusts will engage in any business activities or
have any assets or obligations prior to the issuance of the related series of
offered certificates. Accordingly, no financial statements with respect to any
trust will be included in this prospectus or in the related prospectus
supplement. We have determined that our financial statements will not be
material to the offering of any offered certificates.
Rating
It is a condition to the issuance of any class of offered certificates
that, at the time of issuance, at least one nationally recognized statistical
rating organization has rated those certificates in one of its generic rating
categories which signifies investment grade. Typically, the four highest rating
categories,
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within which there may be sub-categories or gradations indicating relative
standing, signify investment grade.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders of all payments of interest and/or principal to which
they are entitled. These ratings address the structural, legal and
issuer-related aspects associated with the certificates, the nature of the
underlying mortgage assets and the credit quality of any third-party credit
enhancer. The rating(s) on a class of offered certificates will not represent
any assessment of--
o whether the price paid for those certificates is fair;
o whether those certificates are a suitable investment for any
particular investor;
o the tax attributes of those certificates or of the related
trust;
o the yield to maturity or, if they have principal balances, the
average life of those certificates;
o the likelihood or frequency of prepayments of principal on the
underlying mortgage loans;
o the degree to which the amount or frequency of prepayments on
the underlying mortgage loans might differ from those
originally anticipated;
o whether or to what extent the interest payable on those
certificates may be reduced in connection with interest
shortfalls resulting from the timing of voluntary prepayments;
o the likelihood that any amounts other than interest at the
related mortgage interest rates and principal will be received
with respect to the underlying mortgage loans; or
o if those certificates provide solely or primarily for payments
of interest, whether the holders, despite receiving all
payments of interest to which they are entitled, would
ultimately recover their initial investments in those
certificates.
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.
GLOSSARY
The following capitalized terms will have the respective meanings
assigned to them in this "Glossary" section whenever they are used in this
prospectus.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"CERCLA" means the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
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"COMMITTEE REPORT" means the Conference Committee Report accompanying
the Tax Reform Act of 1986.
"CPR" means an assumed constant rate of prepayment each month, which is
expressed on a per annum basis, relative to the then outstanding principal
balance of a pool of mortgage loans for the life of those loans.
"DISQUALIFIED ORGANIZATION" means:
o the United States,
o any State or political subdivision of the United States,
o any foreign government,
o any international organization,
o any agency or instrumentality of the foregoing, except for
instrumentalities described in Section 168(h)(2)(D) of the
Internal Revenue Code or the Freddie Mac,
o any organization, other than a cooperative described in
Section 521 of the Internal Revenue Code, that is exempt from
federal income tax, except if it is subject to the tax imposed
by Section 511 of the Internal Revenue Code, or
o any organization described in Section 1381(a)(2)(C) of the
Internal Revenue Code.
"ECS" means Euroclear Clearance System, S.C., a Belgian cooperative
corporation.
"ELECTING LARGE PARTNERSHIP" means any partnership having more than 100
members during the preceding tax year which elects to apply simplified reporting
provisions under the Internal Revenue Code of 1986, except for some service
partnerships and commodity pools.
"ERISA PLAN" means any employee benefit plan, or other retirement plan,
arrangement or account, that is subject to the fiduciary responsibility
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and Section 4975 of the Internal Revenue Code of 1986.
"EUROCLEAR OPERATOR" means Morgan Guaranty Trust Company of New York,
Brussels, Belgium office, as operator of the Euroclear System.
"EUROCLEAR TERMS AND CONDITIONS" means the Terms and Conditions
Governing Use of Euroclear and the related Operating Procedures of the Euroclear
System and, to the extent that it applies to the operation of the Euroclear
System, Belgian law.
"FANNIE MAE" means the Federal National Mortgage Association.
----------
"FARMER MAC" means the Federal Agricultural Mortgage Corporation.
----------
"FASIT" means a financial asset securitization trust, within the
meaning of, and formed in accordance with, the Small Business Job Protection Act
of 1996 and Sections 860I through 860L of the Internal Revenue Code of 1986.
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"FDIC" means the Federal Deposit Insurance Corporation.
"FINANCIAL INTERMEDIARY" means a brokerage firm, bank, thrift
institution or other financial intermediary that maintains an account of a
beneficial owner of securities.
"FREDDIE MAC" means the Federal Home Loan Mortgage Association.
"GINNIE MAE" means the Government National Mortgage Association.
"GOVERNING DOCUMENT" means the pooling and servicing agreement or other
similar agreement or collection of agreements, which governs the issuance of a
series of offered certificates.
"IRS" means the Internal Revenue Service.
"LENDER LIABILITY ACT" means the Asset Conservation Lender Liability
and Deposit Insurance Act of 1996, as amended.
"NET INCOME FROM FORECLOSURE PROPERTY" means income from foreclosure
property other than qualifying rents and other qualifying income for a REIT.
"NCUA" means the National Credit Union Administration.
"OCC" means the Office of the Comptroller of the Currency.
"OTS" means the Office of Thrift Supervision.
"PARTY IN INTEREST" means any person that is a "party in interest"
within the meaning of ERISA or a "disqualified person" within the meaning of the
Internal Revenue Code of 1986.
"PASS-THROUGH ENTITY" means any:
o regulated investment company,
o real estate investment trust,
o trust,
o partnership, or
o other entities described in Section 860E(e)(6) of the Internal
Revenue Code.
"PLAN ASSET REGULATIONS" means the regulations of the U.S. Department
of Labor promulgated under the Employee Retirement Income Security Act of 1974,
as amended.
"REIT" means a real estate investment trust within the meaning of
Section 856(a) of the Internal Revenue Code of 1986.
"RELIEF ACT" means the Soldiers' and Sailors' Relief Act of 1940, as
amended.
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"REMIC" means a real estate mortgage investment conduit, within the
meaning of, and formed in accordance with, the Tax Reform Act of 1986 and
Sections 860A through 860G of the Internal Revenue Code of 1986.
"SEC" means the Securities and Exchange Commission.
"SPA" means standard prepayment assumption.
"UCC" means, for any jurisdiction, the Uniform Commercial Code as in
effect in that jurisdiction.
"U.S. Person" means:
o a citizen or resident of the United States;
o a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any
political subdivision of the United States;
o an estate whose income from sources without the United States
is includible in gross income for United States federal income
tax purposes regardless of its connection with the conduct of
a trade or business within the United States; or
o a trust as to which--
1. a court in the United States is able to exercise
primary supervision over the administration of the
trust, and
2. one or more United States persons have the authority
to control all substantial decisions of the trust.
In addition, to the extent provided in the Treasury Regulations, a
trust will be a U.S. Person if it was in existence on August 20, 1996 and it
elected to be treated as a U.S. Person.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee............................... $ 26,400.00(1)
Printing and Engraving Fees........................ 20,000.00*
Legal Fees and Expenses............................ 150,000.00*
Accounting Fees and Expenses....................... 50,000.00*
Trustee Fees and Expenses.......................... 20,000.00*
Rating Agency Fees................................. 75,000.00*
Miscellaneous...................................... 15,000.00*
Total......................................... $356,400.00
===========
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(1) Previously paid.
* Based on the offering of a single series of Securities.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 8(b) of the proposed form of Underwriting Agreement, the
Underwriters are obligated under certain circumstances to indemnify certain
controlling persons of the Depositor against certain liabilities, including
liabilities under the Securities Act of 1933.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred by him in con nection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person
<PAGE>
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of expenses provided by, or granted pursuant to,
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The By-Laws of the Depositor provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of Delaware, the Depositor (i) shall indemnify and
hold harmless each person who was or is a party or is threatened to be made a
party to any action, suit or proceeding described in subsections (a) and (b) by
reason of the fact that he is or was a director or officer, or his testator or
intestate is or was a director or officer of the Depositor against expenses,
judgments, fines and amounts paid in settlement, and (ii) shall indemnify and
hold harmless each person who was or is a party or is threat ened to be made a
party to any such action, suit or proceeding if such person is or was serving at
the request of the Depositor as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Pursuant to Section 145 of the General Corporation Law of Delaware,
liability insurance is maintained covering directors and principal officers of
the Depositor.
The Pooling and Servicing Agreement or Trust Agreement with respect to
each series of Certificates and the Servicing Agreement, Indenture and Owner
Trust Agreement with respect to each series of Notes will provide that no
director, officer, employee or agent of the Depositor is liable to the Trust
Fund or the Securityholders, except for such person's own willful misfeasance,
bad faith or gross negligence in the performance of duties or reckless disregard
of obligations and duties. The Pooling and Servicing Agreement or Trust
Agreement with respect to each series of Certificates and the Servicing
Agreement, Indenture and Owner Trust Agreement with respect to each series of
Notes will further provide that, with the exceptions stated above, a director,
officer, employee or agent of the Depositor is entitled to be indemnified
against any loss, liability or expense incurred in connection with legal action
relating to such Pooling and Servicing Agreement, Trust Agreement, Servicing
Agreement, Indenture or Owner Trust Agreement and related Securities other than
such expenses related to particular Mortgage Loans.
II - 2
<PAGE>
Item 16. EXHIBITS.
1.1 Form of Underwriting Agreement is incorporated by reference
from Registration Statement on Form S-3 (File No. 33-78332).
3.1 Certificate of Incorporation of the Registrant is incorporated
by reference from Registration Statement on Form S-3 (File No.
33-78332).
3.2 By-laws of the Registrant are incorporated by reference from
Registration Statement on Form S-3 (File No. 33-78332).
4.1 Form of Pooling and Servicing Agreement, for a series
consisting of Senior and Subordinate Certificates is
incorporated by reference from Registration Statement on Form
S-3 (File No. 33-78332).
4.2 Form of Pooling and Servicing Agreement, for a series
consisting of a single class of Certificates is incorporated
by reference from Registration Statement on Form S-3 (File No.
33-78332).
4.3 Form of Trust Agreement, for a resecuritization of Mortgage
Pass-Through Certificates is incorporated by reference from
Registration Statement on Form S-3 (File No. 333-14225).
4.4 Form of Servicing Agreement, for a series consisting of
Mortgage-Backed Notes is incorporated by reference from
Registration Statement on Form S-3 (File No. 333- 44593).
4.5 Form of Trust Agreement, for a series consisting of
Mortgage-Backed Notes is incorporated by reference from
Registration Statement on Form S-3 (File No. 333- 44593).
4.6 Form of Indenture, for a series consisting of Mortgage-Backed
Notes is incorporated by reference from Registration Statement
on Form S-3 (File No. 333-44593).
5.1 Opinion of Thacher Proffitt & Wood (included as part of
original filing on June 29, 2000).
5.2 Opinion of Sidley & Austin (included as part of original
filing on June 29, 2000).
8.1 Opinion of Thacher Proffitt & Wood with respect to certain tax
matters (included as part of Exhibit 5.1) (included as part of
original filing on June 29, 2000).
8.2 Opinion of Sidley & Austin with respect to certain tax matters
(included as part of original filing on June 29, 2000).
II - 3
<PAGE>
23.1 Consent of Thacher Proffitt & Wood (included as part of
Exhibits 5.1 and 8.1) (included as part of original filing on
June 29, 2000).
23.2 Consent of Sidley & Austin (included as part of Exhibits 5.2
and 8.2) (included as part of original filing on June 29,
2000).
24.1 Power of Attorney (File No. 333-84249).
II - 4
<PAGE>
Item 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post- effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; (iii) to include
any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material
change of such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
B. UNDERTAKING IN CONNECTION WITH INCORPORATION BY REFERENCE OF CERTAIN
FILINGS UNDER THE SECURITIES EXCHANGE ACT OF 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification
II - 5
<PAGE>
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issues.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Salomon Brothers Mortgage Securities VII, Inc. certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form
S-3/A and has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 6th day of September, 2000.
SALOMON BROTHERS MORTGAGE
SECURITIES VII, INC.
By: /s/ Susan Mills
-------------------------------
Name: Susan Mills
Title: Assistant Vice President
II - 7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Susan Mills * Director and President September 6, 2000
------------------------ (Principal Executive Officer)
Mark Tsesarsky
/s/ Mark Kleinman Treasurer (Principal Financial September 6, 2000
----------------------- Officer)
Mark Kleinman
/s/ Charlie Milone Assistant Vice President September 6, 2000
----------------------- (Principal Accounting Officer)
Charlie Milone
/s/ Susan Mills * Director and September 6, 2000
------------------------ Vice President
Jeffrey A. Perlowitz
/s/ Marcy Engel Director September 6, 2000
--------------------------
Marcy Engel
</TABLE>
* By: /s/ Susan Mills
---------------------
Susan Mills
Attorney-in-fact
II - 8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
------
1.1 Form of Underwriting Agreement is incorporated by reference from
Registration Statement on Form S-3 (File No. 33-78332).
3.1 Certificate of Incorporation of the Registrant is incorporated by
reference from Registration Statement on Form S-3 (File No. 33-78332).
3.2 By-laws of the Registrant are incorporated by reference from Registration
Statement on Form S-3 (File No. 33-78332).
4.1 Form of Pooling and Servicing Agreement, for a series consisting of
Senior and Subordinate Certificates is incorporated by reference from
Registration Statement on Form S-3 (File No. 33-78332).
4.2 Form of Pooling and Servicing Agreement, for a series consisting of a
single class of Certificates is incorporated by reference from
Registration Statement on Form S-3 (File No. 33-78332).
4.3 Form of Trust Agreement, for a resecuritization of Mortgage Pass-Through
Certificates is incorporated by reference from Registration Statement on
Form S-3 (File No. 333-14225).
4.4 Form of Servicing Agreement, for a series consisting of Mortgage-Backed
Notes is incorporated by reference from Registration Statement on Form
S-3 (File No. 333-44593).
4.5 Form of Trust Agreement, for a series consisting of Mortgage-Backed Notes
is incorporated by reference from Registration Statement on Form S-3
(File No. 333-44593).
4.6 Form of Indenture, for a series consisting of Mortgage-Backed Notes is
incorporated by reference from Registration Statement on Form S-3 (File
No. 333-44593).
5.1 Opinion of Thacher Proffitt & Wood (included as part of original filing
on June 29, 2000).
5.2 Opinion of Sidley & Austin (included as part of original filing on June
29, 2000).
8.1 Opinion of Thacher Proffitt & Wood with respect to certain tax matters
(included as part of Exhibit 5.1) (included as part of original filing on
June 29, 2000).
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<PAGE>
8.2 Opinion of Sidley & Austin with respect to certain tax matters (included
as part of original filing on June 29, 2000).
23.1 Consent of Thacher Proffitt & Wood (included as part of Exhibits 5.1 and
8.1)(included as part of original filing on June 29, 2000).
23.2 Consent of Sidley & Austin (included as part of Exhibits 5.2 and 8.2)
(included as part of original filing on June 29, 2000).
24.1 Power of Attorney (File No. 333-84249).
II - 10
