<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 20, 1996)
$81,129,770
MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 1996-1
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
BERKELEY FEDERAL BANK & TRUST FSB
MORTGAGE LOAN SELLER AND MASTER SERVICER
------------------------
The Series 1996-1 Certificates will consist of two classes of certificates
(collectively, the 'Certificates'), designated as (i) the Class A Certificates
(the 'Class A Certificates') and (ii) the Class R Certificates (the 'Residual
Certificates'). The rights of the holders of the Residual Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the holders of the Class A Certificates to the extent described
herein and in the Prospectus. Only the Class A Certificates are offered hereby.
Distributions on the Class A Certificates will be made on the 25th day of
each month or, if such day is not a business day, on the next succeeding
business day, beginning in October 1996 (each, a 'Distribution Date'). As
described more fully herein, interest payable with respect to each Distribution
Date will accrue on the Class A Certificates during the period commencing on the
25th day of the month immediately preceding the month in which such Distribution
Date occurs (or, in the case of the first period, commencing on the Closing
Date) and ending on the 24th day of the month in which such Distribution Date
occurs. Interest will be calculated, in the case of the Class A Certificates, on
the basis of a 360-day year and the actual number of days in the applicable
accrual period, and will be based on the then-outstanding Certificate Principal
Balance of the Class A Certificates and the then-applicable Pass-Through Rate
thereon, as reduced by certain interest shortfalls.
On or before the date of issuance of the Certificates, the Depositor will
obtain from Financial Security Assurance Inc. (the 'Insurer') a Financial
Guaranty Insurance Policy (the 'Policy'), which will, subject to its terms,
protect the holders of the Class A Certificates against any interest shortfalls
(except as described herein) allocated to the Class A Certificates and the
principal portion of any Realized Losses allocated to the Class A Certificates.
See 'Description of the Certificates -- Financial Guaranty Insurance Policy'
herein.
The Pass-Through Rate on the Class A Certificates is adjustable and will be
calculated for each Distribution Date as described herein. The Pass-Through Rate
on the Class A Certificates will be approximately 5.9125% per annum for the
first Distribution Date. Distributions in respect of principal of the Class A
Certificates will be made as described herein under 'Description of the
Certificates -- Principal Distributions on the Class A Certificates.'
(cover continued on next page)
[Logo]
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE POLICY ARE
THE SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES. THE CERTIFICATES DO NOT
REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR, THE MASTER SERVICER,
THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. 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.
------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER 'RISK
FACTORS' BEGINNING ON PAGE S-15 OF THIS PROSPECTUS SUPPLEMENT.
<TABLE>
<CAPTION>
INITIAL PRINCIPAL PASS-THROUGH PRICE TO UNDERWRITING
BALANCE RATE PUBLIC DISCOUNT
<S> <C> <C> <C> <C>
Per Class A Certificate..................................... $81,129,770 Variable 100% .29%
<CAPTION>
PROCEEDS TO
DEPOSITOR(1)
<S> <C>
Per Class A Certificate..................................... 99.71%
</TABLE>
(1) Before deducting expenses payable by the Depositor estimated to be $250,000.
------------------------
The Class A Certificates are offered subject to prior sale, when, as and if
issued by the Trust Fund and accepted by the Underwriter and subject to its
right to reject orders in whole or in part. It is expected that delivery of the
Class A Certificates will be made in book-entry form only through the Same-Day
Funds Settlement System of The Depository Trust Company, CEDEL S.A. and the
Euroclear System against payment therefor in immediately available funds in New
York, New York on or about September 26, 1996.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus Supplement is September 20, 1996.
<PAGE>
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It is a condition of the issuance of the Class A Certificates that they be
rated 'AAA' by Standard & Poor's Ratings Services, a Division of the McGraw-Hill
Companies, Inc. ('Standard & Poor's') and 'Aaa' by Moody's Investors Service,
Inc. ('Moody's').
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the 'Trust Fund') consisting primarily of a segregated
pool (the 'Mortgage Pool') of conventional, one- to four-family, first lien
mortgage loans having original terms to maturity ranging from 15 years to 30
years (the 'Mortgage Loans'). The Mortgage Loans were originated or acquired by
Berkeley Federal Bank & Trust FSB (the 'Mortgage Loan Seller') in the ordinary
course of its business. The Depositor will acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a Mortgage Loan Purchase Agreement. The Trust
Fund will be created pursuant to a Pooling and Servicing Agreement, dated as of
September 1, 1996 (the 'Agreement'), among the Depositor, Berkeley Federal Bank
& Trust FSB, as Master Servicer, and Bankers Trust Company, as Trustee. The
Mortgage Pool consists of fixed-rate Mortgage Loans ('Fixed Rate Mortgage
Loans') having an aggregate principal balance as of September 1, 1996 (the
'Cut-off Date') of approximately $16,903,118, and adjustable-rate Mortgage Loans
('Adjustable Rate Mortgage Loans') having an aggregate principal balance as of
the Cut-off Date of approximately $64,226,653, in each case subject to a
permitted variance as described herein under 'The Mortgage Pool.' Each
Adjustable Rate Mortgage Loan provides for semiannual adjustment to the Mortgage
Rate thereon (in the case of the majority of such Mortgage Loans, after an
initial period of two years, or in the case of seven such Mortgage Loans three
years, from the origination thereof) based on six-month London interbank offered
rates for United States dollar deposits (the 'Index') and for corresponding
adjustments to the monthly payment amount due thereon, in each case subject to
the limitations described herein. The Class A Certificates will initially have
an aggregate Certificate Principal Balance equal to the sum of the aggregate
principal balances as of the Cut-off Date of the Mortgage Loans.
The Class A Certificates initially will be represented by certificates
registered in the name of CEDE & Co., as nominee of The Depository Trust Company
('DTC'). The interests of beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's name on the
books of their respective depositories which in turn will hold such positions in
customers' securities accounts in the depositories' names on the books of DTC.
Definitive Certificates will be available for the Class A Certificates only
under the limited circumstances described herein. See 'Description of the
Certificates -- Registration of the Class A Certificates' herein.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL BE SENSITIVE TO THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
REPURCHASES) ON THE MORTGAGE LOANS, AND TO ADJUSTMENTS TO THE MORTGAGE RATES ON
THE ADJUSTABLE RATE MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID
IN FULL OR IN PART AT ANY TIME; HOWEVER, WITH RESPECT TO A MAJORITY OF THE
MORTGAGE LOANS, A PREPAYMENT MAY SUBJECT THE RELATED MORTGAGOR TO A PREPAYMENT
CHARGE. SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO
PREPAYMENTS WILL BE OFFSET BY THE MASTER SERVICER TO THE EXTENT DESCRIBED
HEREIN. SEE 'SUMMARY OF PROSPECTUS SUPPLEMENT -- SPECIAL PREPAYMENT
CONSIDERATIONS' AND ' -- SPECIAL YIELD CONSIDERATIONS' AND 'YIELD ON THE
CERTIFICATES' HEREIN.
An election will be made to treat the Trust Fund as a 'real estate mortgage
investment conduit' ('REMIC') for federal income tax purposes. As described more
fully herein and in the Prospectus, the Class A Certificates will be the
'regular interests' in the REMIC and the Residual Certificates will be the sole
class of 'residual interests' in the REMIC. See 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
Prior to their issuance, there has been no market for the Class A
Certificates nor can there by any assurance that one will develop or, if it does
develop, that it will provide the Certificateholders with liquidity or will
continue for the life of the Class A Certificates. The Underwriter intends, but
is not obligated, to make a market in the Class A Certificates. See 'Risk
Factors' herein.
As provided herein under 'The Insurer -- Incorporation of Certain Documents
by Reference,' the Depositor will provide without charge to any person to whom
this Prospectus Supplement is delivered, upon oral or written request of such
person, a copy of any or all financial statements incorporated herein by
reference. Requests for such copies should be directed as provided under 'The
Insurer -- Incorporation of Certain Documents by Reference' herein.
S-2
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<PAGE>
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THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL
CONSTITUTE A PORTION OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE
DEPOSITOR AND ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED SEPTEMBER 20,
1996, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING
THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED
TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE
CLASS A CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED
BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
TO THE EXTENT THAT ANY STATEMENTS IN THIS PROSPECTUS SUPPLEMENT MODIFY
STATEMENTS CONTAINED IN THE PROSPECTUS, THE STATEMENTS IN THIS PROSPECTUS
SUPPLEMENT SHALL CONTROL.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-3
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<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Principal Definitions is included at the
end of the Prospectus.
<TABLE>
<S> <C>
Title of Series.............................. Mortgage Loan Asset Backed Certificates, Series 1996-1 (the
'Certificates').
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund (the 'Trust Fund') consisting
primarily of a segregated pool (the 'Mortgage Pool') of
conventional one- to four-family, first lien mortgage loans (the
'Mortgage Loans'). The Mortgage Pool consists of fixed-rate
Mortgage Loans (the 'Fixed Rate Mortgage Loans') having an
aggregate principal balance as of September 1, 1996 (the
'Cut-off Date') of approximately $16,903,118, and
adjustable-rate Mortgage Loans (the 'Adjustable Rate Mortgage
Loans') having an aggregate principal balance as of the Cut-off
Date of approximately $64,226,653, in each case subject to a
permitted variance as described herein under 'The Mortgage
Pool.' The Certificates will consist of two classes of
certificates, designated as (i) the Class A Certificates (the
'Class A Certificates') and (ii) the Class R Certificates (the
'Residual Certificates').
Only the Class A Certificates are offered hereby. The Certificates
will be issued pursuant to a Pooling and Servicing Agreement, to
be dated as of September 1, 1996 (the 'Agreement'), among the
Depositor, the Master Servicer and the Trustee.
Offered Certificates......................... The Class A Certificates will have an aggregate initial
Certificate Principal Balance of approximately $81,129,770. The
Pass-Through Rate on the Class A Certificates is adjustable and
is calculated as described under ' -- Pass-Through Rate' herein.
The Class A Certificates in the aggregate initially evidence an
interest of 100% in the principal of the Trust Fund. The Class A
Certificates will initially have an aggregate Certificate
Principal Balance equal to the aggregate principal balance of
the Mortgage Loans.
Cut-off Date................................. September 1, 1996.
Closing Date................................. On or about September 26, 1996.
Expected Final Maturity Date................. September 25, 2027.
Residual Certificates........................ The Certificate Principal Balance of the Residual Certificates
will initially be zero but will be subject to increase as
described herein. The Residual Certificates will not have a
Pass-Through Rate. The Residual Certificates are not being
offered hereby.
Depositor of Mortgage Loans.................. Merrill Lynch Mortgage Investors, Inc., a Delaware corporation and
a wholly-owned, limited purpose subsidiary of Merrill Lynch
Capital Corporation, which is a wholly owned indirect subsidiary
of Merrill Lynch & Co., Inc. The Depositor is an affiliate of
the Underwriter. Neither Merrill Lynch & Co., Inc. nor any of
its affiliates, including the Depositor and the Underwriter, has
insured or guaranteed the Certificates or the Mortgage Loans or
is otherwise obligated in respect thereof. See 'The Depositor'
in the Prospectus.
Mortgage Loan Seller and Master Servicer..... Berkeley Federal Bank & Trust FSB, a federally chartered
</TABLE>
S-4
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<TABLE>
<S> <C>
savings bank. See 'The Master Servicer and the Mortgage Loan
Seller,' 'The Mortgage Pool -- Underwriting Standards;
Representations' and 'Pooling and Servicing Agreement -- The
Mortgage Loan Seller and Master Servicer' herein.
Trustee...................................... Bankers Trust Company, a New York banking corporation. See
'Pooling and Servicing Agreement -- The Trustee' herein.
The Mortgage Pool General.................... The Mortgage Pool will consist of approximately 748 conventional,
one- to four-family, fixed-rate and adjustable-rate Mortgage
Loans secured by first liens on residential real properties (the
'Mortgaged Properties') having an aggregate principal balance as
of the Cut-off Date of $81,129,770 (the 'Cut-off Date Pool
Principal Balance'). The Mortgage Loans have original terms to
maturity ranging from 15 years to 30 years. The Mortgage Pool
consists of both Fixed Rate Mortgage Loans and Adjustable Rate
Mortgage Loans.
Approximately 194 of the Mortgage Loans are Fixed Rate Mortgage
Loans having an aggregate principal balance as of the Cut-off
Date, after application of payments of principal received, on or
prior to the Cut-off Date, of approximately $16,903,118, subject
to a permitted variance of plus or minus 5%. The Fixed Rate
Mortgage Loans bear interest at fixed annualized rates
('Mortgage Rates') which range from 8.875% per annum to 15.000%
per annum, with a weighted average Mortgage Rate as of the
Cut-off Date of approximately 10.765% per annum. As of the
Cut-off Date, the Fixed Rate Mortgage Loans will have a weighted
average remaining term to maturity of approximately 24 years and
10 months.
Approximately 5.66% of the Fixed Rate Mortgage Loans are Buydown
Mortgage Loans. Approximately 21.78% of the Fixed Rate Mortgage
Loans are balloon payment mortgage loans (each, a 'Balloon
Mortgage Loan'). See 'The Mortgage Pool' herein.
Approximately 554 of the Mortgage Loans are Adjustable Rate
Mortgage Loans having an aggregate principal balance as of the
Cut-off Date, after application of payments of principal
received, on or before the Cut-off Date of approximately
$64,226,653, subject to a permitted variance of plus or minus
5%. Each Adjustable Rate Mortgage Loan provides for semiannual
adjustment to the Mortgage Rate thereon and for corresponding
adjustments to the monthly payment amount due thereon, in each
case on each adjustment date applicable thereto (each such date,
an 'Adjustment Date'); provided, however, that in the case of
approximately 73.63% of the Adjustable Rate Mortgage Loans (each
a 'Delayed First Adjustment Mortgage Loan'), the first
Adjustment Date for each such Mortgage Loan will occur after an
initial period of two years, or in the case of seven such
Mortgage Loans three years, from the origination thereof. On
each Adjustment Date for each Adjustable Rate Mortgage Loan, the
Mortgage Rate thereon will be adjusted to equal the sum, rounded
to the nearest multiple of 0.125%, of the Index (as described
below) and a fixed percentage amount (the 'Gross Margin'),
subject to periodic and lifetime limitations as described
herein. See 'The Mortgage Pool' herein. None of the Adjustable
Rate Mortgage Loans permits the related mortgagor to
</TABLE>
S-5
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<TABLE>
<S> <C>
convert the adjustable Mortgage Rate thereon to a fixed Mortgage
Rate.
As of the Cut-off Date, the Adjustable Rate Mortgage Loans have
Mortgage Rates ranging from 7.250% per annum to 14.990% per
annum, a weighted average Mortgage Rate of approximately 10.130%
per annum, a weighted average next Adjustment Date in March
1998, Gross Margins ranging from 3.000% to 8.950% and a weighted
average Gross Margin of approximately 6.404%. As of the Cut-off
Date, the Adjustable Rate Mortgage Loans will have a weighted
average remaining term to maturity of approximately 29 years and
11 months.
None of the Adjustable Rate Mortgage Loans are Buydown Mortgage
Loans. See 'The Mortgage Pool' herein.
The Index.................................... 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 most recently
available either (i) as of the first business day 45 days prior
to such Adjustment Date or (ii) as of the first business day of
the month preceding the month of such Adjustment Date, as
specified in the related Mortgage Note. See 'The Mortgage
Pool -- The Index' herein.
Registration of Offered Certificates......... Holders of the Class A Certificates may elect to hold their Class
A Certificate interests through The Depository Trust Company
('DTC'), in the United States, or Centrale de Livraison de
Valeurs Mobilieres S.A. ('CEDEL') or the Euroclear System
('Euroclear'), in Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be in accordance with the
usual rules and operating procedures of the relevant system.
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and counterparties
holding directly or indirectly through CEDEL or Euroclear, on
the other, will be effected in DTC through Citibank, N.A. or The
Chase Manhattan Bank, the relevant depositaries (collectively,
the 'Depositaries') of CEDEL or Euroclear, respectively, and
each a participating member of DTC. The Class A Certificates
will be initially registered in the name of CEDE & Co., the
nominee of DTC. The interests of the Class A Certificateholders
will be represented by book-entries on the records of DTC, its
Participants and Indirect Participants for the benefit of the
Class A Certificate Owners. Certificates representing the Class
A Certificates will be issued in definitive form only under the
limited circumstances described in the Prospectus. In the case
of the Class A Certificates, all references herein to 'Holders'
or 'Certificateholders' shall reflect the rights of Certificate
Owners as they may indirectly exercise such rights through DTC,
CEDEL, Euroclear and participating members thereof, except as
otherwise specified herein.
Pass-Through Rate............................ The Pass-Through Rate on the Class A Certificates on each
Distribution Date after the first Distribution Date will be a
rate per annum equal to the lesser of (i) One-Month LIBOR (as
defined herein) plus 0.35%, in the case of each Distribution
Date through and including the Distribution Date on which the
aggregate Stated
</TABLE>
S-6
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<TABLE>
<S> <C>
Principal Balance (as defined herein) of the Mortgage Loans is
reduced to 10% or less of the Cut-off Date Pool Principal
Balance, or One-Month LIBOR plus 0.75% per annum, in the case of
any Distribution Date thereafter and (ii) the Available Funds
Pass-Through Rate for such Distribution Date. For the first
Distribution Date, the Pass-Through Rate on the Class A
Certificates will be approximately 5.9125% per annum.
The 'Available Funds Pass-Through Rate' for any Distribution Date
is a per annum rate equal to the weighted average of the Expense
Adjusted Mortgage Rates (minus the premium rate payable to the
Insurer in respect of the Policy) as described under
'Description of the Certificates -- Pass-Through Rate' herein.
The 'Expense Adjusted Mortgage Rate' on any Mortgage Loan is equal
to the then applicable Mortgage Rate thereon minus the sum of
(i) the Minimum Spread, (ii) the Trustee Fee Rate and (iii) the
Servicing Fee Rate. For any Distribution Date, the Minimum
Spread is equal to 0.75% per annum, the Trustee Fee Rate is
equal to 0.015% per annum and the Servicing Fee Rate is equal to
0.50% per annum. See 'Pooling and Servicing Agreement -- The
Trustee' and ' -- Servicing and Other Compensation and Payment
of Expenses' herein. The amount of the premium payable to the
Insurer with respect to the Policy for any Distribution Date is
described under 'Pooling and Servicing Agreement -- Certain
Matters Regarding the Insurer' herein.
In the event that the Pass-Through Rate for any Distribution Date
equals the Available Funds Pass-Through Rate, the holders of the
Class A Certificates will be entitled to receive the excess of
the amount calculated pursuant to clause (i) of the definition
of Pass-Through Rate over the Available Funds Pass-Through Rate
(such excess being herein referred to as the 'Basis Risk
Shortfall'), together with interest thereon at the Pass-Through
Rate applicable from time to time after certain distributions to
the holders of the Class A Certificates and the Insurer but
before the Residual Certificates are entitled to any
distributions. Notwithstanding the preceding sentence, the
amount of the Basis Risk Shortfall for any Distribution Date may
not exceed the excess of (x) the amount payable at the Maximum
Class A Pass-Through Rate over (y) the amount payable at the
Available Funds Pass-Through Rate. The 'Unpaid Basis Risk
Shortfall' for the Class A Certificates and any Distribution
Date is equal to the aggregate of all Basis Risk Shortfalls for
any previous Distribution Dates less all payments made to the
holders of the Class A Certificates in respect of such Basis
Risk Shortfalls on or prior to such Distribution Date. The
Policy will not cover Basis Risk Shortfalls or Unpaid Basis Risk
Shortfalls. See 'Description of the
Certificates -- Overcollateralization Provisions' and
' -- Financial Guaranty Insurance Policy' herein.
The 'Maximum Class A Pass-Through Rate' for any Distribution Date
is a per annum rate equal to the weighted average of the Expense
Adjusted Maximum Mortgage Rates (minus the premium rate payable
to the Insurer in respect of the Policy) as described under
'Description of the Certificates -- Pass-Through Rate' herein.
</TABLE>
S-7
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The 'Expense Adjusted Maximum Mortgage Rate' on any Mortgage Loan
is equal to the excess of (x) in the case of the Fixed Rate
Mortgage Loans, the Mortgage Rate, and in the case of the
Adjustable Rate Mortgage Loans, the Maximum Mortgage Rate (as
defined herein) thereon over (y) the sum of (i) the Minimum
Spread, (ii) the Trustee Fee Rate and (iii) the Servicing Fee
Rate.
Distributions -- General..................... Distributions on the Class A Certificates will be made on the 25th
day of each month or, if such day is not a business day, on the
next succeeding business day, beginning in October 1996 (each, a
'Distribution Date'). The Collection Period with respect to any
Distribution Date is the calendar month immediately preceding
the month in which such Distribution Date occurs. The
Determination Date with respect to any Distribution Date is on
the 15th day of the month in which such Distribution Date occurs
or, if such day is not a business day, then on the immediately
preceding business day. The Interest Accrual Period for any
Distribution Date and the Class A Certificates is the period
commencing on the 25th day of the month immediately preceding
the month in which such Distribution Date occurs (or, in the
case of the first period, commencing on the Closing Date) and
ending on the 24th day of the month in which such Distribution
Date occurs, and all distributions of interest on the Class A
Certificates will be based on a 360-day year and the actual
number of days in the applicable Interest Accrual Period. See
'Description of the Certificates' herein.
Interest Distributions....................... On each Distribution Date, holders of the Class A Certificates
will be entitled to receive interest distributions (the
'Interest Distribution Amount') in an amount equal to interest
accrued during the related Interest Accrual Period on the
Certificate Principal Balance thereof at the then-applicable
Pass-Through Rate, subject to reduction only in the event of
shortfalls caused by the Relief Act (as defined herein).
Notwithstanding the foregoing, if payments were not made as
required under the Policy, additional interest shortfalls may be
allocated to the Class A Certificates, as described herein. See
'Description of the Certificates -- Interest Distributions'
herein.
Principal Distributions...................... Holders of the Class A Certificates will be entitled to receive on
each Distribution Date an amount equal to the Principal
Distribution Amount (as defined herein). The Principal
Distribution Amount will include, to the extent of available
funds from the Mortgage Pool and except as otherwise described
herein, the principal portion of all monthly payments on the
Mortgage Loans to the extent received during the related
Collection Period, all unscheduled amounts received in respect
of the Mortgage Loans during the related Collection Period that
are allocable to principal (including proceeds of repurchases,
prepayments, liquidations and insurance (excluding payments made
under the Policy) and shortfalls relating to substitution) and
certain other amounts described herein allocable to Realized
Losses on the Mortgage Loans, and will be adjusted as a result
of the related required level of subordination, all as described
herein.
In addition, on each Distribution Date, funds received as a result
of a claim under the Policy in respect of the principal portion
of Realized Losses allocated to the
</TABLE>
S-8
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Class A Certificates will be distributed by or on behalf of the
Trustee to the holders of the Class A Certificates. See
'Description of the Certificates -- Financial Guaranty Insurance
Policy' herein.
The Certificate Principal Balance of a Class A Certificate as of
any date of determination is equal to the initial Certificate
Principal Balance thereof, reduced by the aggregate of (a) all
amounts allocable to principal previously distributed with
respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in
connection with the allocation of Realized Losses in the manner
described herein. The Certificate Principal Balance of the
Residual Certificates in the aggregate as of any date of
determination is equal to the excess, if any, of (a) the then
aggregate Stated Principal Balance of the Mortgage Loans over
(b) the then aggregate Certificate Principal Balance of the
Class A Certificates.
The subordination and cash flow provisions of the Residual
Certificates will, to the extent of available funds, result in a
limited acceleration of the principal payments to the holders of
the Class A Certificates to the extent the amount of
overcollateralization provided by the Mortgage Pool is less than
the then current related required amount. As of the Closing
Date, the aggregate Certificate Principal Balance of the Class A
Certificates will equal 100% of the aggregate principal balance
as of the Cut-off Date of the Mortgage Loans, and therefore as
of the Closing Date, the amount of overcollateralization
provided by the Mortgage Pool will be zero, which is less than
the required levels. The subordination provisions are more fully
described under ' -- Credit Enhancement' below and 'Description
of the Certificates -- Overcollateralization Provisions' herein.
Such subordination provisions may have the effect of shortening
the weighted average life of the Class A Certificates by
increasing the rate at which principal is distributed to the
Class A Certificateholders.
Servicing Fee................................ The Servicing Fee will be retained by the Master Servicer each
month in an amount equal to 0.50% per annum with respect to each
Mortgage Loan on the Stated Principal Balance of each Mortgage
Loan on the Determination Date.
Credit Enhancement........................... The Credit Enhancement provided for the benefit of the Class A
Certificateholders consists of the overcollateralization and the
Policy, each as described below and herein.
Overcollateralization: As described above, as of the Closing Date,
the aggregate Certificate Principal Balance of the Class A
Certificates will equal 100% of the Cut-off Date Pool Principal
Balance of the Mortgage Loans, and therefore as of the Closing
Date, the amount of overcollateralization provided by the
Mortgage Pool will be zero. However, the required level of
overcollateralization for the Mortgage Pool is a level at which
the principal balance of the Mortgage Loans would exceed the
aggregate Certificate Principal Balance of the Class A
Certificates by an amount equal to approximately 3.0% of the
aggregate Stated Principal Balance of the Mortgage Loans as of
the Cut-off Date. Until the actual level of
overcollateralization for the Mortgage Pool increases to the
required level, to the extent of available
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funds, a temporary period of accelerated amortization of the
Class A Certificates will occur.
The Agreement provides that, subject to certain trigger tests set
forth therein, the required level of overcollateralization for
the Mortgage Pool may increase or decrease over time. An
increase would result in a further temporary period of
accelerated amortization of the Class A Certificates to increase
the actual level of overcollateralization to its increased
required level; a decrease would result in a temporary period of
decelerated amortization of the Class A Certificates to achieve
an actual level of overcollateralization equal to its decreased
required level. See 'Description of the
Certificates -- Overcollateralization Provisions' herein.
The Financial Guaranty Insurance Policy: The Class A Certificates
will be entitled to the benefit of a certificate guaranty
insurance policy (the 'Policy') to be issued by Financial
Security Assurance Inc. (the 'Insurer'), discussed more fully
under ' -- Financial Guaranty Insurance Policy' below. See also
'Description of the Certificates' herein.
Financial Guaranty Insurance Policy.......... The Insurer will issue the Policy as a means of providing
additional credit enhancement to the Class A Certificates. Under
the Policy, the Insurer will irrevocably and unconditionally
guarantee payment to the Trustee, for the benefit of the holders
of the Class A Certificates, on each Distribution Date, as
further described herein, of an amount that will cover any
interest shortfalls (except for shortfalls in respect of the
Relief Act, Basis Risk Shortfalls and Unpaid Basis Risk
Shortfalls) allocated to the Class A Certificates plus the
principal portion of any Realized Losses allocated to the Class
A Certificates. A payment by the Insurer under the Policy is
referred to herein as an 'Insured Payment.' The Policy does not
guarantee the holders of the Class A Certificates any specified
rate of principal payments. See 'Description of the
Certificates -- Financial Guaranty Insurance Policy' herein.
Allocation of Losses; Subordination.......... Except as otherwise described herein, Realized Losses (as defined
herein) on the Mortgage Loans will be allocated first to the Net
Monthly Excess Cashflow (as defined herein), second to the
Residual Certificates until the Certificate Principal Balance
thereof has been reduced to zero and third to the Class A
Certificates, in each case to the extent described in
'Description of the Certificates -- Allocation of Losses;
Subordination' herein. Subject to the terms of the Policy, all
Realized Losses allocated to the Class A Certificates will be
covered by the Policy. See 'Description of the
Certificates -- Financial Guaranty Insurance Policy' herein.
Neither the Class A Certificates nor the Mortgage Loans are
insured or guaranteed by any governmental agency or
instrumentality or by the Depositor, the Master Servicer, the
Trustee or any of their respective affiliates.
Monthly Advances............................. The Master Servicer is required to make advances in respect of
delinquent payments of interest on the Mortgage Loans, subject
to the limitations described herein. As further described
herein, the credit enhancement will provide protection to the
holders of the Class A Certificates against any shortfalls
resulting from delinquencies as to which a Monthly Advance is
not made or is determined to be non-recoverable. See
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'Description of the Certificates -- Monthly Advances' herein and
'Description of the Certificates -- Advances in respect of
Delinquencies' in the Prospectus.
Record Date.................................. The Record Date for each Distribution Date will be the close of
business on the last business day of the month preceding the
month in which such Distribution Date occurs. See 'Description
of the Certificates -- General' herein.
Optional Termination......................... At its option, the majority holder of the Residual Certificates
(or if such holder does not exercise such option, the Master
Servicer or the Insurer) may purchase all of the Mortgage Loans,
together with any properties in respect thereof acquired by the
Trustee, and thereby effect termination and early retirement of
the Certificates, on any Distribution Date on which the
aggregate principal balance of the Mortgage Loans and such
properties remaining is 10% or less of the Cut-off Date Pool
Principal Balance of the Mortgage Loans. In the event the
majority holder of the Residual Certificates, the Master
Servicer or the Insurer exercises such option, the purchase
price payable in connection therewith generally will be equal to
par plus accrued interest for each Mortgage Loan at the related
Mortgage Rate to but not including the first day of the month in
which such repurchase price is distributed, together with any
amounts due to the Master Servicer for servicing compensation at
the related Servicing Fee Rate. In the event the majority holder
of the Residual Certificates, the Master Servicer or the Insurer
exercises such option, the portion of the purchase price
allocable to the Class A Certificates will be, to the extent of
available funds (including funds paid under the Policy), (i)
100% of the then outstanding Certificate Principal Balance
thereof, plus (ii) one month's interest on the then outstanding
Certificate Principal Balance thereof at the then applicable
Pass-Through Rate, plus (iii) any previously accrued but unpaid
interest thereon. See 'Pooling and Servicing
Agreement -- Termination' herein and 'Description of the
Certificates -- Termination' in the Prospectus.
Special Prepayment Considerations............ The rate and timing of distributions allocable to principal on the
Class A Certificates will depend, in general, on the rate and
timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) on the
Mortgage Loans and the allocation thereof to pay principal on
the Class A Certificates as provided herein. As is the case with
mortgage pass-through certificates generally, the Class A
Certificates are subject to substantial inherent cash-flow
uncertainties because the related Mortgage Loans may be prepaid
at any time; however, with respect to a majority of the Mortgage
Loans, a prepayment may subject the related mortgagor to a
prepayment charge. See 'The Mortgage Pool' herein.
Generally, when prevailing interest rates are increasing,
prepayment rates on mortgage loans tend to decrease; a decrease
in the prepayment rates on the Mortgage Loans will result in a
reduced rate of return of principal to investors in the Class A
Certificates at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing
interest rates are declining, prepayment rates on mortgage loans
tend to increase; an increase in the prepayment rates on the
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Mortgage Loans will result in a greater rate of return of
principal to investors in the Class A Certificates at a time
when reinvestment at comparable yields may not be possible.
Special Yield Considerations................. The yield to maturity on the Class A Certificates will depend, in
general, on (i) the Pass-Through Rate, (ii) the purchase price
and (iii) the rate and timing of principal payments (including
payments by the Insurer, prepayments and collections upon
defaults, liquidations and repurchases) on the Mortgage Loans
and the application thereof to reduce the Certificate Principal
Balance of the Class A Certificates, as well as other factors.
The yield to investors in the Class A Certificates will be
adversely affected by any allocation thereto of any interest
shortfalls not covered by the Insurer.
In general, if the Class A 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 Class A Certificates are purchased
at a discount and principal distributions thereon occur at a
rate slower than that assumed at the time of purchase, the
investor's actual yield to maturity will be lower than that
originally anticipated.
The proceeds to the Depositor from the sale of the Class A
Certificates were determined based on a number of assumptions,
including a prepayment assumption of 100% of the Prepayment
Vector (as defined herein), in the case of the Fixed Rate
Mortgage Loans, or 20% CPR (as defined herein), in the case of
the Adjustable Rate Mortgage Loans, and weighted average lives
corresponding thereto. No representation is made that the
Mortgage Loans will prepay at either such rate or at any other
rate, or that the Fixed Rate Mortgage Loans and Adjustable Rate
Mortgage Loans will prepay at the same rate. The yield
assumptions for the Class A Certificates will vary as determined
at the time of sale.
Certain Federal Income Tax Consequences...... A real estate mortgage investment conduit ('REMIC') election will
be made with respect to the Trust Fund for federal income tax
purposes. Upon the issuance of the Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with
all provisions of the Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986, as
amended (the 'Code').
For federal income tax purposes, (i) the Residual Certificates
will be the sole class of 'residual interests' in the REMIC and
(ii) the Class A Certificates will be 'regular interests' in,
and generally will be treated as debt instruments of, the REMIC.
The Class A Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code and real estate assets, under
Section 856(c)(5)(A) of the Code, generally in the same
proportion that the assets in the Trust Fund would be so
treated. In addition, interest on the Class A Certificates will
be treated as 'interest on obligations secured by mortgages on
real property' under Section
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856(c)(3)(B) of the Code generally to the extent that the Class
A Certificates are treated as 'real estate assets' under Section
856(c)(5)(A) of the Code. The Class A Certificates also will be
treated as 'qualified mortgages' under Section 860G(a)(3) of the
Code. See 'Certain Federal Income Tax
Consequences -- Characterization of Investments in REMIC
Certificates' in the Prospectus.
For federal income tax reporting purposes, the Class A
Certificates will not be treated as having been issued with
original issue discount. The Class A Certificates may be treated
for federal income tax purposes as having been issued at a
premium. 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 is 100% of the Prepayment Vector, in the case of the
Fixed Rate Mortgage Loans, or 20% CPR, in the case of the
Adjustable Rate Mortgage Loans. No representation is made that
the Mortgage Loans will prepay at that rate or at any other
rate. See 'Yield on the Certificates' herein.
For further information regarding the federal income tax
consequences of investing in the Class A Certificates, see
'Certain Federal Income Tax Consequences' herein and in the
Prospectus.
Ratings...................................... It is a condition to the issuance of the Certificates that the
Class A Certificates be rated 'AAA' by Standard & Poor's and
'Aaa' by Moody's. The ratings on the Class A Certificates are
based in part on the ratings of the claims-paying ability of the
Insurer by Standard & Poor's and Moody's. Any change in the
ratings of the Insurer by Standard & Poor's and Moody's may
result in a change in the ratings on the Class A Certificates.
The Depositor has not requested that any rating agency rate the
Class A Certificates other than as stated above. If another
rating agency were to rate the Class A Certificates, such rating
agency may assign a rating different from the ratings described
above. 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. 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' herein and 'Yield
Considerations' in the Prospectus.
Legal Investment............................. The appropriate characterization of the Class A Certificates under
various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase the Class A
Certificates, may be subject to significant interpretive
uncertainties. The Class A Certificates will be 'mortgage
related securities' within the meaning of the Secondary Mortgage
Market Enhancement Act of 1984 ('SMMEA') so long as they are
rated in at least the second highest rating category by a Rating
Agency (as defined in the Prospectus) and, as such, are legal
investments for certain entities to the extent provided in
SMMEA. Accordingly, investors should consult their own legal
advisors to determine whether and to what extent the Class A
Certificates constitute legal investments for them. See 'Legal
Investment' herein and in the Prospectus.
ERISA Considerations......................... A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee
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Retirement Income Security Act of 1974, as amended ('ERISA'), or
Section 4975 of the Code should review carefully with its legal
advisors whether the purchase or holding of Class A Certificates
could give rise to a transaction that is prohibited or is not
otherwise permitted either under ERISA or Section 4975 of the
Code or whether there exists any statutory or administrative
exemption applicable to an investment therein. The U.S.
Department of Labor has issued an individual exemption,
Prohibited Transaction Exemption 90-29, to the Underwriter that
generally exempts from the application of certain of the
prohibited transaction provisions of Section 406 of ERISA, and
the excise taxes imposed on such prohibited transactions by
Section 4975(a)and (b) of the Code 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 Class A Certificates and the servicing and operation of
asset pools, provided that certain conditions are satisfied. A
fiduciary of any employee benefit plan subject to ERISA or the
Code should consult with its legal advisors regarding the
requirements of ERISA and the Code. See 'ERISA Considerations'
herein and in the Prospectus.
Use of Proceeds.............................. The net proceeds to be received from the sale of the Class A
Certificates will be used by the Depositor to pay the purchase
price of the Mortgage Loans to the Mortgage Loan Seller.
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RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Class A Certificates.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
THE MORTGAGE LOAN SELLER'S UNDERWRITING STANDARDS ARE PRIMARILY INTENDED TO
ASSESS THE VALUE OF THE MORTGAGED PROPERTY AND TO EVALUATE THE ADEQUACY OF SUCH
PROPERTY AS COLLATERAL FOR THE MORTGAGE LOAN. THE MORTGAGE LOAN SELLER PROVIDES
LOANS PRIMARILY TO BORROWERS WHO DO NOT QUALIFY FOR LOANS CONFORMING TO FNMA AND
FHLMC GUIDELINES BUT WHO HAVE EQUITY IN THEIR PROPERTY. WHILE THE MORTGAGE LOAN
SELLER'S PRIMARY CONSIDERATION IN UNDERWRITING A MORTGAGE LOAN IS THE VALUE OF
THE MORTGAGED PROPERTY, THE MORTGAGE LOAN SELLER 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.
AS A RESULT OF THE MORTGAGE LOAN SELLER'S UNDERWRITING STANDARDS, THE
MORTGAGE LOANS ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND
BANKRUPTCY THAT ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE
EXPERIENCED BY MORTGAGE LOANS UNDERWRITTEN IN ACCORDANCE WITH TRADITIONAL FNMA
AND FHLMC GUIDELINES.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Mortgage Loans. Approximately 44.76% of the Fixed Rate Mortgage
Loans and approximately 33.58% of the Adjustable Rate Mortgage Loans, each by
aggregate principal balance of the related Mortgage Loans as of the Cut-off
Date, are secured by Mortgaged Properties located in the State of California. If
the California residential real estate market should experience an overall
decline in property values after the dates of origination of the Mortgage Loans,
the rates of delinquencies, foreclosures, bankruptcies and losses on the
Mortgage Loans may be expected to increase, and may increase substantially. See
'The Mortgage Pool -- Underwriting Standards; Representations' herein.
As described below under 'Pooling and Servicing Agreement -- The Mortgage
Loan Seller and Master Servicer,' the Mortgage Loan Seller commenced receiving
applications for mortgage loans under its regular lending program in December
1994. Accordingly, the Mortgage Loan Seller (whether as an originator or
acquirer of mortgage loans or as a servicer of such mortgage loans) does not
have representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Mortgage Loans.
LIMITED LIQUIDITY
Prior to their issuance there has been no market for the Class A
Certificates nor can there be any assurance that one will develop or, if it does
develop, that it will provide Owners of the Class A Certificates with liquidity
or will continue for the life of the Class A Certificates. The Underwriter
intends, but is not obligated, to make a market in the Class A Certificates.
DIFFICULTY IN PLEDGING
Since transactions in Class A Certificates can be effected only through
DTC, CEDEL or Euroclear, their Participants and Indirect Participants, the
ability of a Certificate Owner to pledge a Class A Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear systems, or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing such Certificates. See 'Description
of the Certificates -- Book-Entry Registration and Definitive Certificates'
herein.
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POTENTIAL DELAYS IN RECEIPT OF DISTRIBUTIONS
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants which will thereafter credit
them to the accounts of Certificate Owners either directly or indirectly through
Indirect Participants. See 'Description of the Certificates -- Book-Entry
Registration and Definitive Certificates' herein.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Approximately 8.63% of the Fixed Rate Mortgage Loans and approximately
14.23% of the Adjustable Rate Mortgage Loans, each by aggregate principal
balance of the related Mortgage Loans as of the Cut-off Date, had a
Loan-to-Value Ratio at origination in excess of 80% but will not be covered by a
primary mortgage insurance policy. Mortgage Loans with higher Loan-to-Value
Ratios may present a greater risk of loss. See 'The Mortgage Pool -- General'
herein.
Approximately 21.78% of the Fixed Rate Mortgage Loans and none of the
Adjustable Rate Mortgage Loans, each by aggregate principal balance of the
related Mortgage Loans as of the Cut-off Date, are Balloon Mortgage Loans. The
Balloon Mortgage Loans in the Trust Fund will not be fully amortizing over their
terms to maturity, and will require substantial principal payments at their
stated maturity. Balloon Mortgage Loans 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
Balloon Mortgage 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. See 'The Mortgage Pool -- General' and 'Yield on the
Certificates -- Balloon Mortgage Loans' herein.
Approximately 25.74% of the Fixed Rate Mortgage Loans and approximately
27.68% of the Adjustable Rate Mortgage Loans, each by aggregate principal
balance as of the Cut-off Date, have a first Due Date (as defined herein) on
October 1, 1996. The Mortgage Loan Seller has agreed to pay the amount of any
shortfall in the Interest Distribution Amount for the initial Distribution Date
up to the amount of the aggregate interest on such Mortgage Loans due on October
1, 1996.
LIMITED OBLIGATIONS
The Class A Certificates will not represent an interest in or obligation of
the Depositor, the Master Servicer, the Trustee or any of their respective
affiliates. The only obligations of the foregoing entities with respect to the
Certificates or any Mortgage Loan will be the obligations of the Depositor and
of the Master Servicer (in its capacity as Mortgage Loan Seller) pursuant to
certain limited representations and warranties made with respect to the Mortgage
Loans and of the Master Servicer with respect to its servicing obligations under
the Agreement (including the limited obligation to make certain Monthly
Advances). 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. The Class A Certificates are covered by the Policy, as and to the
extent described under the caption 'Description of the Certificates -- Financial
Guaranty Insurance Policy' herein. Proceeds of the assets included in the Trust
Fund (including the Mortgage Loans) and of the Policy will be the sole source of
payments on the Class A Certificates, and there will be no recourse to the
Depositor, the Master Servicer, the Trustee or any other entity in the event
that such proceeds are insufficient or otherwise unavailable to make all
payments provided for under the Class A Certificates.
YIELD CONSIDERATIONS WITH RESPECT TO THE ADJUSTABLE RATE MORTGAGE LOANS
The yield to maturity on the Class A Certificates may be affected by the
resetting of the Mortgage Rates on the Adjustable Rate Mortgage Loans on the
related Adjustment Dates. In addition, because the Mortgage Rate for each
Adjustable Rate Mortgage Loan is based on the Index plus the related Gross
Margin, such rate could be higher than prevailing market interest rates, and
this may result in an increase in the rate of prepayments on the Adjustable Rate
Mortgage Loans after such adjustment. Finally, because the Mortgage Rates on the
Adjustable Rate Mortgage Loans are based on the Index
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while the Pass-Through Rate on the Class A Certificates is based in part on
One-Month LIBOR, and a substantial number of the Mortgage Loans are Delayed
First Adjustment Mortgage Loans, any resulting Basis Risk Shortfalls or Unpaid
Basis Risk Shortfalls, to the extent not covered by amounts otherwise payable to
the Residual Certificates, as described herein, will adversely affect the yield
to maturity on the Class A Certificates. The Policy will not cover Basis Risk
Shortfalls or Unpaid Basis Risk Shortfalls.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF INSOLVENCY OF THE MORTGAGE LOAN
SELLER
The Depositor believes that the transfer of the Mortgage Loans by the
Mortgage Loan Seller to it will constitute absolute and unconditional sales.
However, in the event of an insolvency and receivership of the Mortgage Loan
Seller at a time when it or any affiliate holds Certificates, the Federal
Deposit Insurance Corporation (the 'FDIC') as its receiver, for purposes of such
a receivership, could attempt to recharacterize the sale of the Mortgage Loans
by the Mortgage Loan Seller as a borrowing by the Mortgage Loan Seller or such
affiliate from the Depositor, secured by a pledge of the Mortgage Loans. Such an
attempt, even if unsuccessful, could result in delays in payments on the
Certificates. If such an attempt were successful, the FDIC could elect to
liquidate the Mortgage Loans and accelerate payment of the Certificates with the
holders thereof entitled to the then outstanding principal amount thereof, if
any, together with interest at the applicable Pass-Through Rate to the date of
payment. Thus, the holders of Certificates could lose the right to future
payments of interest, and might suffer reinvestment loss in a lower interest
rate environment. Thacher, Proffitt & Wood, counsel to the Depositor, will
deliver a legal opinion in connection with the issuance of the Certificates to
the effect that, in the event of the insolvency of the Mortgage Loan Seller and
the appointment of the Federal Deposit Insurance Corporation as receiver or
conservator for the Mortgage Loan Seller, a court would not hold that the
transfer of the Mortgage Loans by the Mortgage Loan Seller to the Depositor in
exchange for the net proceeds of the sale of the Class A Certificates and the
delivery of the Class R Certificates is a loan secured by the Mortgage Loans
rather than a sale of the ownership interest in the Mortgage Loans evidenced by
the Class A Certificates.
THE MASTER SERVICER AND THE MORTGAGE LOAN SELLER
The information set forth in the following paragraphs has been provided by
the Mortgage Loan Seller. None of the Depositor, the Trustee or any of their
affiliates have made or will make any representation as to the accuracy or
completeness of such information.
Berkeley Federal Bank & Trust FSB, a federally-chartered savings bank,
headquartered in West Palm Beach, Florida (the 'Mortgage Loan Seller'), will
serve as the Master Servicer for the Mortgage Loans pursuant to the Agreement
(in such capacity, the 'Master Servicer'). The Mortgage Loan Seller is a
wholly-owned subsidiary of Ocwen Financial Corporation, a privately-owned
financial services holding company. At June 30, 1996, the Mortgage Loan Seller
had approximately $1.864 billion in assets, approximately $1.724 billion in
liabilities and approximately $140 million in equity. At June 30, 1996, the
Mortgage Loan Seller's tangible and leveraged capital ratio was approximately
6.74% and its risk-based capital ratio was approximately 13.61%. For the year
ended December 31, 1995, the Mortgage Loan Seller's income from continuing
operations was approximately $31 million.
The major business of the Mortgage Loan Seller has been the resolution of
nonperforming single-family, multifamily and commercial mortgage loan portfolios
acquired from the Resolution Trust Corporation, from private investors, and most
recently, from HUD through HUD's auction of defaulted FHA Loans. The Mortgage
Loan Seller is a market leader in the nonperforming mortgage loan acquisition
business, having acquired in excess of $2.6 billion of such mortgage loans over
the past five years. The Mortgage Loan Seller is using its expertise in the
resolution of nonperforming portfolios as the foundation for entering into the
acquisition and servicing of non-conforming credit mortgage loans ('BCD Mortgage
Loans').
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THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately 748 conventional, one- to
four-family, fixed-rate and adjustable-rate Mortgage Loans secured by first
liens on residential real properties (the 'Mortgaged Properties'). The Mortgage
Loans have original terms to maturity ranging from 15 years to 30 years. The
Mortgage Pool consists of fixed-rate Mortgage Loans (the 'Fixed Rate Mortgage
Loans'), which will consist of approximately 194 Mortgage Loans having an
aggregate principal balance as of September 1, 1996 (the 'Cut-off Date') of
approximately $16,903,118, and adjustable-rate Mortgage Loans (the 'Adjustable
Rate Mortgage Loans'), which will consist of approximately 554 Mortgage Loans
having an aggregate principal balance as of the Cut-off Date of approximately
$64,226,653, in each case after application of payments of principal received on
or before the Cut-off Date, and in each case subject to a permitted variance of
plus or minus 5%. Each Adjustable Rate Mortgage Loan provides for semiannual
adjustment to the mortgage rate thereon (in the case of a majority of such
Mortgage Loans, after an initial period of two years, or in the case of seven
such Mortgage Loans three years, from the origination thereof) based on
six-month London interbank offered rates for United States dollar deposits (the
'Index') and for corresponding adjustments to the monthly payment amount due
thereon, in each case subject to the limitations described under ' -- Adjustable
Rate Mortgage Loans' herein.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of detached or semi-detached one- to
four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments and manufactured housing. The
Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor from the Mortgage Loan Seller. See ' -- Underwriting Standards;
Representations' herein. The Mortgage Loan Seller will act as the master
servicer for the Mortgage Loans pursuant to the Agreement (in such capacity, the
'Master Servicer').
Approximately 8.63% of the Fixed Rate Mortgage Loans and approximately
14.23% of the Adjustable Rate Mortgage Loans had a Loan-to-Value Ratio (as
defined in the Prospectus) at origination in excess of 80% but will not be
covered by a primary mortgage insurance policy. No Mortgage Loan will have a
Loan-to-Value Ratio at origination exceeding 90.00%. 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.
All of the Mortgage Loans have scheduled monthly payments due on the first
day of the month (with respect to each Mortgage Loan, a 'Due Date'), except for
five Mortgage Loans as to which the Due Date is on the fifteenth day of the
month. Each Mortgage Loan will contain a customary 'due-on-sale' clause, except
for one Mortgage Loan, which is freely assumable upon transfer or sale of the
Mortgaged Property by the related mortgagor.
Approximately 89.68% of the Fixed Rate Mortgage Loans and approximately
75.61% of the Adjustable Rate Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within one year, two years, three years or five years from the date of
origination of such Mortgage Loan. The amount of the prepayment charge is as
provided in the related Mortgage Note but is generally equal to six month's
interest on any amounts prepaid in excess of 20% of the then outstanding
principal balance of the related Mortgage Loan in any 12 month period. The
Master Servicer will be entitled to all prepayment charges received on the
Mortgage Loans and such amounts will not be available for distribution on the
Certificates.
Approximately 5.66% of the Fixed Rate Mortgage Loans are Buydown Mortgage
Loans. None of the Adjustable Rate Mortgage Loans are Buydown Mortgage Loans.
Approximately 21.78% of the Fixed Rate Mortgage Loans and none of the
Adjustable Rate Mortgage Loans are balloon payment mortgage loans (each, a
'Balloon Mortgage Loan'). Each Balloon Mortgage Loan generally amortizes over
360 months, but the final payment (the 'Balloon Payment') on each Balloon
Mortgage Loan is due and payable on the 180th month. The amount of the
S-18
<PAGE>
<PAGE>
Balloon Payment on each Balloon Payment Loan is substantially in excess of the
amount of the scheduled monthly payment on Mortgage Loan for the period prior to
the Due Date of such Balloon Payment.
The Mortgage Loans are expected to have the additional characteristics
described below under ' -- Fixed Rate Mortgage Loans' or ' -- Adjustable Rate
Mortgage Loans,' as applicable.
FIXED RATE MORTGAGE LOANS
Each Fixed Rate Mortgage Loan had a Mortgage Rate of not less than 8.875%
per annum and not more than 15.000% per annum and as of the Cut-off Date the
weighted average Mortgage Rate was approximately 10.765% per annum.
The weighted average original term to maturity of the Fixed Rate Mortgage
Loans will be approximately 300 months. The weighted average remaining term to
maturity of the Fixed Rate Mortgage Loans will be approximately 298 months as of
the Cut-off Date. None of the Fixed Rate Mortgage Loans will have a first Due
Date prior to May 1995 or after October 1996, or will have a remaining term to
maturity of of less than 163 months or greater than 30 years as of the Cut-off
Date. The earliest origination date of any Fixed Rate Mortgage Loan is March 17,
1995. The latest origination date of any Fixed Rate Mortgage Loan is August 27,
1996. The earliest maturity date of any Fixed Rate Mortgage Loan is April 2010.
The latest maturity date of any Fixed Rate Mortgage Loan is September 2026.
The average principal balance of the Fixed Rate Mortgage Loans at
origination was approximately $87,250. No Fixed Rate Mortgage Loan had a
principal balance at origination of greater than $318,750 or less than $16,100.
The average principal balance of the Fixed Rate Mortgage Loans as of the Cut-off
Date was approximately $87,129. No Mortgage Loan had a principal balance as of
the Cut-off Date of greater than approximately $318,334 or less than
approximately $16,100.
The Fixed Rate 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):
PRINCIPAL BALANCES OF THE FIXED RATE MORTGAGE LOANS AT ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF ORIGINATION DATE PRINCIPAL BALANCES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00....................................... 3 $ 65,081 0.39%
25,000.01 - 50,000.00....................................... 41 1,549,139 9.16
50,000.01 - 75,000.00....................................... 48 3,010,721 17.81
75,000.01 - 100,000.00....................................... 42 3,769,364 22.30
100,000.01 - 125,000.00....................................... 31 3,436,295 20.33
125,000.01 - 150,000.00....................................... 12 1,654,367 9.79
150,000.01 - 175,000.00....................................... 9 1,463,318 8.66
175,000.01 - 200,000.00....................................... 2 389,704 2.31
200,000.01 - 225,000.00....................................... 2 439,562 2.60
250,000.01 - 275,000.00....................................... 2 515,166 3.05
275,000.01 - 300,000.00....................................... 1 292,068 1.73
300,000.01 - 325,000.00....................................... 1 318,334 1.88
--- ----------------- -------
Total..................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The average principal balance of the Fixed Rate Mortgage Loans at
origination was approximately $87,250. No Fixed Rate Mortgage Loan had a
principal balance at origination greater than $318,750 or less than $16,100.
S-19
<PAGE>
<PAGE>
PRINCIPAL BALANCES OF THE FIXED RATE MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00....................................... 3 $ 65,081 0.39%
25,000.01 - 50,000.00....................................... 41 1,549,139 9.16
50,000.01 - 75,000.00....................................... 48 3,010,721 17.81
75,000.01 - 100,000.00....................................... 42 3,769,364 22.30
100,000.01 - 125,000.00....................................... 31 3,436,295 20.33
125,000.01 - 150,000.00....................................... 12 1,654,367 9.79
150,000.01 - 175,000.00....................................... 9 1,463,318 8.66
175,000.01 - 200,000.00....................................... 2 389,704 2.31
200,000.01 - 225,000.00....................................... 2 439,562 2.60
250,000.01 - 275,000.00....................................... 2 515,166 3.05
275,000.01 - 300,000.00....................................... 1 292,068 1.73
300,000.01 - 325,000.00....................................... 1 318,334 1.88
--- ----------------- -------
Total..................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The average principal balance of the Fixed Rate Mortgage Loans as of the
Cut-off Date was approximately $87,129. No Fixed Rate Mortgage Loan had a
principal balance as of the Cut-off Date greater than $318,334 or less than
$16,100.
PROPERTY TYPES -- FIXED RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
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>
Condo (Low Rise)............................................... 2 $ 79,978 0.47%
Planned Unit Development....................................... 1 318,334 1.88
Single Family.................................................. 183 15,906,556 94.10
Two- to Four-Family............................................ 8 598,250 3.54
--- ----------------- -------
Total..................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
OCCUPANCY STATUS -- FIXED RATE MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
Non Owner-Occupied............................................. 23 $ 1,388,190 8.21%
Owner-Occupied................................................. 171 15,514,928 91.79
--- ----------------- -------
Total..................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-20
<PAGE>
<PAGE>
MORTGAGE RATES OF THE FIXED RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF MORTGAGE RATES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
8.500 - 8.999%............................................... 3 $ 242,536 1.43%
9.000 - 9.499................................................ 7 590,555 3.49
9.500 - 9.999................................................ 42 3,949,046 23.36
10.000 - 10.499................................................ 18 1,766,424 10.45
10.500 - 10.999................................................ 55 5,167,649 30.57
11.000 - 11.499................................................ 21 1,493,458 8.84
11.500 - 11.999................................................ 26 1,901,787 11.25
12.000 - 12.499................................................ 6 389,530 2.30
12.500 - 12.999................................................ 9 877,124 5.19
13.000 - 13.499................................................ 1 30,000 0.18
13.500 - 13.999................................................ 5 436,526 2.58
15.000 - 15.499................................................ 1 58,483 0.35
--- ----------------- -------
Total..................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Fixed
Rate Mortgage Loans was approximately 10.765% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE FIXED RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
10.01 - 20.00%................................................. 3 $ 132,682 0.78%
20.01 - 30.00.................................................. 5 215,889 1.28
30.01 - 40.00.................................................. 8 486,194 2.88
40.01 - 50.00.................................................. 8 676,884 4.00
50.01 - 60.00.................................................. 20 1,562,404 9.24
60.01 - 70.00.................................................. 51 3,874,954 22.92
70.01 - 75.00.................................................. 46 4,731,396 27.99
75.01 - 80.00.................................................. 38 3,763,949 22.27
80.01 - 85.00.................................................. 15 1,458,766 8.63
--- ----------------- -------
Total..................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Fixed Rate
Mortgage Loans was approximately 69.78%. No Fixed Rate Mortgage Loan had a
Loan-to-Value Ratio at origination greater than 85.00% or less than 13.56%.
S-21
<PAGE>
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
STATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------------------------------- -------- ----------------- ----------------
<S> <C> <C> <C>
Arizona......................................................... 4 $ 423,650 2.51%
California...................................................... 78 7,566,166 44.76
Colorado........................................................ 9 573,266 3.39
Florida......................................................... 25 1,703,682 10.08
Georgia......................................................... 1 87,968 0.52
Idaho........................................................... 1 91,330 0.54
Illinois........................................................ 2 282,828 1.67
Indiana......................................................... 15 671,667 3.97
Massachusetts................................................... 4 242,827 1.44
Michigan........................................................ 4 383,002 2.27
North Carolina.................................................. 4 521,882 3.09
Nevada.......................................................... 1 64,983 0.38
New York........................................................ 1 165,000 0.98
Oregon.......................................................... 4 290,711 1.72
Pennsylvania.................................................... 4 198,312 1.17
Texas........................................................... 1 23,981 0.14
Utah............................................................ 21 1,862,169 11.02
Virginia........................................................ 3 211,618 1.25
Washington...................................................... 12 1,538,078 9.10
--- ----------------- -------
Total...................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The aggregate principal balance of Fixed Rate Mortgage Loans in the
California zip code with the largest amount of such Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, was approximately $378,450.
PURPOSE OF THE FIXED RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------------------------------- -------- ----------------- ----------------
<S> <C> <C> <C>
Cash-out........................................................ 126 $10,252,254 60.65%
Purchase........................................................ 22 1,823,577 10.79
Refinance....................................................... 46 4,827,287 28.56
--- ----------------- -------
Total...................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
FIXED RATE MORTGAGE LOAN PROGRAMS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
DOCUMENTATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------------------------------- -------- ----------------- ----------------
<S> <C> <C> <C>
Stated Income Documentation Program............................. 69 $ 5,866,268 34.71%
Full Documentation Program...................................... 119 10,543,566 62.38
Lite Documentation Program...................................... 6 493,284 2.92
--- ----------------- -------
Total...................................................... 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-22
<PAGE>
<PAGE>
FIXED RATE MORTGAGE LOAN RISK CATEGORIES
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------ -------- ----------------- ----------------
<S> <C> <C> <C>
A................................................ 25 $ 2,161,522 12.79%
A -.............................................. 92 7,903,386 46.76
B................................................ 54 4,730,815 27.99
C................................................ 16 1,403,928 8.31
D................................................ 7 703,467 4.16
--- ----------------- -------
Total............................................ 194 $16,903,118 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
ADJUSTABLE RATE MORTGAGE LOANS
Each Adjustable Rate Mortgage Loan provides for semiannual adjustment to
the Mortgage Rate thereon and for corresponding adjustments to the monthly
payment amount due thereon, in each case on each adjustment date applicable
thereto (each such date, an 'Adjustment Date'); provided, however, that in the
case of approximately 73.63% of the Adjustable Rate Mortgage Loans (each a
'Delayed First Adjustment Mortgage Loan'), the first Adjustment Date for each
such Mortgage Loan will occur after an initial period of two years, or in the
case of seven such Mortgage Loans three years, from the origination thereof. On
each Adjustment Date for each Adjustable Rate Mortgage Loan, the Mortgage Rate
thereon will be adjusted to equal the sum, rounded to the nearest multiple of
0.125%, of the Index (as described below) and a fixed percentage amount (the
'Gross Margin'); provided, however, that the Mortgage Rate on each such Mortgage
Loan generally will not increase or decrease by more than 1% per annum on any
related Adjustment Date (the 'Periodic Rate Cap') and will not exceed a
specified maximum Mortgage Rate over the life of such Mortgage Loan (the
'Maximum Mortgage Rate') or be less than a specified minimum Mortgage Rate over
the life of such Mortgage Loan (the 'Minimum Mortgage Rate'). Notwithstanding
the foregoing, the Delayed First Adjustment Mortgage Loans have a weighted
average Periodic Rate Cap of approximately 2.967% per annum for their first
Adjustment Date. 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 Mortgage Loan over its remaining term, and pay
interest at the Mortgage Rate as so adjusted. Approximately 3.55% of the
Adjustable Rate Mortgage Loans (the 'Introductory Rate Loans') were originated
with Mortgage Rates lower than the Lifetime Floor and provide for semiannual
adjustments to the Mortgage Rate, subject to a 2% Periodic Rate Cap for the
initial Adjustment Date and a 1% Periodic Rate Cap thereafter. Approximately
3.20% of the Adjustable Rate Mortgage Loans are Introductory Rate Loans that
have not reached their respective initial Adjustment Dates. Due to the
application of the Periodic Rate Caps and the Maximum Mortgage Rates, the
Mortgage Rate on each such Mortgage Loan, as adjusted on any related Adjustment
Date, may be less than the sum of the Index and Gross Margin, rounded as
described herein. See ' -- The Index' herein. None of the Adjustable Rate
Mortgage Loans permits the related mortgagor to convert the adjustable Mortgage
Rate thereon to a fixed Mortgage Rate.
The Adjustable Rate Mortgage Loans had Mortgage Rates as of the Cut-off
Date of not less than 7.250% per annum and not more than 14.990% per annum and
the weighted average Mortgage Rate was approximately 10.130% per annum. As of
the Cut-off Date, the Adjustable Rate Mortgage Loans had Gross Margins ranging
from 3.000% to 8.950%, Minimum Mortgage Rates ranging from 6.375% per annum to
14.990% per annum and Maximum Mortgage Rates ranging from 11.250% per annum to
22.000% per annum. As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.404%, the weighted average Minimum Mortgage Rate was
approximately 10.140% per annum and the weighted average Maximum Mortgage Rate
was approximately 16.644% per annum. The latest first Adjustment Date following
the Cut-off Date on any Adjustable Rate Mortgage Loan occurs on August 1, 1999
and the weighted average next Adjustment Date for all of the Adjustable Rate
Mortgage Loans following the Cut-off Date is March, 1998.
S-23
<PAGE>
<PAGE>
The weighted average original term to maturity of the Adjustable Rate
Mortgage Loans will be approximately 360 months. The weighted average remaining
term to maturity of the Adjustable Rate Mortgage Loans will be approximately 359
months as of the Cut-off Date. None of the Adjustable Rate Mortgage Loans will
have a first Due Date prior to July 1, 1995 or after October 1, 1996, or will
have a remaining term to maturity of less than 345 months or greater than 30
years as of the Cut-off Date. The earliest origination date of any Adjustable
Rate Mortgage Loan is May 22, 1995. The latest origination date of any
Adjustable Rate Mortgage Loan is August 26, 1996. The earliest maturity date of
any Adjustable Rate Mortgage Loan is June 1, 2025. The latest maturity date of
any Adjustable Rate Mortgage Loan is September 1, 2026.
The average principal balance of the Adjustable Rate Mortgage Loans at
origination was approximately $115,980. No Adjustable Rate Mortgage Loan had a
principal balance at origination of greater than $500,000 or less than $20,000.
The average principal balance of the Adjustable Rate Mortgage Loans as of the
Cut-off Date was approximately $115,933. No Mortgage Loan had a principal
balance as of the Cut-off Date of greater than $500,000 or less than $20,000.
The Adjustable Rate 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):
PRINCIPAL BALANCES OF THE ADJUSTABLE RATE MORTGAGE LOANS AT ORIGINATION
<TABLE>
<CAPTION>
% OF
NUMBER AGGREGATE ORIGINAL AGGREGATE ORIGINAL
RANGE OF ORIGINATION DATE PRINCIPAL BALANCES OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------------------------- -------- ------------------ ------------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00....................................... 1 $ 20,000 0.03%
25,000.01 - 50,000.00....................................... 60 2,436,934 3.79
50,000.01 - 75,000.00....................................... 110 6,909,478 10.76
75,000.01 - 100,000.00....................................... 127 11,227,566 17.48
100,000.01 - 125,000.00....................................... 98 11,048,720 17.20
125,000.01 - 150,000.00....................................... 49 6,655,278 10.36
150,000.01 - 175,000.00....................................... 31 5,071,644 7.90
175,000.01 - 200,000.00....................................... 20 3,697,898 5.76
200,000.01 - 225,000.00....................................... 11 2,380,053 3.71
225,000.01 - 250,000.00....................................... 11 2,614,736 4.07
250,000.01 - 275,000.00....................................... 9 2,363,659 3.68
275,000.01 - 300,000.00....................................... 8 2,293,418 3.57
300,000.01 - 325,000.00....................................... 5 1,571,929 2.45
325,000.01 - 350,000.00....................................... 3 1,009,408 1.57
350,000.01 - 375,000.00....................................... 2 737,660 1.15
375,000.01 - 400,000.00....................................... 1 386,250 0.60
425,000.01 - 450,000.00....................................... 2 881,264 1.37
450,000.01 - 475,000.00....................................... 1 460,000 0.72
475,000.01 - 500,000.00....................................... 5 2,460,757 3.83
--- ------------------ -------
Total..................................................... 554 $ 64,226,653 100.00%
--- ------------------ -------
--- ------------------ -------
</TABLE>
The average principal balance of the Adjustable Rate Mortgage Loans at
origination was approximately $115,980. No Adjustable Rate Mortgage Loan had a
principal balance at origination greater than $500,000 or less than $20,000.
S-24
<PAGE>
<PAGE>
PRINCIPAL BALANCES OF THE ADJUSTABLE RATE MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00......................................... 1 $ 20,000 0.03%
25,000.01 - 50,000.00......................................... 60 2,436,934 3.79
50,000.01 - 75,000.00......................................... 110 6,909,478 10.76
75,000.01 - 100,000.00......................................... 127 11,227,566 17.48
100,000.01 - 125,000.00......................................... 98 11,048,720 17.20
125,000.01 - 150,000.00......................................... 49 6,655,278 10.36
150,000.01 - 175,000.00......................................... 31 5,071,644 7.90
175,000.01 - 200,000.00......................................... 20 3,697,898 5.76
200,000.01 - 225,000.00......................................... 11 2,380,053 3.71
225,000.01 - 250,000.00......................................... 11 2,614,736 4.07
250,000.01 - 275,000.00......................................... 9 2,363,659 3.68
275,000.01 - 300,000.00......................................... 8 2,293,418 3.57
300,000.01 - 325,000.00......................................... 5 1,571,929 2.45
325,000.01 - 350,000.00......................................... 3 1,009,408 1.57
350,000.01 - 375,000.00......................................... 2 737,660 1.15
375,000.01 - 400,000.00......................................... 1 386,250 0.60
425,000.01 - 450,000.00......................................... 2 881,264 1.37
450,000.01 - 475,000.00......................................... 1 460,000 0.72
475,000.01 - 500,000.00......................................... 5 2,460,757 3.83
--- ----------------- -------
Total....................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The average principal balance of the Adjustable Rate Mortgage Loans as of
the Cut-off Date was approximately $115,933. No Adjustable Rate Mortgage Loan
had a principal balance as of the Cut-off Date greater than $500,000 or less
than $20,000.
PROPERTY TYPES -- ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
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>
Condo (Low Rise)................................................. 27 1,897,343 2.95%
Manufactured Housing............................................. 1 79,050 0.12
Planned Unit Development......................................... 14 1,494,580 2.33
Single Family.................................................... 485 57,833,326 90.05
Townhouse........................................................ 2 280,041 0.44
Two- to Four-Family.............................................. 25 2,642,312 4.11
--- ----------------- -------
Total....................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
OCCUPANCY STATUS -- ADJUSTABLE RATE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
Non Owner-Occupied............................................... 83 $ 7,385,833 11.50%
Owner-Occupied................................................... 471 56,840,820 88.50
--- ----------------- -------
Total....................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-25
<PAGE>
<PAGE>
MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF MORTGAGE RATES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
7.000 - 7.499%................................................. 4 $ 519,731 0.81%
7.500 - 7.999.................................................. 16 2,383,190 3.71
8.000 - 8.499.................................................. 15 2,023,657 3.15
8.500 - 8.999.................................................. 50 5,885,348 9.16
9.000 - 9.499.................................................. 27 3,167,247 4.93
9.500 - 9.999.................................................. 130 17,556,607 27.34
10.000 - 10.499.................................................. 82 9,348,800 14.56
10.500 - 10.999.................................................. 109 11,613,192 18.08
11.000 - 11.499.................................................. 48 5,531,707 8.61
11.500 - 11.999.................................................. 25 2,199,519 3.42
12.000 - 12.499.................................................. 17 1,630,838 2.54
12.500 - 12.999.................................................. 18 1,504,034 2.34
13.000 - 13.499.................................................. 5 396,245 0.62
13.500 - 13.999.................................................. 3 168,328 0.26
14.000 - 14.499.................................................. 3 177,535 0.28
14.500 - 14.999.................................................. 2 120,676 0.19
--- ----------------- -------
Total....................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the
Adjustable Rate Mortgage Loans was approximately 10.130% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
10.01 - 20.00%................................................... 2 $ 89,990 0.14%
20.01 - 30.00.................................................... 5 251,689 0.39
30.01 - 40.00.................................................... 5 302,064 0.47
40.01 - 50.00.................................................... 19 1,442,364 2.25
50.01 - 60.00.................................................... 44 3,420,594 5.33
60.01 - 70.00.................................................... 142 14,604,476 22.74
70.01 - 75.00.................................................... 142 18,200,766 28.34
75.01 - 80.00.................................................... 125 16,773,290 26.12
80.01 - 85.00.................................................... 61 7,855,730 12.23
85.01 - 90.00.................................................... 9 1,285,690 2.00
--- ----------------- -------
Total....................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Adjustable
Rate Mortgage Loans was approximately 73.67%. No Adjustable Rate Mortgage Loan
had a Loan-to-Value Ratio at origination greater than 90.00% or less than
16.00%.
S-26
<PAGE>
<PAGE>
ADJUSTABLE RATE MORTGAGE LOAN GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED
PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
STATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
Arizona........................................................ 30 $ 3,293,076 5.13%
California..................................................... 166 21,566,921 33.58
Colorado....................................................... 22 2,879,130 4.48
Connecticut.................................................... 2 169,947 0.26
Florida........................................................ 39 3,908,000 6.08
Georgia........................................................ 8 999,514 1.56
Hawaii......................................................... 2 291,786 0.45
Iowa........................................................... 1 50,605 0.08
Idaho.......................................................... 2 109,867 0.17
Illinois....................................................... 51 5,317,223 8.28
Indiana........................................................ 14 1,273,413 1.98
Massachusetts.................................................. 17 2,345,164 3.65
Maryland....................................................... 6 1,277,282 1.99
Maine.......................................................... 2 133,900 0.21
Michigan....................................................... 9 731,264 1.14
Missouri....................................................... 2 546,000 0.85
North Carolina................................................. 11 1,264,291 1.97
New Hampshire.................................................. 1 76,362 0.12
New Jersey..................................................... 16 2,213,299 3.45
New Mexico..................................................... 4 386,083 0.60
Nevada......................................................... 4 592,935 0.92
New York....................................................... 5 758,996 1.18
Ohio........................................................... 4 448,400 0.70
Oregon......................................................... 48 5,150,411 8.02
Pennsylvania................................................... 2 120,855 0.19
Rhode Island................................................... 2 394,866 0.61
Texas.......................................................... 4 301,710 0.47
Utah........................................................... 39 3,350,655 5.22
Virginia....................................................... 5 657,520 1.02
Vermont........................................................ 1 67,867 0.11
Washington..................................................... 32 3,300,387 5.14
Wisconsin...................................................... 1 53,625 0.08
West Virginia.................................................. 2 195,300 0.30
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The aggregate principal balance of Adjustable Rate Mortgage Loans in the
California zip code with the largest amount of such Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, was approximately $539,924.
PURPOSE OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
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>
Cashout........................................................ 229 $31,456,602 48.98%
Purchase....................................................... 138 17,622,845 27.44
Refinance...................................................... 117 15,147,206 23.58
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-27
<PAGE>
<PAGE>
ADJUSTABLE RATE MORTGAGE LOAN PROGRAMS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
Stated Income Documentation Program............................ 234 $28,297,534 44.06%
Full Documentation Program..................................... 286 31,574,717 49.16
Lite Documentation Program..................................... 34 4,354,401 6.78
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
ADJUSTABLE RATE MORTGAGE LOAN RISK CATEGORIES
<TABLE>
<CAPTION>
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>
A.............................................................. 22 $ 3,151,144 4.91%
A -............................................................ 261 32,400,390 50.45
B.............................................................. 164 17,567,790 27.35
C.............................................................. 56 6,575,294 10.24
D.............................................................. 51 4,532,035 7.06
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
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>
11.000 - 11.499%............................................... 1 $ 94,018 0.15%
13.500 - 13.999................................................ 1 158,879 0.25
14.000 - 14.499................................................ 12 1,902,712 2.96
14.500 - 14.999................................................ 17 2,249,151 3.50
15.000 - 15.499................................................ 52 6,158,895 9.59
15.500 - 15.999................................................ 30 3,646,472 5.68
16.000 - 16.499................................................ 132 17,766,165 27.66
16.500 - 16.999................................................ 78 8,998,919 14.01
17.000 - 17.499................................................ 103 10,952,347 17.05
17.500 - 17.999................................................ 52 5,731,303 8.92
18.000 - 18.499................................................ 29 2,560,334 3.99
18.500 - 18.999................................................ 17 1,757,736 2.74
19.000 - 19.499................................................ 20 1,584,760 2.47
19.500 - 19.999................................................ 5 307,485 0.48
20.000 - 20.499................................................ 2 113,300 0.18
20.500 - 20.999................................................ 1 63,000 0.10
21.000 - 21.499................................................ 1 57,676 0.09
21.500 - 22.499................................................ 1 123,500 0.19
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Maximum Mortgage Rate of the Adjustable Rate Mortgage
Loans as of the Cut-off Date was approximately 16.644% per annum.
S-28
<PAGE>
<PAGE>
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
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>
6.000 - 6.999%............................................... 1 $ 94,018 0.15%
7.000 - 7.499................................................ 1 158,879 0.25
7.500 - 7.999................................................ 12 1,902,712 2.96
8.000 - 8.499................................................ 16 2,200,039 3.43
8.500 - 8.999................................................ 54 6,346,253 9.88
9.000 - 9.499................................................ 27 3,203,197 4.99
9.500 - 9.999................................................ 135 18,167,797 28.29
10.000 - 10.499................................................ 79 9,076,068 14.13
10.500 - 10.999................................................ 105 11,035,202 17.18
11.000 - 11.499................................................ 49 5,529,978 8.61
11.500 - 11.999................................................ 27 2,478,969 3.86
12.000 - 12.499................................................ 15 1,585,998 2.47
12.500 - 12.999................................................ 22 1,756,498 2.73
13.000 - 13.499................................................ 5 305,620 0.48
13.500 - 13.999................................................ 2 113,300 0.18
14.000 - 14.499................................................ 2 151,450 0.24
14.500 - 14.999................................................ 2 120,676 0.19
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Minimum Mortgage Rate of the Mortgage Loans as of the
Cut-off Date was approximately 10.140% per annum.
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
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>
3.000 - 3.249%................................................. 1 $ 180,120 0.28%
3.750 - 3.999.................................................. 1 431,474 0.67
4.500 - 4.749.................................................. 1 158,879 0.25
4.750 - 4.999.................................................. 4 417,175 0.65
5.000 - 5.249.................................................. 7 726,407 1.13
5.250 - 5.499.................................................. 16 1,701,211 2.65
5.500 - 5.749.................................................. 33 5,014,847 7.81
5.750 - 5.999.................................................. 79 9,863,746 15.36
6.000 - 6.249.................................................. 53 7,306,762 11.38
6.250 - 6.499.................................................. 57 6,933,096 10.79
6.500 - 6.749.................................................. 74 8,656,408 13.48
6.750 - 6.999.................................................. 72 7,164,383 11.15
7.000 - 7.249.................................................. 51 5,993,143 9.33
7.250 - 7.499.................................................. 42 3,015,131 4.69
7.500 - 7.749.................................................. 33 3,789,019 5.90
7.750 - 7.999.................................................. 16 1,786,776 2.78
8.000 - 8.249.................................................. 3 271,300 0.42
8.250 - 8.499.................................................. 8 663,785 1.03
8.500 - 8.749.................................................. 2 118,000 0.18
8.750 - 8.999.................................................. 1 34,990 0.05
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Gross Margin of the Adjustable Rate Mortgage Loans as
of the Cut-off Date was approximately 6.404%.
S-29
<PAGE>
<PAGE>
NEXT ADJUSTMENT DATES FOR THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
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>
11/15/1996........................................................ 2 $ 190,216 0.30%
12/01/1996........................................................ 9 725,384 1.13
01/01/1997........................................................ 42 4,964,455 7.73
01/15/1997........................................................ 1 29,198 0.05
02/01/1997........................................................ 54 6,344,269 9.88
03/01/1997........................................................ 31 4,568,351 7.11
03/15/1997........................................................ 1 116,710 0.18
07/01/1997........................................................ 2 103,617 0.16
11/01/1997........................................................ 1 123,291 0.19
12/01/1997........................................................ 1 74,103 0.12
01/01/1998........................................................ 1 78,347 0.12
02/01/1998........................................................ 2 154,541 0.24
03/01/1998........................................................ 2 121,793 0.19
04/01/1998........................................................ 1 72,636 0.11
05/01/1998........................................................ 5 854,586 1.33
06/01/1998........................................................ 11 1,883,695 2.93
07/01/1998........................................................ 145 16,914,267 26.34
08/01/1998........................................................ 126 13,093,875 20.39
09/01/1998........................................................ 110 13,208,465 20.57
06/01/1999........................................................ 1 65,549 0.10
07/01/1999........................................................ 3 304,006 0.47
08/01/1999........................................................ 3 235,300 0.37
--- ----------------- -------
Total..................................................... 554 $64,226,653 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
As of the Cut-off Date, the weighted average next Adjustment Date of the
Adjustable Rate Mortgage Loans was March, 1998.
S-30
<PAGE>
<PAGE>
THE INDEX
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 ('Six-Month LIBOR') as published in The Wall Street Journal and as
most recently available either (i) as of the first business day 45 days prior to
such Adjustment Date or (ii) as of the first business day of the month preceding
the month of such Adjustment Date, as specified in the related Mortgage Note.
In the event that the Index becomes unavailable or otherwise unpublished,
the Master Servicer will select a comparable alternative index over which it has
no direct control and which is readily verifiable.
The table below sets forth historical average rates of Six-Month LIBOR for
the months indicated as made available from FNMA, which rates may differ from
the rates of the Index, which is six-month LIBOR as published in The Wall Street
Journal as described above. The table does not purport to be representative of
the subsequent rates of the Index which will be used to determine the Mortgage
Rate on each Adjustable Rate Mortgage Loan.
<TABLE>
<CAPTION>
YEAR
---------------------------------------------------------------------
MONTH 1996 1995 1994 1993 1992 1991 1990
- ----------------------------------------------- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January........................................ 5.34% 6.69% 3.39% 3.44% 4.25% 7.13% 8.44%
February....................................... 5.29 6.44 4.00 3.33 4.38 6.89 8.44
March.......................................... 5.52 6.44 4.25 3.38 4.55 6.53 8.69
April.......................................... 6.31 4.63 3.31 4.27 6.31 9.00
May............................................ 6.06 5.00 3.44 4.25 6.19 8.50
June........................................... 5.88 5.25 3.56 4.13 6.56 8.44
July........................................... 5.88 5.33 3.56 3.63 6.31 8.05
August......................................... 5.94 5.33 3.44 3.63 5.88 8.19
September...................................... 5.99 5.69 3.38 3.31 5.69 8.42
October........................................ 5.95 6.00 3.50 3.64 5.36 8.06
November....................................... 5.74 6.44 3.52 3.89 4.94 8.38
December....................................... 5.56 7.00 3.50 3.64 4.25 7.56
</TABLE>
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor from the Mortgage Loan
Seller. All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.
The Mortgage Loan Seller's underwriting standards are primarily intended to
assess the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. All of the Mortgage Loans were
also underwritten with a view toward the resale thereof in the secondary
mortgage market. While the Mortgage Loan Seller's primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, the
Mortgage Loan Seller also considers, among other things, a mortgagor's credit
history, repayment ability and debt service-to-income ratio ('Debt Ratio'), as
well as the type and use of the mortgaged property. Second lien financing of the
mortgaged properties may be provided by lenders at any time (including at
origination), in which case the combined loan-to-value ratios of such the
related mortgage loans may not exceed 90%. The Mortgage Loan Seller, however,
will not itself provide second lien financing on a mortgaged property. The
Mortgage Loans generally bear higher rates of interest than mortgage loans that
are originated in accordance with FNMA and FHLMC 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. Unless prohibited by state law or
otherwise waived by the Mortgage Loan Seller upon the payment by the related
mortgagor of higher origination fees and a higher Mortgage Rate, a majority of
the Mortgage Loans provide for the payment by the mortgagor of a prepayment
charge in limited circumstances on certain full or partial prepayments made
within one year, two years, three years or five years from the date of
origination of the related Mortgage Loan as described under ' -- General' above.
The amount of the prepayment charge is as
S-31
<PAGE>
<PAGE>
provided in the related Mortgage Note but is generally equal to six month's
interest on any amounts prepaid in excess of 20% of the then outstanding
principal balance of the related Mortgage Loan in any 12 month period.
As a result of the Mortgage Loan Seller's underwriting criteria, changes in
the values of Mortgaged Properties may have a greater effect on the Mortgage
Loan Seller's delinquency, foreclosure and loss experience than on those of
lenders whose mortgage loans are originated in a more traditional manner. No
assurance can be given that the values of the Mortgaged Properties have remained
or will remain at the levels in effect on the dates of origination of the
related Mortgage Loans. Approximately 44.76% of the Fixed Rate Mortgage Loans
and approximately 33.58% of the Adjustable Rate Mortgage Loans, each by
aggregate principal balance of the related Mortgage Loans as of the Cut-off
Date, are secured by Mortgaged Properties located in the State of California. If
the California residential real estate markets should experience an overall
decline in property values after the dates of origination of the Mortgage Loans,
the rates of delinquencies, foreclosures and losses on the Mortgage Loans may
increase over historical levels of comparable type loans, and may increase
substantially.
As described below under 'Pooling and Servicing Agreement -- The Mortgage
Loan Seller and Master Servicer,' the Mortgage Loan Seller commenced receiving
applications for mortgage loans under its regular lending program in December
1994. Accordingly, the Mortgage Loan Seller (whether as an originator or
acquirer of mortgage loans or as a servicer of such mortgage loans) does not
have representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Mortgage Loans.
All originations by the Mortgage Loan Seller of one- to four-family
residential mortgage loans are based on loan application packages submitted
through approved correspondents. Such loan application packages, which generally
contain relevant credit, property and underwriting information on the loan
request, are compiled by the applicable correspondent and submitted to the
Mortgage Loan Seller for approval and purchase. The correspondents receive all
or a portion of the loan origination fee charged to the borrower at the time the
loan is made. As part of its quality control procedures, the Mortgage Loan
Seller maintains a file with respect to each correspondent including a copy of
such correspondent's license and reports of any complaints received with respect
to such correspondent or its brokers.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Mortgage Loan Seller requires a
credit report on each applicant from a credit reporting company. The report
typically contains information relating to such matters as credit history with
local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions, or judgments. Properties that
are to secure single-family (otherwise referred to herein as one- to
four-family) mortgage loans are appraised or reviewed by qualified independent
appraisers who are approved by the Mortgage Loan Seller's internal appraisal
department. Such appraisers inspect the interior and/or exterior and appraise
the subject property and report the property condition. Following each
inspection, the appraiser prepares a report which includes a market value
analysis based on recent sales of comparable homes in the area and, when deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. All appraisals are required to conform to the Uniform Standards
of Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and must be on forms acceptable to FNMA and FHLMC.
Every independent appraisal is reviewed by either the Mortgage Loan Seller or by
another independent appraiser approved by the Mortgage Loan Seller before the
mortgage loan is made and to the extent that such review appraisal determines a
market value more than ten percent less than the market value determined by the
initial appraisal, such review appraisal is used in place of the initial
appraisal.
The Mortgage Loans were underwritten by the Mortgage Loan Seller's regular
lending division pursuant to the Mortgage Loan Seller's 'Full Documentation,'
'Lite Documentation,' and 'Stated Income Documentation' residential loan
programs. Under each of the programs, the Mortgage Loan Seller's regular lending
division reviews the loan applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar documentation,
reviews the credit history of the applicant, calculates the Debt Ratio to
determine the applicant's ability to repay the loan,
S-32
<PAGE>
<PAGE>
reviews the type and use of the property being financed and reviews the property
for compliance with the Mortgage Loan Seller's standards. In determining the
ability of the applicant to repay the loan, the Mortgage Loan Seller uses the
interest rate of the loan being applied for (the 'Qualifying Rate'). The
Mortgage Loan Seller's underwriting standards are applied in a standardized
procedure which complies with applicable federal and state laws and regulations
and requires its underwriters and/or the in-house appraiser to be satisfied that
the value of the property being financed, as indicated by an appraisal and a
review appraisal, currently supports the outstanding loan balance. In general,
the maximum loan amount for mortgage loans originated under the regular lending
program is $750,000; however, mortgage loans on a case by case basis may be
originated higher. None of the Mortgage Loans have principal balances at
origination higher than $750,000. The Mortgage Loan Seller underwrites one- to
four-family loans with Loan-to-Value Ratios at origination of generally up to
85%, depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and Debt Ratio, as well as the
type and use of the property. Under each class of underwriting criteria, the
maximum combined loan-to-value ratio at origination, including any then existing
second deeds of trust subordinate to the Mortgage Loan Seller's first deed of
trust, is 90%. The Mortgage Loan Seller, however, will not itself provide second
lien financing on a mortgaged property. Generally, none of the mortgage loans
originated or acquired by the Mortgage Loan Seller will be covered by a primary
mortgage insurance policy.
The Mortgage Loan Seller verifies the income of each borrower and the
source of funds under its various programs as follows: under the Full
Documentation program, borrowers are generally required to submit verification
of stable income for a two year period. Under the Lite Documentation program,
borrowers are generally required to submit verification of stable employment for
the past six months. Under the Stated Income program, the borrowers may be
qualified based upon the monthly income stated on the mortgage application,
without verification. The income stated must be reasonable and customary for the
borrower's line of work and a copy of the business license is required or other
generally acceptable evidence of business conduct. Under all of the programs,
the correspondent generally performs a telephone verification of the borrower's
employment. For self-employed borrowers the business location and telephone
number must be confirmed through an independent source, such as directory
assistance or a published telephone directory.
The Mortgage Loan Seller uses the following categories and characteristics
as guidelines to grade the mortgage loans:
'A' Risk. Under the 'A' risk category, account ratings cannot be
greater than 30-days past due. A maximum of 0x30-day late payment in the
last 12 months and 1x30 day late payment in the last 24 months is
acceptable (or 0x30 for mortgage loans originated under the Lite
Documentation and Stated Income Documentation programs). No 60-day late
payments within the last 24 months is acceptable on an existing mortgage
loan. For purposes of determining whether a prospective mortgagor has been
30-days late, the Mortgage Loan Seller uses a 'rolling 30-day period,' i.e.
the Mortgage Loan Seller generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment. All judgments,
garnishments and liens of records must be paid in full at funding. No
bankruptcies may have occurred during the preceding 24 months and no notice
of default may have occurred in the preceding 36 months. All bankruptcies
must have been discharged or dismissed. Two years re-established excellent
credit since discharge or dismissal is required. A maximum Loan-to-Value
Ratio of 85% (or 75% for mortgage loans originated under the Lite
Documentation and Stated Income Documentation programs) is permitted for a
mortgage loan on a single family owner occupied property. A maximum of 80%
Loan-to-Value Ratio is permitted for a mortgage loan on an owner occupied
condominium or two to four family residential property originated under the
Full Documentation program. All non-owner occupied loans have a maximum
Loan-to-Value Ratio of 75% (or 70% and 65% for mortgage loans originated
under the Lite Documentation or Stated Income Documentation programs,
respectively.) The required Debt Ratio is 42% or less.
'A - ' Risk. Under the 'A - ' risk category, account ratings cannot be
greater than 30-days past due. All derogatory credit greater than 30 days
must relate to an isolated life event. A maximum of 2x30-day late payments
in the last 12 months is acceptable on a mortgage loan. No 60-day late
S-33
<PAGE>
<PAGE>
payments within the last 24 months is acceptable on an existing mortgage
loan. For purposes of determining whether a prospective mortgagor has been
30-days late, the Mortgage Loan Seller uses a 'rolling 30-day period,' i.e.
the Mortgage Loan Seller generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment. An existing mortgage
loan is not required to be current at the time the application is
submitted. All judgments, garnishments and liens of records must be paid in
full at funding. When the Loan-to-Value Ratio is equal to 70% or less,
judgments, charge offs and collections that do not appear in the public
records need not be paid on rate/term refinances (no cash to borrowers) and
purchases only. No bankruptcies may have occurred in the preceding 24
months. All bankruptcies must have been discharged or dismissed. No notice
of default may have occurred in the preceding 24 months. Two years
re-established excellent credit since discharge or dismissal is required. A
maximum Loan-to-Value Ratio of 85% (or 75% for mortgage loans originated
under the Lite Documentation and Stated Income Documentation programs) is
permitted for a mortgage loan on a single family owner occupied property. A
maximum of 80% Loan-to-Value Ratio is permitted for a mortgage loan on an
owner occupied condominium or two to four family residential property under
the Full Documentation program only. Non-owner occupied loans have a
maximum Loan-to-Value Ratio of 70% under the Full Documentation and Lite
Documentation programs (or 60% for mortgage loans originated under the
Stated Income program). The maximum Debt Ratio generally ranges from 45% or
less to 50% depending on the Loan-to-Value Ratio. Debt Ratio concessions
are allowed on loans with Loan-to-Value Ratios of 75% or less. Debt Ratio
concessions allow an inverse relationship between the Debt Ratio and the
Loan-to-Value ratio. Beginning at 75% Loan-to-Value Ratio there can be a
corresponding 5% increase in Debt Ratio for every 5% incremental decline in
Loan-to-Value Ratio below the program maximum. In no event can the Debt
Ratio exceed 60%.
'B' Risk. Under the 'B' risk category, account ratings cannot be
greater than 60-days past due. All derogatory credit greater than 60 days
must relate to an isolated life event. A maximum of 4x30 or 2x30 and 1x60
day late payments in the last 12 months is acceptable on a mortgage loan.
For purposes of determining whether a prospective mortgagor has been
30-days late, the Mortgage Loan Seller uses a 'rolling 30-day period,' i.e.
the Mortgage Loan Seller generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment. An existing mortgage
loan is not required to be current at the time the application is
submitted. All judgments, garnishments and liens of records must be paid in
full at funding. When the Loan-to-Value Ratio is equal to 70% or less,
judgments, charge offs and collections that do not appear in the public
records need not be paid on rate/term refinances (no cash to borrowers) and
purchases only. No bankruptcies may have occurred in the preceding 24
months. All bankruptcies must have been discharged or dismissed. Two year's
re-established good credit since discharge or dismissal is required. No
notice of default may have occurred in the preceding 24 months. A maximum
Loan-to-Value Ratio of 80% (or 75% for mortgage loans originated under the
Lite Documentation and Stated Income Documentation programs) is permitted
for an owner occupied mortgage loan regardless of the property type.
Non-owner occupied loans have a maximum Loan-to-Value Ratio of 70% under
the Full Documentation and 65% under the Lite Documentation programs. Non-
owner occupied properties are not allowed under the Stated Income
Documentation program. The maximum Debt Ratio generally ranges from 50% or
less to 55% depending on the Loan-to-Value Ratio and the documentation
level. Debt Ratio concessions are allowed on loans with Loan-to-Value
Ratios of 75% or less. Debt Ratio concessions allow an inverse relationship
between the debt ratio and the Loan-to-Value ratio. Beginning at 75%
Loan-to-Value Ratio there can be a corresponding 5% increase in Debt Ratio
for every 5% incremental decline in Loan-to-Value Ratio below the program
maximum. In no event can the Debt Ratio exceed 60%.
'C' Risk. Under the 'C' risk category, account ratings cannot be
greater than 90-days past due. The majority of the credit must not be
currently delinquent. A maximum of 6x30 or 3x30 and 1x60 or 2x60 or 2x30
and 1x90 day late payments in the last 12 months is acceptable. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Mortgage Loan Seller uses a 'rolling 30-day period,' i.e. the
Mortgage Loan Seller generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment. An existing mortgage
loan is not required to be current at the time the application is
submitted. When the Loan-to-Value Ratio is
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<PAGE>
<PAGE>
equal to 70% or less, judgments, charge offs and collections that do not
appear in the public records need not be paid on rate/term refinances (no
cash to borrowers) and purchases only. No bankruptcies may have occurred in
the preceding 24 months and all bankruptcies must have been discharged or
dismissed. Two years re-established credit since discharge or dismissal is
required. No notice of default may have occurred in the preceding 12
months. A maximum Loan-to-Value Ratio of 75% is permitted for an owner
occupied mortgage loan regardless of the property type. Non-owner occupied
loans have a maximum Loan-to-Value Ratio of 65% under the Full
Documentation and 60% under the Lite Documentation programs. Non-owner
occupied properties are not allowed under the Stated Income Documentation
program. The required Debt Ratio is 60% or less. Debt Ratio concessions are
allowed on loans with Loan-to-Value Ratios of 75% or less. Debt Ratio
concessions allow an inverse relationship between the Debt Ratio and the
Loan-to-Value ratio. Beginning at 75% Loan-to-Value Ratio there can be a
corresponding 5% increase in Debt Ratio for every 5% incremental decline in
Loan-to-Value Ratio below the program maximum. In no event can the Debt
Ratio exceed 60%.
'D' Risk. Under the 'D' risk category, account ratings cannot be
greater than 180-days past due in the last 12 months. A maximum 120 days
past due (or over 120 days with a Loan-to-Value ratio of 60% or less) in
the last 12 months is acceptable. No notice of sale can be filed on any
notice of default. For purposes of determining whether a prospective
mortgagor has been 30-days late, the Mortgage Loan Seller uses a 'rolling
30-day period,' i.e. the Mortgage Loan Seller generally will consider a
continuous sequence of 30-day late payments as a single 30-day late
payment. An existing mortgage loan is not required to be current at the
time the application is submitted. Judgments, charge-offs and collections
that do not appear in the public records need not be paid on rate/term
refinances (no cash to borrowers) and purchases only. Mortgagor cannot be
currently in bankruptcy on a purchase but a recent discharge or dismissal
is allowed. On refinances the mortgagor can be currently in a Chapter 11 or
13 bankruptcy. The proceeds can be used to obtain the bankruptcy discharge
if the Loan-to-Value Ratio does not exceed 65%, the mortgagor has paid at
least 2/3rds of the required amount, the mortgagor occupies the subject
property and will continue to do so, the property condition is stated to be
average to good by the appraiser, there are no other liens against the
property except the Mortgage Loan Seller, the mortgagor receives no cash
proceeds from the refinance transaction, the settlement agent disburses the
funds required to obtain the discharge of the debtor directly to the
bankruptcy court, all liens and judgments and past due taxes are paid at
the time of closing and the trustee provides an affidavit indicating the
amount required to obtain the discharge and the estimated discharge date
after receipt of funds. A maximum Loan-to-Value Ratio of 70% is permitted
for an owner occupied mortgage loan regardless of the property type.
Non-owner occupied loans have a maximum Loan-to-Value Ratio of 60% under
the Full Documentation and 55% under the Lite Documentation programs. Non-
owner occupied properties are not allowed under the Stated Income
Documentation program. The required Debt Ratio is 60% or less.
Exceptions. As described above the Mortgage Loan Seller uses the
foregoing categories and characteristics as guidelines only. On a case by
case basis only, the Mortgage Loan Seller may determine that the
prospective mortgagor warrants a risk upgrade or an exception from certain
requirements of a particular risk category. A one level credit upgrade in
'B' and 'C' risk grade loans only may be allowed if the application
reflects certain compensating factors, among others: low Loan-to-Value
Ratio, stable employment, ownership of current residence of 5 or more years
and condition of the property. An exception may also be granted if the
applicant has tendered a minimum down payment of 20% or more, the new loan
reduces the applicant's housing expense by more than 25% and if the
mortgage credit history is rated 0x30 or 1x30 in the last 12 months.
The Mortgage Loan Seller will make representations and warranties with
respect to the Mortgage Loans as of the Closing Date. The Mortgage Loan Seller
will be obligated to repurchase Mortgage Loans in respect of which a material
breach of the representations and warranties it has made has occurred (other
than those breaches which have been cured). For a discussion of the
representations and warranties made and the repurchase obligation, see 'Mortgage
Loan Program -- Representations by or on behalf of the Mortgage Loan Seller;
Repurchases' in the Prospectus.
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<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the principal payments received
on or before such date. Prior to the issuance of the Certificates, Mortgage
Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
YIELD ON THE CERTIFICATES
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. Regarding those interest shortfalls
attributable to full and partial prepayments by the mortgagors on the Mortgage
Loans ('Prepayment Interest Shortfalls'), the Master Servicer is obligated to
pay from its own funds such shortfalls, but only to the extent of its total
servicing compensation for the related Collection Period. See 'Pooling and
Servicing Agreement -- Servicing and Other Compensation and Payment of Expenses'
herein. In addition, the application of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the 'Relief Act'), to any Mortgage Loan will adversely
affect, for an indeterminate period of time, the ability of the Master Servicer
to collect full amounts of interest on such Mortgage Loan. The effect of 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. The Policy does not cover Relief Act Shortfalls. See
'Certain Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil
Relief Act of 1940' in the Prospectus. Any such shortfalls will be allocated
among the Certificates as provided herein under 'Description of the
Certificates -- Interest Distributions' and ' -- Overcollateralization
Provisions.'
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates will be related to the rate and timing of payments of
principal on the related Mortgage Loans. The rate of principal payments on the
Mortgage Loans will in turn be affected by the amortization schedules of such
Mortgage Loans and by the rate of principal prepayments thereon (including for
this purpose payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor or the Mortgage Loan Seller, as the case
may be). The Mortgage Loans generally may be prepaid by the mortgagors at any
time; however, as described under 'The Mortgage Pool' herein, with respect to a
majority of the Mortgage Loans, 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 Class A
Certificates then entitled to receive such distributions that otherwise would be
distributed over the remaining terms of the Mortgage Loans. See 'Maturity and
Prepayment Considerations' in the Prospectus. Since the rates of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under 'Yield
Considerations' and 'Maturity and Prepayment Considerations'), no assurance can
be given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of the Class A Certificates may vary from the
anticipated yield will depend upon the
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<PAGE>
degree to which such Certificates are purchased at a discount or premium and the
degree to which the timing of payments thereon is sensitive to prepayments on
the related Mortgage Loans. Further, in the case of Class A Certificates
purchased at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments on the related Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of Class A Certificates purchased at a premium, an
investor should consider the risk that a faster than anticipated rate of
principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. In general, the earlier a prepayment of
principal on the Mortgage Loans, the greater will be the effect on the yield to
maturity of an investor in the Class A Certificates. As a result, the effect on
an investor's yield of principal payments occurring on the related Mortgage
Loans at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Class A Certificates
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate, and the prepayment charges imposed in connection with prepayments on
certain of the Mortgage Loans will have an uncertain effect on the rate and
timing of prepayments on the Mortgage Loans. Moreover, the timing of prepayments
on the Mortgage Loans may significantly affect the actual yield to maturity on
the Class A Certificates, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Certificates. See
'Yield Considerations' and 'Maturity and Prepayment Considerations' in the
Prospectus.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates generally are higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a mortgagor's default on a Mortgage Loan, other than as provided by the Policy
as described herein, there can be no assurance that recourse will be available
beyond the specific Mortgaged Property pledged as security for repayment. See
'The Mortgage Pool -- Underwriting Standards; Representations' herein.
BALLOON MORTGAGE LOANS
The Balloon Mortgage Loans in the Trust Fund will not be fully amortizing
over their terms to maturity, and will require substantial principal payments at
their stated maturity. Balloon Mortgage Loans 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
Balloon Mortgage 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, tax laws, prevailing general economic
conditions and the availability of credit for loans secured by residential
property. Because the ability of a mortgagor to make a Balloon Payment typically
will depend upon its ability either to refinance the Balloon Mortgage Loan or to
sell the related Mortgaged Property, there is a risk that the Balloon Mortgage
Loans may default at maturity. Any defaulted Balloon Payment that extends the
maturity of a Balloon Mortgage Loan may delay distributions of principal on the
Class A Certificates and thereby extend the weighted average life of the
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<PAGE>
Class A Certificates and, if the Class A Certificates were purchased at a
discount, reduce the yield thereon.
SPECIAL YIELD CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS
Because the Mortgage Rates on the Fixed Rate Mortgage Loans are fixed, such
rates will not change in response to changes in market interest rates.
Accordingly, if mortgage market interest rates or market yields for securities
similar to the Class A Certificates were to rise, the market value of the Class
A Certificates may decline in cases where the Pass-Through Rate did not increase
accordingly.
The Mortgage Rates on the Adjustable Rate Mortgage Loans adjust
semi-annually based upon the Index, whereas the Pass-Through Rate on the Class A
Certificates adjusts monthly based upon One-Month LIBOR as described under
'Description of the Certificates -- Calculation of One-Month LIBOR' herein,
subject to the Available Funds Pass-Through Rate and the Maximum Pass Through
Rate, with the result that increases in the Pass-Through Rate on the Class A
Certificates may be limited for extended periods in a rising interest rate
environment. In addition, because the Pass-Through Rate is determined, to some
extent, by the Mortgage Rates on the Fixed Rate Mortgage Loans, in certain
instances, such limitation may be a permanent one. Investors should note that
approximately 73.63% of the Adjustable Rate Mortgage Loans are Delayed First
Adjustment Mortgage Loans. The interest due on the Adjustable Rate Mortgage
Loans during any Collection Period may not equal the amount of interest that
would accrue at One-Month LIBOR plus the applicable spread on the Class A
Certificates during the related Interest Accrual Period, however, any such
shortfall will be payable to the holders of the Class A Certificates as limited
by the Maximum Pass-Though Rate to the extent and in the priority provided
herein. In addition, the Index and One-Month LIBOR may respond differently to
economic and market factors. Thus, it is possible, for example, that if both
One-Month LIBOR and the Index rise during the same period, One-Month LIBOR may
rise more rapidly than the Index or may rise higher than the Index, potentially
resulting in a Basis Risk Shortfall to holders of the Class A Certificates. The
Policy does not cover Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the Class
A Certificates will be influenced by the rate at which principal on the related
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Distributions of principal to the holders of the Class A Certificates will
be made on a pro rata basis. The weighted average life of the Class A
Certificates will be affected by the rates of prepayment on the Mortgage Loans.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
'Prepayment Assumption') assumes a prepayment rate for the Fixed Rate Mortgage
Loans of 100% of the Prepayment Vector, and a prepayment rate for the Adjustable
Rate Mortgage Loans of 20% CPR. A 100% Prepayment Vector assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of 4.00% CPR
in the first month of the life of such pool, such rate increasing by an
additional approximate 0.947368% (or 18/19ths of 1%) CPR each month thereafter
until the nineteenth month. Beginning in the twentieth month and in each month
thereafter during the life of such pool, a 100% Prepayment Vector assumes a
prepayment rate of 22% CPR. A 50% Prepayment Vector assumes, for example, that
the outstanding balance of a pool of mortgage loans prepays at a rate of 2.00%
CPR in the first month of the life of such pool, such rate increasing by an
additional approximate 0.473684% CPR each month thereafter until the nineteenth
month. Beginning in the twentieth month and in each month thereafter during the
life of the such pool, a 50% Prepayment Vector assumes a prepayment rate of 11%
CPR. No representation is made that the Fixed Rate Mortgage Loans will prepay at
the above-described rates or any other rate. The Constant Prepayment Rate model
('CPR'), assumes that the outstanding principal balance of a
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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 20% 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 Adjustable
Rate Mortgage Loans will prepay at 20% CPR or any other rate.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO
SCENARIO 1 2 3 4 5
- ---------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed Rate Mortgage Loans(1)........................ 0% 50% 100% 150% 200%
Adjustable Rate Mortgage Loans(2)................... 0% 15% 20% 25% 30%
</TABLE>
- ------------
(1) As a percentage of the Prepayment Vector.
(2) As a constant prepayment rate (CPR).
The table following the next paragraph indicates the percentage of the
initial Certificate Principal Balance of the Class A 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 the Class
A Certificates. The table is based on the following assumptions (the 'Modeling
Assumptions'): (i) the Mortgage Pool consists of Mortgage Loans with the
characteristics set forth in the tables below, (ii) distributions on such
Certificates are received, in cash, on the 25th day of each month, commencing in
October 1996, (iii) the Mortgage Loans prepay at the percentages of the
Prepayment Assumption indicated, (iv) no defaults or delinquencies occur in the
payment by mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Relief Act are incurred, (v) none of
the Depositor, the Mortgage Loan Seller, the majority holder of the Residual
Certificates, the Insurer, the Master Servicer or any other person purchases
from the Trust Fund any Mortgage Loan pursuant to any obligation or option under
the Agreement, except as indicated in footnote two in the tables, (vi) scheduled
monthly payments on the Mortgage Loans are received on the first day of each
month commencing in September 1996, and are computed prior to giving effect to
any prepayments received in the prior month, (vii) prepayments representing
payment in full of individual Mortgage Loans are received on the last day of
each month commencing in September 1996, and include 30 days' interest thereon,
(viii) the scheduled monthly payment for each Mortgage Loan is calculated based
on its principal balance, Mortgage Rate, original term to maturity and remaining
term to maturity such that the Mortgage Loan will amortize in amounts sufficient
to repay the remaining principal balance of such Mortgage Loan by its remaining
term to maturity (ix) the Certificates are purchased on September 26, 1996, (x)
the Index remains constant at 5.85156% per annum and the Mortgage Rate on each
Adjustable Rate Mortgage Loan is adjusted on the next Adjustment Date (and on
subsequent Adjustment Dates if necessary) to equal the Index plus the applicable
Gross Margin, subject to the applicable Periodic Rate Cap, (xi) One-Month LIBOR
remains constant at 5.50% per annum, (xii) the monthly payment on each
Adjustable Rate Mortgage Loan is adjusted on the Due Date immediately following
the next Adjustment Date (and on subsequent Adjustment Dates, if necessary) to
equal a fully amortizing monthly payment as described in clause (viii) above and
(xiii) the Servicing Fee Rate is equal to 0.50% per annum, the Trustee Fee Rate
is equal to 0.015% per annum, the Minimum Spread is equal to 0.75% per annum and
the amount of the premium payable to the Insurer is as described under the
heading 'Pooling and Servicing Agreement -- Certain Matters Regarding the
Insurer.'
HYPOTHETICAL FIXED RATE MORTGAGE LOANS:
<TABLE>
<CAPTION>
OUTSTANDING ORIGINAL REMAINING REMAINING ORIGINAL
PRINCIPAL GROSS AMORTIZATION AMORTIZATION MONTHS TO MONTHS TO
BALANCE WAC TERM TERM BALLOON BALLOON
-------------- ------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fully Amortizing........................ $13,221,555.83 10.8674% 334 333 N/A N/A
Balloon Loans........................... 3,681,561.99 10.3962 360 355 175 180
</TABLE>
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<PAGE>
HYPOTHETICAL ADJUSTABLE RATE MORTGAGE LOANS (6 MONTH LIBOR):
<TABLE>
<CAPTION>
MONTHS ORIGINAL REMAINING
TO MORTGAGE MAXIMUM MINIMUM TERM TERM
RATE INTEREST GROSS INTEREST INTEREST TO TO PERIODIC
PRINCIPAL BALANCE CHANGE RATE MARGIN RATE RATE MATURITY MATURITY CAP
- ----------------- ------ -------- ------ ------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 915,600.68 3 10.1026% 6.209% 16.054% 9.614% 360 354 1.000%
4,993,653.21 4 9.0924 6.267 15.743 9.226 360 358 1.000
10,912,619.88 5 9.4824 6.755 16.072 9.570 360 359 1.000
343,617.66 10 11.8676 6.539 18.113 11.783 360 348 1.000
47,061,161.23 23 10.3786 6.340 16.873 10.368 360 359 1.000
</TABLE>
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table. Any such
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balance outstanding (and the weighted average life) of the Class A
Certificates set forth in the table. In addition, since the actual Mortgage
Loans will have characteristics that differ from those assumed in preparing the
table set forth below and, since it is not likely the level of the Index will
remain constant as assumed, the Class A Certificates may mature earlier or later
than indicated by the table. Based on the foregoing assumptions, the table
indicates the weighted average life of the Class A Certificates and sets forth
the percentages of the initial Certificate Principal Balance that would be
outstanding after each of the Distribution Dates shown, at various percentages
of the Prepayment Assumption. Neither the prepayment model used herein nor any
other prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the
Mortgage Pool. Variations in the prepayment experience and the balance of the
related Mortgage Loans that prepay may increase or decrease the percentages of
initial Certificate Principal Balances (and weighted average lives) shown in the
following table. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals any of the specified percentages of
the prepayment assumption.
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<PAGE>
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED SCENARIOS
<TABLE>
<CAPTION>
CLASS A CERTIFICATES
--------------------------------------------------------
SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO
DISTRIBUTION DATE 1 2 3 4 5
- ------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Closing Date............................... 100% 100% 100% 100% 100%
September 1997............................. 96 84 78 73 68
September 1998............................. 96 71 62 53 45
September 1999............................. 95 60 48 38 29
September 2000............................. 95 51 38 28 20
September 2001............................. 94 43 30 20 14
September 2002............................. 93 37 24 15 0
September 2003............................. 93 32 19 11 0
September 2004............................. 92 27 15 0 0
September 2005............................. 91 23 12 0 0
September 2006............................. 90 20 0 0 0
September 2007............................. 88 17 0 0 0
September 2008............................. 87 14 0 0 0
September 2009............................. 85 12 0 0 0
September 2010............................. 83 10 0 0 0
September 2011............................. 78 0 0 0 0
September 2012............................. 75 0 0 0 0
September 2013............................. 73 0 0 0 0
September 2014............................. 70 0 0 0 0
September 2015............................. 67 0 0 0 0
September 2016............................. 64 0 0 0 0
September 2017............................. 60 0 0 0 0
September 2018............................. 55 0 0 0 0
September 2019............................. 50 0 0 0 0
September 2020............................. 44 0 0 0 0
September 2021............................. 38 0 0 0 0
September 2022............................. 32 0 0 0 0
September 2023............................. 24 0 0 0 0
September 2024............................. 16 0 0 0 0
September 2025............................. 0 0 0 0 0
Weighted Average Life in Years(1)(2)....... 20.81 5.51 3.81 2.89 2.31
Weighted Average Life in Years(1)(3)....... 20.86 5.89 4.13 3.15 2.53
</TABLE>
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the Certificate to the related Distribution Date, (b)
adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchase the Mortgage Loans when the aggregate principal balance
of the Mortgage Loans and such properties remaining is 10% or less of the
Cut-off Date Pool Principal Balance. See 'Pooling and Servicing
Agreement -- Termination' herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the table above,
or to any other level, or that the actual weighted average life of the Class A
Certificates of any class will conform to any of the weighted average live set
forth in the table above. Furthermore, the information contained in the table
with respect to the weighted average life of the Class A Certificates is not
necessarily indicative of the
S-41
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<PAGE>
weighted average life 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 table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity, that all of the Mortgage
Loans will prepay at the same rate or that, in the case of an Adjustable Rate
Mortgage Loan, the level of the Index will remain constant or at any level for
any period of time. The timing of changes in the rate of prepayments may
significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments and, in the case of Adjustable Rate
Mortgage Loans, the level of the Index is consistent with the expectations of
investors.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of two classes of certificates, designated as
(i) the Class A Certificates (the 'Class A Certificates') and (ii) the Class R
Certificates (the 'Residual Certificates'). Only the Class A Certificates are
offered hereby. The Residual Certificates, which are not being offered hereby,
may be sold at any time on or after the Closing Date in accordance with the
Agreement.
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the 'Trust Fund') consisting primarily of a pool (the
'Mortgage Pool') of conventional, one- to four-family, first lien mortgage loans
having original terms to maturity ranging from 15 years to 30 years (the
'Mortgage Loans'). The Mortgage Pool consists of fixed-rate Mortgage Loans (the
'Fixed Rate Mortgage Loans') having an aggregate principal balance as of the
Cut-off Date of approximately $16,903,118, and adjustable-rate Mortgage Loans
(the 'Adjustable Rate Mortgage Loans') having an aggregate principal balance as
of the Cut-off Date of approximately $64,226,653, in each case subject to a
permitted variance as described under 'The Mortgage Pool' herein.
The Class A Certificates in the aggregate will have an initial Certificate
Principal Balance of approximately $81,129,770. The Pass-Through Rate on the
Class A Certificates is adjustable and is calculated as described under
' -- Pass-Through Rate' herein. The Class A Certificates in the aggregate
initially evidence an interest of 100% in the principal of the Trust Fund. The
Class A Certificates will initially have an aggregate Certificate Principal
Balance equal to the aggregate principal balance as of the Cut-off Date of the
Mortgage Loans.
The expected final maturity date of the Class A Certificates is September
25, 2027, which is the Distribution Date occurring one year and one month after
the maturity date of the latest maturing Mortgage Loan.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its Participants in minimum denominations of
$1,000 and integral multiples of $1.00 in excess thereof. The Class A
Certificates will initially be represented by one or more global certificates
registered in the name of the nominee of DTC (together with any successor
clearing agency selected by the Depositor, the 'Clearing Agency'), except as
provided below. The Depositor has been informed by DTC that DTC's nominee will
be CEDE & Co. ('CEDE'). No Certificate Owner will be entitled to receive a
certificate representing such person's interest, except as set forth below under
' -- Definitive Certificates.' Unless and until Definitive Certificates are
issued under the limited circumstances described herein, all references to
actions by Certificateholders with respect to the Class A Certificates shall
refer to actions taken by DTC upon instructions from its Participants (as
defined below), and all references herein to distributions, notices, reports and
statements to Certificateholders with respect to the Class A Certificates shall
refer to distributions, notices, reports and statements to DTC or CEDE, as the
registered holder of the Class A Certificates, for distribution to Certificate
Owners in accordance with DTC procedures. See ' -- Registration of the Class A
Certificates' and ' -- Definitive Certificates' herein.
All distributions to holders of the Class A Certificates, other than the
final distribution on the Class A Certificates, will be made by or on behalf of
the Trustee to the persons in whose names such Class A Certificates are
registered at the close of business on each Record Date, which will be the last
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business day of the month preceding the month in which the related Distribution
Date occurs. Such distributions will be made either (i) by check mailed to the
address of each such Certificateholder as it appears in the Certificate Register
or (ii) upon written request to the Trustee at least five business days prior to
the relevant Record Date by any holder of Class A Certificates having an
aggregate initial Certificate Principal Balance that is in excess of $5,000,000
by wire transfer in immediately available funds to the account of such
Certificateholder specified in the request. The final distribution on the Class
A Certificates will be made in like manner, but only upon presentment and
surrender of such Class A Certificates at the corporate trust office of the
Trustee or such other location specified in the notice to Certificateholders of
such final distribution.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
The Class A Certificates will be issued as Book-Entry Certificates, and
such class will be represented by one or more single Certificates registered in
the name of CEDE & Co., the nominee of the depository, The Depository Trust
Company ('DTC').
Holders of Certificates may hold their Certificates through DTC (in the
United States) or Centrale de Livraison de Valeurs Mobilieres S.A. ('CEDEL') or
the Euroclear System ('Euroclear'), in Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be in accordance with the usual rules and
operating procedures of the relevant system (in Europe) if they are participants
of such systems, or indirectly through organizations which are participants in
such systems.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. The Chase Manhattan Bank will act as depositary for CEDEL and
Morgan Guaranty Trust Company of New York will act as depositary for Euroclear
(in such capacities, individually the 'Depositary' and collectively the
'Depositaries').
Transfers between Participants (as defined below) will occur in accordance
with DTC rules. Transfers between CEDEL Participants and Euroclear Participants
(each as defined below) will occur in accordance with their respective rules and
operating procedures.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the UCC and a 'clearing agency' registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ('Participants') and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ('Indirect Participants').
Owners of the Class A Certificates ('Certificate Owners') or prospective
owners, as the case may be, that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, the Class A Certificates may do so only through Participants and
Indirect Participants. In addition, such Certificate Owners will receive all
distributions of principal and interest on the Class A Certificates from the
Trustee or the applicable paying agent through DTC and its Participants. Under a
book-entry format, Certificateholders may receive payments after the related
Remittance Date because, while payments are required to be forwarded to CEDE &
Co., as nominee for DTC, on each such date, DTC will forward such payments to
its Participants which thereafter will be required to forward them to Indirect
Participants or Certificate Owners. The only 'Certificateholder' (as such term
is used in the Agreement) will be CEDE & Co., as nominee of DTC, and the
Certificate Owners will not be recognized by the Trustee as Certificateholders
under the Agreement. Certificate Owners will be permitted to exercise the rights
of Certificate Owners under the Agreement only indirectly through DTC and its
Participants who in turn will exercise their rights through DTC.
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Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain other entities, the ability of a
Certificate Owner to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
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 its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ('CEDEL
Participants') and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ('Euroclear Participants') and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the 'Euroclear Operator'), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
'Cooperative'). All operations are conducted by the Euroclear Operator,
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and all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
established policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash with Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through 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 its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See 'Certain Income Tax Consequences'. CEDEL or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Certificates initially issued as Book-Entry Certificates will be issued as
Definitive Certificates only if (i) DTC or the Servicer advises the Trustee in
writing that DTC is no longer willing or able to properly discharge its
responsibilities as nominee and depository with respect to the Certificates and
the Servicer is unable to locate a qualified successor or (ii) the Servicer, at
its option, elects to terminate the book-entry system through DTC or (iii) after
the occurrence of an Event of Default, if holders of Class A Certificates
evidencing not less than 51% of the Voting Rights advise the Trustee in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) to the exclusion of any physical certificates being issued to
Certificate Owners is no longer in the best interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates for the Certificates. Upon
surrender by DTC of the certificate or certificates representing such
Certificates and instructions for reregistration, the Trustee will issue such
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as Certificateholders
under the Agreement and such holders of Definitive Certificates will deal
directly with the Trustee with respect to transfers, notices and distributions.
In the event that Definitive Certificates are issued or DTC ceases to be the
clearing agency for the Certificates, the Agreement will provide that the
applicable Certificateholders will be notified of such event. For purposes of
this
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Prospectus and each Prospectus Supplement, unless the context otherwise
requires, the term 'Certificateholder' shall be deemed to mean Certificate
Owner.
PASS-THROUGH RATE
The Pass-Through Rate on the Class A Certificates on each Distribution Date
after the first Distribution Date will be a rate per annum equal to the lesser
of (i) One-Month LIBOR (as defined herein) plus 0.35%, in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance (as defined herein) of the Mortgage Loans is reduced
to 10% or less of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date, or One-Month LIBOR plus 0.75% per annum, in the case of any
Distribution Date thereafter and (ii) the Available Funds Pass-Through Rate for
such Distribution Date. For the first Distribution Date, the Pass-Through Rate
on the Class A Certificates will be approximately 5.9125% per annum. See
' -- Calculation of One-Month LIBOR' herein.
The 'Available Funds Pass-Through Rate' for any Distribution Date is a rate
per annum equal to the fraction, expressed as a percentage, the numerator of
which is (i) an amount equal to (A) 1/12 of the aggregate principal balance of
the then outstanding Mortgage Loans times the weighted average of the Expense
Adjusted Mortgage Rates on the then outstanding Mortgage Loans minus (B) the
amount of the premium with respect to the Class A Certificates payable to the
Insurer with respect to the Policy for such Distribution Date, and the
denominator of which is (ii) an amount equal to (A) the then aggregate principal
balance of the then outstanding Mortgage Loans multiplied by (B) the actual
number of days elapsed in the related Interest Accrual Period (as defined
herein) divided by 360.
The 'Expense Adjusted Mortgage Rate' is, as to any Mortgage Loan, an amount
equal to the then applicable Mortgage Rate thereon minus the sum of (i) the
Minimum Spread, (ii) the Trustee Fee Rate and (iii) the Servicing Fee Rate. For
any Distribution Date, the Minimum Spread is equal to 0.75% per annum, the
Trustee Fee Rate is equal to .015% per annum and the Servicing Fee Rate is equal
to 0.50% per annum. See 'Pooling and Servicing Agreement -- The Trustee' and
' -- Servicing and Other Compensation and Payment of Expenses' herein. The
amount of the premium payable to the Insurer with respect to the Policy for any
Distribution Date is described under 'Pooling and Servicing Agreement -- Certain
Matters Regarding the Insurer' herein.
The Pass-Through Rate on the Class A Certificates for the current Interest
Accrual Period, to the extent it has been determined, and for the immediately
preceding Interest Accrual Period may be obtained by telephoning the Trustee at
(800) 735-7777.
As further described herein, to the extent that the Pass-Through Rate for
any Distribution Date equals the Available Funds Pass-Through Rate, the holders
of the Class A Certificates will be entitled (subject to the limitation
described in the next succeeding sentence) to the amount of the difference
between the amount payable if clause (i) of the definition of Pass-Through Rate
is used to calculate interest and the amount payable at the Available Funds
Pass-Through Rate (the 'Basis Risk Shortfall'), together with interest thereon
at the Pass-Through Rate applicable from time to time, after certain
distributions to the holders of the Class A Certificates and the Insurer but
before the Residual Certificates are entitled to any distributions.
Notwithstanding the preceding sentence, the amount of the Basis Risk Shortfall
for any Distribution Date may not exceed the excess of (x) the amount payable at
the Maximum Class A Pass-Through Rate over (y) the amount payable at the
Available Funds Pass-Through Rate. The 'Unpaid Basis Risk Shortfall' for any
Distribution Date is equal to the aggregate of all Basis Risk Shortfalls for any
previous Distribution Dates less all payments made to the holders of the Class A
Certificates in respect of such Basis Risk Shortfalls on or prior to such
Distribution Date. The Policy will not cover Basis Risk Shortfalls or Unpaid
Basis Risk Shortfalls. See ' -- Overcollateralization Provisions' and
' -- Financial Guaranty Insurance Policy' herein.
The 'Maximum Class A Pass-Through Rate' for any Distribution Date is a per
annum rate equal to the fraction, expressed as a percentage, the numerator of
which is (i) an amount equal to (A) 1/12 of the aggregate principal balance of
the then outstanding Mortgage Loans times the weighted average of the Expense
Adjusted Maximum Mortgage Rates on the then outstanding Mortgage Loans minus (B)
the amount of the premium with respect to the Class A Certificates payable to
the Insurer with respect
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to the Policy for such Distribution Date, and the denominator of which is (ii)
an amount equal to (A) the aggregate principal balance of the then outstanding
Mortgage Loans multiplied by (B) the actual number of days elapsed in the
related Interest Accrual Period divided by 360.
The 'Expense Adjusted Maximum Mortgage Rate' on any Mortgage Loan is equal
to the excess of (x) in the case of the Fixed Rate Mortgage Loans, the Mortgage
Rate, and in the case of the Adjustable Rate Mortgage Loans, the Maximum
Mortgage Rate (as defined herein) thereon over (y) the sum of (i) the Minimum
Spread, (ii) the Trustee Fee Rate and (iii) the Servicing Fee Rate.
INTEREST DISTRIBUTIONS
Distributions in respect of interest on each Distribution Date will be made
to the holders of the Class A Certificates in an amount equal to the Interest
Distribution Amount.
The Interest Distribution Amount on any Distribution Date is equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balance thereof immediately prior to such Distribution Date at the
then applicable Pass-Through Rate, reduced (to not less than zero) by any
shortfalls resulting from the application of the Relief Act.
Distributions of the Interest Distribution Amount will be made on each
Distribution Date, commencing with the first Distribution Date. The Interest
Accrual Period for any Distribution Date is the period commencing on the 25th
day of the month immediately preceding the month in which such Distribution Date
occurs (or, in the case of the first period, commencing on the Closing Date) and
ending on the 24th day of the month in which such Distribution Date occurs, and
all distributions of interest will be based on a 360-day year and the actual
number of days in the applicable Interest Accrual Period.
Subject to the terms of the Policy, any interest losses allocable to the
Class A Certificates (other than shortfalls resulting from the application of
the Relief Act, Basis Risk Shortfalls and Unpaid Basis Risk Shortfalls) will be
covered under the Policy. Notwithstanding the foregoing, if payments are not
made as required under the Policy, any such interest losses may be allocated to
the Class A Certificates.
The Certificate Principal Balance of a Class A Certificate outstanding at
any time represents the then maximum amount that the holder thereof is
thereafter entitled to receive as distributions allocable to principal from the
cash flow on the Mortgage Loans and the other assets in the Trust Fund. The
Certificate Principal Balance of a Class A Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses in the manner described herein. The Certificate
Principal Balance of the Residual Certificates in the aggregate as of any date
of determination is equal to the excess, if any, of (a) the then aggregate
Stated Principal Balance of the Mortgage Loans over (b) the then aggregate
Certificate Principal Balance of the Class A Certificates.
CALCULATION OF ONE-MONTH LIBOR
The Pass-Through Rate on the first Distribution Date will be approximately
5.9125% per annum. Thereafter, on the second business day preceding each
Distribution Date (each such date, an 'Interest Determination Date'), the
Trustee will determine the London interbank offered rate for one-month U.S.
dollar deposits ('One-Month LIBOR') for the next Interest Accrual Period on the
basis of the offered rates of the Reference Banks for one-month U.S. dollar
deposits, as such rates appear on the Reuter Screen LIBO Page, as of 11:00 a.m.
(London time) on such Interest Determination Date. 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; 'Reuter Screen LIBO Page'
means the display designated as page 'LIBO' on the Reuter Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for the
purpose of displaying London interbank offered rates of major banks); and
'Reference Banks' means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Reuter Screen LIBO Page on the
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Interest Determination Date in question, (iii) which have been designated as
such by the Trustee and (iv) not controlling, controlled by, or under common
control with, the Depositor or the Mortgage Loan Seller.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Accrual Period will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Interest
Accrual Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate. The 'Reserve Interest Rate' shall be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month U.S. dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank market
or, in the event that the Trustee can determine no such arithmetic mean,
(ii) the lowest one-month U.S. dollar lending rate which New York City
banks selected by the Trustee are quoting on such Interest Determination
Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class A Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date the 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 Interest
Distribution Amount; and
(b) the sum of:
(i) the principal portion of all monthly payments on the Mortgage
Loans received during the related Collection Period;
(ii) the principal portion of all proceeds of the repurchase of a
related Mortgage Loan (or, in the case of a substitution, certain
amounts representing a principal adjustment) as required by the
Agreement during the related Collection 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 Collection
Period, to the extent applied as recoveries of principal on the related
Mortgage Loans;
(iv) the principal portion of any Realized Losses incurred (or
deemed to have been incurred) on any related Mortgage Loans in the
calendar month preceding such Distribution Date to the extent covered by
Net Monthly Excess Cashflow (as defined herein) for such Distribution
Date; and
(v) the amount of any Subordination Increase Amount (as defined
herein) for such Distribution Date;
minus
(vi) the amount of any Subordination Reduction Amount (as defined
herein) for such Distribution Date.
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Notwithstanding the foregoing, as described under
' -- Overcollateralization Provisions' herein, no amounts will be distributed to
the holders of the Class A Certificates pursuant to clause (v) above except to
the extent of any Net Monthly Excess Cashflow remaining after payment to the
holders of the Class A Certificates of all amounts in respect of Realized Losses
pursuant to clause (iv) above and payment to the Insurer of the full amount of
any Cumulative Insurance Payments. As of any Distribution Date, 'Cumulative
Insurance Payments' refers to the aggregate of any payments (other than those
attributable to Excess Bankruptcy Losses, Excess Fraud Losses, Excess Special
Hazard Losses and Excess Extraordinary Losses) made by the Insurer under the
Policy to the extent not previously reimbursed, plus interest thereon.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
aggregate Certificate Principal Balance of the Class A Certificates.
The 'Available Distribution Amount' for the Class A Certificates for any
Distribution Date is equal to the sum, net of amounts reimbursable therefrom to
the Master Servicer, of (i) the aggregate amount of monthly payments on the
related Mortgage Loans received by the Trustee during the related Collection
Period, after deduction of the Servicing Fee, the Trustee Fee and the premium
payable with respect to the Policy, (ii) certain unscheduled payments in respect
of the related Mortgage Loans, including prepayments, insurance proceeds,
liquidation proceeds and proceeds from repurchases of and substitutions for such
Mortgage Loans occurring during the preceding calendar month and (iii) all
Monthly Advances with respect to the related Mortgage Loans received by the
Trustee for such Distribution Date.
In addition, on each Distribution Date, funds received as a result of a
claim under the Policy in respect of the principal portion of Realized Losses
allocated to the Class A Certificates will be distributed by or on behalf of the
Trustee to the holders of such Certificates. See ' -- Financial Guaranty
Insurance Policy' herein.
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that, on each Distribution Date, the Net Monthly
Excess Cashflow, if any, be applied on such Distribution Date as an accelerated
payment of principal on the Class A Certificates, but only to the limited extent
hereafter described. The 'Net Monthly Excess Cashflow' for any Distribution Date
is equal to the excess of the (x) the Available Distribution Amount for such
Distribution Date over (y) the sum for such Distribution Date of (A) the
Interest Distribution Amount payable to the holders of the Class A Certificates
and (B) the amount described in clauses (b)(i)-(iii) of the definition of
Principal Distribution Amount.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
shall be paid as follows:
first, to the holders of the Class A Certificates in an amount equal
to any interest shortfalls (other than Prepayment Interest Shortfalls to
the extent not covered by Compensating Interest paid by the Master
Servicer, shortfalls resulting from the application of the Relief Act,
Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls) and 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 A Certificates, in an amount equal
to the Subordination Increase Amount;
fourth, to the holders of the Class A Certificates, in an amount equal
to any Prepayment Interest Shortfalls on the Mortgage Loans to the extent
not covered by Compensating Interest paid by the Master Servicer and any
shortfalls resulting from the application of the Relief Act with respect to
the Mortgage Loans;
fifth, to the holders of the Class A Certificates in an amount equal
to any Basis Risk Shortfall;
sixth, to the holders of the Class A Certificates, in an amount equal
to any Unpaid Basis Risk Shortfall;
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seventh, to the Insurer, any amounts remaining due to the Insurer
under the terms of the Insurance Agreement (other than those attributable
to Excess Bankruptcy Losses, Excess Fraud Losses, Excess Special Hazard
Losses and Excess Extraordinary Losses); and
eighth, to the holders of the Residual Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Stated Principal Balance of the Mortgage Loans immediately following
such Distribution Date over (b) the Certificate Principal Balance of the Class A
Certificates as of such date (after taking into account the payment of the
amounts described in clauses (b)(i) through (iv) of the definition of Principal
Distribution Amount, on such Distribution Date) is the 'Subordinated Amount' as
of such Distribution Date. 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, reduced by all amounts allocable to principal that have been
distributed to Certificateholders with respect to such Mortgage Loan on or
before such date, and as further reduced to the extent that any Realized Loss
thereon has been allocated to one or more classes of Certificates on or before
the date of determination. Any amount of Net Monthly Excess Cashflow actually
applied as an accelerated payment of principal to the extent the Required
Subordinated Amount exceeds the Subordinated Amount as of such Distribution Date
is a 'Subordination Increase Amount.' The required level of the Subordinated
Amount with respect to a Distribution Date is the 'Required Subordinated Amount'
with respect to such Distribution Date. With respect to any Distribution Date,
the Required Subordinated Amount will be an amount equal to 3.00% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the Cut-off Date,
subject to increase ('step up') or, after three years, decrease ('step down'),
upon the occurrence of certain loss and delinquency triggers with respect to the
Mortgage Pool set forth in the Agreement.
In the event that the Required Subordinated Amount is required to step up
on any Distribution Date, the Agreement provides that all Net Monthly Excess
Cashflow remaining after the distributions described in clauses first through
second above will be distributed in respect of the Subordination Increase Amount
until the Subordinated Amount equals the Required Subordinated Amount.
In the event that the Required Subordinated Amount is permitted to step
down on any Distribution Date, the Agreement provides that a portion of the
principal which would otherwise be distributed to the holders of the Class A
Certificates on such Distribution Date shall be distributed to the holders of
the Residual Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Class A Certificates, relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
With respect to any Distribution Date, the excess, if any, of (a) the
Subordinated Amount over (b) the Required Subordinated Amount is the 'Excess
Subordinated Amount'. If, on any Distribution Date, the Excess Subordinated
Amount is, or, after taking into account all other distributions to be made on
such Distribution Date would be, greater than zero (i.e., the Subordinated
Amount is or would be greater than the Required Subordinated Amount), then any
amounts relating to principal which would otherwise be distributed to the
holders of the Class A Certificates on such Distribution Date shall instead be
distributed to the holders of the Residual Certificates in an amount equal to
the lesser of (x) the Excess Subordinated Amount and (y) the amount available
for distribution specified in clauses (b)(i) through (iii) of the definition of
Principal Distribution Amount, on such Distribution Date; such amount being the
'Subordination Reduction Amount' for such Distribution Date.
FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Class A Certificates, the Insurer
will deliver the Policy to the Trustee for the benefit of the holders of the
Class A Certificates. Under the Policy, the Insurer will irrevocably and
unconditionally guarantee payment on each Distribution Date to the Trustee for
the benefit of the holders of the Class A Certificates the full and complete
payment of Insured Payments with respect to the Class A Certificates, calculated
in accordance with the original terms of the Class A
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Certificates when issued and without regard to any amendment or modification of
the Class A Certificates or the Agreement except amendments or modifications to
which the Insurer has given its prior written consent. 'Insured Payments' shall
mean with respect to the Class A Certificates as of any Distribution Date (i)
any shortfall in amounts available in the Distribution Account (as defined in
the Agreement) to pay the Interest Distribution Amount for the related Interest
Accrual Period, (ii) the principal portion of any Realized Losses allocated to
the Class A Certificates and, without duplication, the excess, if any, of (a)
the aggregate Certificate Principal Balance of the Class A Certificates then
outstanding over (b) the aggregate principal balances of the Mortgage Loans then
outstanding and (iii) without duplication of the amount specified in clause
(ii), the aggregate Certificate Principal Balance of the Class A Certificates to
the extent unpaid on the final Distribution Date or earlier termination of the
Trust Fund pursuant to the terms of the Agreement. The Policy does not cover
Relief Act Shortfalls, Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Insurer will pay such
amount out of funds of the Insurer on the later of (a) the date when due to be
paid pursuant to the Order referred to below or (b) the first to occur of (i)
the fourth Business Day following Receipt by the Insurer from the Trustee 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 Class A Certificates is
required to return principal or interest distributed with respect to a Class A
Certificate during the Term of the Policy because such distributions were
avoidable preferences under applicable bankruptcy law (the 'Order'), (B) a
certificate of such holder of Class A Certificates that the Order has been
entered and is not subject to any stay, and (C) an assignment duly executed and
delivered by such holder of Class A Certificates, in such form as is reasonably
required by the Insurer and provided to such holder of Class A Certificates by
the Insurer, irrevocably assigning to the Insurer all rights and claims of such
holder of Class A Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of Receipt by the Insurer from the Trustee of the items referred to in clauses
(A), (B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Insurer shall have Received written notice from the Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Trustee or holder of Class A Certificates directly (unless a holder of Class A
Certificates has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Trustee for distribution to such
Certificateholder upon proof of such payment reasonably satisfactory to the
Insurer). In connection with the foregoing, the Insurer shall have the rights
provided pursuant to the Agreement.
Payment of claims under the Policy will be made by the Insurer following
Receipt by the Insurer of the appropriate notice for payment on the later to
occur of (a) 12:00 noon, New York City time, on the second Business Day
following Receipt of such notice for payment, and (b) 12:00 noon, New York City
time, on the relevant Distribution Date.
The terms 'Receipt' and 'Received,' with respect to the Policy, means
actual delivery to the Insurer and to its fiscal agent appointed by the Insurer
at its option, if any, prior to 12:00 p.m., New York City time, on a Business
Day; delivery either on a day that is not a Business Day or after 12:00 p.m.,
New York City time, shall be deemed to be Receipt on the next succeeding
Business Day. If any notice or certificate given under the Policy by the Trustee
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 Trustee and the Trustee may submit an amended
notice.
Under the Policy, 'Business Day' means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate trust office
of the Trustee is located, are authorized or obligated by law or executive order
to be closed. The Insurer's obligations under the Policy to make Insured
Payments shall be discharged to the extent funds are transferred to the Trustee
as provided in the Policy, whether or not such funds are properly applied by the
Trustee.
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'Term of the Policy' means the period from and including the date of
issuance of the Policy to and including the date on which the Certificate
Principal Balances of the Class A Certificates are zero, plus such additional
period, to the extent specified in the Policy, during which any payment on the
Class A 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 Class A
Certificates to receive payments of principal and interest, as applicable, with
respect to distributions on the Class A Certificates to the extent of any
payment by the Insurer under the Policy. To the extent the Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee), to
the holders of the Class A Certificates, the Insurer will be subrogated to the
rights of the holders of the Class A Certificates, as applicable, with respect
to such Insured Payment and shall be deemed to the extent of the payments so
made to be a registered holder of Class A Certificates for purposes of payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Insurer, and will rank equally with any other unsecured and
unsubordinated obligations of the Insurer except for certain obligations in
respect to tax and other payments to which preference is or may become afforded
by statute. The terms of the Policy cannot be modified, altered or affected by
any other agreement or instrument, or by the merger, consolidation or
dissolution of the Depositor. The Policy by its terms may not be cancelled or
revoked prior to distribution in full of all Guaranteed Distributions (as
defined therein). The Policy is governed by the laws of the State of New York.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Insurer agrees under
the Policy not to assert, and waives, for the benefit of each holder of Class A
Certificates, all its rights (whether by counterclaim, setoff or otherwise) and
defenses (including, without limitation, the defense of fraud), whether acquired
by subrogation, assignment or otherwise, to the extent that such rights and
defenses may be available to the Insurer to avoid payment of its obligations
under the Policy in accordance with the express provisions of the Policy.
Pursuant to the terms of the Agreement, unless an Insurer Default exists,
the Insurer will be entitled to exercise certain rights of the holders of the
Class A Certificates, without the consent of such Certificateholders, and the
holders of the Class A Certificates may exercise such rights only with the prior
written consent of the Insurer. See 'Pooling and Servicing Agreement -- Voting
Rights' and ' -- Certain Matters Regarding the Insurer' herein.
The Depositor, the Mortgage Loan Seller and the Insurer will enter into an
Insurance and Indemnity Agreement (the 'Insurance Agreement') pursuant to which
the Depositor and the Mortgage Loan Seller will agree to reimburse, with
interest, the Insurer for amounts paid pursuant to claims under the Policy. The
Depositor and the Mortgage Loan Seller will further agree to pay the Insurer all
reasonable charges and expenses which the Insurer may pay or incur relative to
any amounts paid under the Policy or otherwise in connection with the
transaction and to indemnify the Insurer against certain liabilities. Except to
the extent provided therein, amounts owing under the Insurance Agreement will be
payable solely from the Trust Fund. An event of default by the Mortgage Loan
Seller under the Insurance Agreement will constitute an Event of Default by the
Mortgage Loan Seller (in its capacity as Master Servicer) under the Agreement
and allow the Insurer, among other things, to direct the Trustee to terminate
the Master Servicer. An 'event of default' by the Mortgage Loan Seller under the
Insurance Agreement includes (i) the Mortgage Loan Seller's failure to pay when
due any amount owed under the Insurance Agreement or certain other documents,
(ii) the Mortgage Loan Seller's untruth or incorrectness in any material respect
of any representation or warranty of the Mortgage Loan Seller in the Insurance
Agreement, the Agreement (in its capacity as Master Servicer) or certain other
documents, (iii) the Mortgage Loan Seller's failure to perform or to observe any
covenant or agreement in the Insurance Agreement, the Agreement (in its capacity
as Master Servicer) and certain other documents, (iv) the Mortgage Loan Seller's
failure to pay its debts in general or the occurrence of certain events of
insolvency or bankruptcy with respect to the Mortgage Loan Seller, and (v) the
occurrence of an Event of Default under the Agreement (in its capacity as Master
Servicer) or certain other documents.
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MONTHLY ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced before each Distribution Date its own funds,
or funds in the Certificate Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of all payments of interest, net of the Servicing Fee Rate, that were
due during the related Collection Period on the Mortgage Loans and that were
delinquent on the related Determination Date, plus certain amounts representing
assumed payments not covered by any current net income on the Mortgaged
Properties acquired by foreclosure or deed in lieu of foreclosure (any such
advance, a 'Monthly Advance').
Monthly Advances are required to be made only to the extent they are deemed
by the Master Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such Monthly
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 Monthly 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 Monthly Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Monthly Advance was made. In addition, any Monthly
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 such advance, the Trustee will be obligated to make any such advance, to the
extent required in the Agreement.
ALLOCATION OF LOSSES; SUBORDINATION
The Policy will cover all Realized Losses allocated to the Class A
Certificates. Notwithstanding the foregoing, if payments are not made as
required under the Policy, Realized Losses will be allocable to the Class A
Certificates.
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the Certificateholders by deed-in-lieu of foreclosure) or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer for Monthly Advances and expenses, including attorneys' fees) towards
interest and principal owing on the Mortgage Loan. Such amount of loss realized
and any Special Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary
Losses are referred to herein as 'Realized Losses.'
Any Realized Losses on the Mortgage Loans other than Excess Special Hazard
Losses, Excess Bankruptcy Losses, Excess Fraud Losses and Excess Extraordinary
Losses on the Mortgage Loans will be allocated on any Distribution Date, (i)
first to the Net Monthly Excess Cashflow, (ii) second, to the Residual
Certificates until the Certificate Principal Balance thereof has been reduced to
zero and (iii) third, to the Class A Certificates.
Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess Fraud Losses
and Excess Extraordinary Losses will be allocated on any Distribution Date among
the Class A Certificates and the Residual Certificates on a pro rata basis.
Any allocation of a Realized Loss to a Certificate will be made by reducing
the Certificate Principal Balance thereof by the amount so allocated as of the
Distribution Date in the month following the calendar month in which such
Realized Loss was incurred.
The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Special Hazard Losses on the Mortgage
Loans (the 'Special Hazard Amount') shall initially be equal to approximately
$1,644,279. As of any date of determination following the Cut-off
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Date, the Special Hazard Amount shall equal the amount set forth in the
preceding sentence less the sum of (A) any amounts allocated solely to the
Residual Certificates in respect of related Special Hazard Losses and (B) the
related Adjustment Amount. The Adjustment Amounts will be as calculated pursuant
to the terms of the Agreement.
The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Fraud Losses on the Mortgage Loans (the
'Fraud Loss Amount') shall initially be equal to approximately $2,433,893. As of
any date of determination after the Cut-off Date, the Fraud Loss Amount shall
equal (X) prior to the first anniversary of the Cut-off Date an amount equal to
3.0% of the aggregate principal balance of all of the related Mortgage Loans as
of the Cut-off Date minus the aggregate amounts allocated to the Residual
Certificates in respect of related Fraud Losses on such Mortgage Loans up to
such date of determination, (Y) from the first to the second anniversary of the
Cut-off Date, an amount equal to (1) the lesser of (a) the related Fraud Loss
Amount as of the most recent anniversary of the Cut-off Date and (b) 2.0% of the
aggregate principal balance of all of the related Mortgage Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate amounts allocated
to the Residual Certificates in respect of Fraud Losses on such Mortgage Loans
since the most recent anniversary of the Cut-off Date up to such date of
determination and (Z) from the second to the fifth anniversary of the Cut-off
Date, an amount equal to (1) the lesser of (a) the related Fraud Loss Amount as
of the most recent anniversary of the Cut-off Date, and (b) 1.00% of the
aggregate principal balance of all of the related Mortgage Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate amounts allocated
to the Residual Certificates in respect of Fraud Losses on such Mortgage Loans
since the most recent anniversary of the Cut-off Date up to such date of
determination. On and after the fifth anniversary of the Cut-off Date, the each
Fraud Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Bankruptcy Losses on the Mortgage Loans
(the 'Bankruptcy Amount') will initially be equal to approximately $100,000. As
of any date of determination, the Bankruptcy Amount shall equal the approximate
amount set forth in the preceding sentence less the sum of any amounts allocated
to the Residual Certificates in respect of Bankruptcy Losses on the Mortgage
Loans up to such date of determination.
The aggregate amount of Realized Losses which may be allocated to the
Residual Certificates in connection with Extraordinary Losses on the Mortgage
Loans (the 'Extraordinary Loss Amount') will initially be equal to approximately
$81,130. As of any date of determination, the Extraordinary Loss Amount shall
equal the approximate amount set forth in the preceding sentence less the sum of
any amounts allocated to the Residual Certificates in respect of Extraordinary
Losses on the related Mortgage Loans up to such date of determination.
A 'Special Hazard Loss' is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgaged
Property (except as a result of the exclusions described below), which is not
insured against under the standard hazard insurance policy or blanket policy
insuring against hazard losses which the Master Servicer is required to cause to
be maintained on each Mortgage Loan. See 'Description of Primary Insurance
Policies -- Primary Hazard Insurance Policies' in the Prospectus.
Special Hazard Losses will not include any loss (an 'Extraordinary Loss')
resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet or dry
rot; inherent vice or latent defect; animals, birds, vermin, insects;
(ii) smog, smoke, vapor, liquid or dust discharge from agricultural or
industrial operations; pollution; contamination;
(iii) settling, subsidence, cracking, shrinkage, bulging or expansion
of pavements, foundations, walls, floors, roofs or ceilings;
(iv) errors in design, faulty workmanship or faulty materials, unless
the collapse of the property or a part thereof ensues and then only for the
ensuing loss;
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(v) nuclear or chemical reaction or nuclear radiation or radioactive
or chemical contamination, all whether controlled or uncontrolled and
whether such loss be direct or indirect, proximate or remote or be in whole
or in part caused by, contributed to or aggravated by a peril insured
against;
(vi) hostile or warlike action in time of peace or war, including
action in hindering, combating or defending against an actual, impending or
expected attack by any government or sovereign power, de jure or de facto,
or by any authority maintaining or using military, naval or air forces, or
by military, naval or air forces, or by an agent of any such government,
power, authority or forces;
(vii) any weapon of war employing atomic fission or radioactive forces
whether in time of peace or war; and
(viii) insurrection, rebellion, revolution, civil war, usurped power
or action taken by governmental authority in hindering, combating or
defending against such an occurrence, seizure or destruction under
quarantine or customs regulations, confiscation by order of any government
or public authority, or risks of contraband or illegal transactions or
trade.
'Excess Special Hazard Losses' are Special Hazard Losses in excess of the
Special Hazard Amount.
'Excess Extraordinary Losses' are Extraordinary Losses in excess of the
Extraordinary Loss Amount.
A 'Fraud Loss' is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan.
'Excess Fraud Losses' are Fraud Losses in excess of the Fraud Loss Amount.
A 'Bankruptcy Loss' is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a 'Deficient Valuation' is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
'Debt Service Reduction' is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
'Excess Bankruptcy Losses' are Bankruptcy Losses in excess of the
Bankruptcy Amount.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement, a form of which
is filed as an exhibit to the Registration Statement. A Current Report on Form
8-K relating to the Certificates containing a copy of the Agreement as executed
will be filed by the Depositor with the Securities and Exchange Commission
within fifteen days of initial issuance of the Certificates. The Trust Fund
created under the Agreement will consist of (i) all of the Depositor's right,
title and interest in the Mortgage Loans, the related Mortgage Notes, Mortgages
and other related documents, (ii) all payments on or collections in respect of
the Mortgage Loans received after the Cut-off Date, together with any proceeds
thereof, (iii) any Mortgaged Properties acquired on behalf of Certificateholders
by foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required to
be maintained pursuant to the Agreement and (v) the rights of the Depositor
under the Mortgage Loan Purchase Agreement between the Depositor and the
Mortgage Loan Seller. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the Trust Fund, the
terms and conditions of the Agreement and the Class A Certificates. The Class A
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee, located in New York, New York. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Agreement. Requests should be
addressed to the Secretary, Merrill Lynch Mortgage Investors, Inc., .
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ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trustee with respect to each Mortgage
Loan (i) the mortgage note endorsed without recourse to the Trustee to reflect
the transfer of the Mortgage Loan, (ii) the original mortgage with evidence of
recording indicated thereon and (iii) an assignment of the mortgage in
recordable form to the Trustee, reflecting the transfer of the Mortgage Loan.
Such assignments of Mortgage Loans are required to be recorded by or on behalf
of the Depositor in the appropriate offices for real property records. The
Trustee, concurrently with the Depositor's assignment, will deliver the
Certificates to the Depositor in exchange for the Mortgage Loans.
THE MORTGAGE LOAN SELLER AND MASTER SERVICER
The information set forth in the following paragraphs has been provided by
the Mortgage Loan Seller. None of the Depositor, the Trustee or any of their
affiliates have made or will make any representation as to the accuracy or
completeness of such information.
The following table sets forth, for the BCD Mortgage Loan servicing
portfolio derived from the Mortgage Loan Seller as of December 31, 1995, and as
of June 30, 1996, certain information relating to the delinquency experience
(including loans in foreclosure of BCD Mortgage Loans included in the Mortgage
Loan Seller's servicing portfolio (which portfolio does not include mortgage
loans that are subserviced by others) at the end of the indicated periods. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until it is one month past due on a contractual basis.
DELINQUENCIES AND FORECLOSURES
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF JUNE 30, 1996
--------------------------------------- ---------------------------------------
PERCENT PERCENT PERCENT PERCENT
BY NO. BY BY NO. BY BY NO. BY BY NO. BY
OF DOLLAR OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ -------- ------- ------ ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio................ 1,694 $194,717 N/A N/A 1,530 $169,151 N/A N/A
Period of Delinquency:
30-59 Days................ 35 3,201 2.07% 1.64% 51 $ 7,008 3.33 4.14
60-89 Days................ 18 2,157 1.06 1.11 32 $ 3,483 2.90% 2.06 %
90 days or more........... 37 5,676 2.18 2.91 97 $ 11,790 6.34% 6.97 %
------ -------- ------- ------ ------ -------- ------- ------
Total Delinquent Loans......... 90 $ 11,034 5.31% 5.67% 180 $ 22,281 11.76% 13.17 %
------ -------- ------- ------ ------ -------- ------- ------
------ -------- ------- ------ ------ -------- ------- ------
Loans in Foreclosure(1)........ 29 $ 4,292 1.71% 2.20% 93 $ 10,274 6.08% 6.07 %
</TABLE>
- ------------
(1) Loans in foreclosure are also included under the heading 'Total Delinquent
Loans'
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio derived from the Mortgage Loan Seller as of December 31, 1995, and as
of June 30, 1996, certain information relating to the foreclosure experience of
BCD Mortgage Loans included in the Mortgage Loan Seller's servicing portfolio
(which portfolio does not include mortgage loans that are subserviced by others)
at the end of the indicated periods.
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REAL ESTATE OWNED
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF JUNE 30, 1996
------------------------ ------------------------
BY NO. OF BY DOLLAR BY NO. OF BY DOLLAR
LOANS AMOUNT LOANS AMOUNT
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Portfolio....................................... 1,694 $ 194,717 1,530 $ 169,151
Foreclosed Loans(1)................................... 0 $ 0 11 $ 1,111
Foreclosed Ratio(2)................................... 0.00% 0.00% 0.72% 0.66%
</TABLE>
- ------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by the Mortgage Loan Seller.
(2) The Foreclosure Ratio is equal to the aggregate principle 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.
------------------------
LOAN GAIN/(LOSS) EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
BY DOLLAR BY DOLLAR
AMOUNT AMOUNT
----------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total Portfolio(1)........................................................ $ 194,717 $169,151
Net Gain/(Losses)(2)...................................................... $ 0 $ 36
Net Gains/(Losses) as a Percentage of Total Portfolio..................... 0% 0.02%
</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 Gains/(Losses)'are actual gains (losses) incurred on liquidated
properties and shortfall payoffs for each respective period. Gains (losses)
are calculated after repayment of all principal, prepayment penalties,
foreclosure costs and accrued interest to the date of liquidation. However,
premiums paid to purchase the loans and other direct origination costs are
not included in the calculation.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Mortgage Loan Seller's mortgage portfolio set forth in the foregoing tables.
The statistics shown above represent the delinquency experience for the Mortgage
Loan Seller's mortgage servicing portfolio 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 Loan Seller commenced receiving applications for
mortgage loans under its BCD Mortgage Loan program in December 1994.
Accordingly, the Mortgage Loan Seller (whether as an originator or acquirer of
mortgage loans or as a servicer of such mortgage loans) does not have
significant historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of Mortgage Loans. There can be no assurance
that the Mortgage Loans comprising the Mortgage Pool will perform consistent
with the delinquency or foreclosure experience described herein. 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 the Mortgage Loan Seller.
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>
<PAGE>
THE TRUSTEE
Bankers Trust Company, a New York banking corporation, will act as Trustee
for the Certificates pursuant to the Agreement. The Trustee's offices for
notices under the Agreement are located at 3 Park Plaza, 16th Floor, Irvine,
California 92614 and its telephone number is (714) 253-7575.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the Trustee
Fee Rate of .015% per annum on the Stated Principal Balance of each Mortgage
Loan. The Agreement will provide that the Trustee and any director, officer,
employee or agent of the Trustee will be indemnified by the Trust Fund and will
be held harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trustee's performance in accordance with the
provisions of the Agreement) incurred by the Trustee arising out of or in
connection with the acceptance or administration of its obligations and duties
under the Agreement, other than any loss, liability or expense (i) resulting
from the Master Servicer's actions or omissions in connection with the Agreement
and the Mortgage Loans, (ii) that constitutes a specific liability of Trustee
under the Agreement or (iii) incurred by reason of willful misfeasance, bad
faith or negligence in the performance of the Trustee's duties under the
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan
on the Stated Principal Balance of each Mortgage Loan. As additional servicing
compensation, the Master Servicer is entitled to retain all assumption fees,
prepayment penalties and late payment charges, to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Certificate Account and any escrow accounts. The Master Servicer is
obligated to offset any Prepayment Interest Shortfall on any Distribution Date
(payments made by the Master Servicer in satisfaction of such obligation,
'Compensating Interest') to the extent of its aggregate servicing compensation
for such Distribution Date described in the preceding two sentences. The Master
Servicer is obligated to pay certain insurance premiums and certain ongoing
expenses associated with the Mortgage Pool and incurred by the Master Servicer
in connection with its responsibilities under the Agreement and is entitled to
reimbursement therefor as provided in the Agreement. See 'Description of the
Certificates -- Retained Interest; Servicing Compensation and Payment of
Expenses' in the Prospectus for information regarding expenses payable by the
Master Servicer and 'Certain Federal Income Tax Consequences' herein regarding
certain taxes payable by the Master Servicer.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the voting
rights (the 'Voting Rights') allocated among holders of the Class A Certificates
and of the Residual Certificates shall be the fraction, expressed as a
percentage, the numerator of which is the aggregate Certificate Principal
Balance of all the Certificates of such class then outstanding and the
denominator of which is the aggregate Stated Principal Balance of the Mortgage
Loans then outstanding. The Voting Rights allocated to each class of
Certificates shall be allocated among all holders of each such class in
proportion to the outstanding Certificate Principal Balance of such
Certificates. Unless an Insurer Default exists, the Insurer will be entitled to
exercise certain voting and other rights of the holders of the Class A
Certificates. See ' -- Certain Matters Regarding the Insurer' herein.
CERTAIN MATTERS REGARDING THE INSURER
Under the Agreement, on each Distribution Date, the Trustee is required to
pay to the Insurer a premium with respect to the Policy equal to 1/12 times
0.18% per annum times the Certificate Principal Balance of the Class A
Certificates.
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<PAGE>
<PAGE>
Pursuant to the terms of the Agreement, unless there exists a continuance
of any failure by the Insurer to make a required payment under the Policy or
there exists a proceeding in bankruptcy by or against the Insurer (either such
condition, an 'Insurer Default'), the Insurer will be entitled to exercise,
among others, the following rights of the holders of the Class A Certificates,
without the consent of such holders, and the holders of the Class A Certificates
may exercise such rights only with the prior written consent of the Insurer: (i)
the right to direct the Trustee to terminate the rights and obligations of the
Master Servicer under the Agreement in the event of a default by the Master
Servicer; (ii) the right to consent to or direct any waivers of defaults by the
Master Servicer; (iii) the right to remove the Trustee pursuant to the
Agreement; and (iv) the right to institute proceedings against the Master
Servicer in the event of default by the Master Servicer and refusal of the
Trustee to institute such proceedings. In addition, unless an Insurer Default
exists, the Insurer will have the right to direct all matters relating to any
proceeding seeking the avoidance as a preferential transfer under applicable
bankruptcy, insolvency, receivership or similar law of any distribution made
with respect to the Class A Certificates, and, unless an Insurer Default exists,
the Insurer's consent will be required prior to, among other things, (i) the
removal of the Trustee, (ii) the appointment of any successor Trustee or Master
Servicer or (iii) any amendment to the Agreement.
TERMINATION
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in 'Description of the
Certificates -- Termination' in the Prospectus. The majority holder of the
Residual Certificates (or if such holder does not exercise such option, the
Master Servicer or the Insurer) will have the right to purchase all remaining
Mortgage Loans and any properties acquired in respect thereof and thereby effect
early retirement of the Certificates on any Distribution Date following the
Collection Period during which the aggregate principal balance of the Mortgage
Loans and such properties at the time of purchase is 10% or less of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. In the
event the majority holder of the Residual Certificates or the Master Servicer or
the Insurer exercises such option, the purchase price payable in connection
therewith generally will be equal to par plus accrued interest for each Mortgage
Loan at the related Mortgage Rate to but not including the first day of the
month in which such repurchase price is distributed, together with any amounts
due to the Master Servicer for servicing compensation at the related Servicing
Fee Rate. In the event the holder of the Residual Certificates or the Master
Servicer or the Insurer exercises such option, the portion of the purchase price
allocable to the Class A Certificates will be, to the extent of available funds
(including funds paid under the Policy), (i) 100% of the then outstanding
Certificate Principal Balance thereof, plus (ii) one month's interest on the
then outstanding Certificate Principal Balance thereof at the then applicable
Pass-Through Rate, plus (iii) any previously accrued but unpaid interest
thereon. No such termination shall be permitted without the prior written
consent of the Insurer if it would result in a draw under the Policy. In no
event will the trust created by the Agreement continue beyond the expiration of
21 years from the death of the survivor of the persons named in the Agreement.
See 'Description of the Certificates -- Termination' in the Prospectus.
THE INSURER
The following information has been supplied by Financial Security Assurance
Inc. (the 'Insurer') for inclusion in this Prospectus Supplement. No
representation is made by the Depositor or the Underwriter as to the accuracy
and completeness of such information.
GENERAL
The Insurer is a monoline insurance company incorporated in 1984 under the
laws of the State of New York. The Insurer is licensed to engage in financial
guaranty insurance business in all 50 states, the District of Columbia and
Puerto Rico.
The Insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial
S-59
<PAGE>
<PAGE>
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer. The
Insurer and its subsidiaries principally insure asset-backed, collateralized and
municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. The Insurer insures both newly-issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy the Insurer's underwriting criteria.
The Insurer is a wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd. ('Holdings'), a New York Stock Exchange Listed company. Major
shareholders of Holdings include Fund American Enterprises Holdings, Inc., U S
West Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Insurer or any claim
under any insurance policy issued by the Insurer or to make any additional
contribution to the capital of the Insurer.
The principal executive offices of the Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Insurer or any of its
domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, the Insurer reinsures a portion of its liabilities
under certain of its financial guaranty insurance policies with other reinsurers
under various quota share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by the Insurer as a risk management device and to
comply with certain statutory and rating agency requirements; it does not alter
or limit the Insurer's obligations under any financial guaranty insurance
policy.
RATINGS OF CLAIMS-PAYING ABILITY
The Insurer's claims-paying ability is rated 'Aaa' by Moody's and 'AAA' by
each of Standard & Poor's, Nippon Investors Service, Inc. and Standard & Poor's
(Australia) Pty. Ltd. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies. See
'Ratings.'
CAPITALIZATION
The following table sets forth the capitalization of the Insurer and its
wholly owned subsidiaries on the basis of generally accepted accounting
principles as of June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)........................... $ 351,180
-------------
Shareholder's Equity:
Common Stock........................................................................ 15,000
Additional Paid-In Capital.......................................................... 681,470
Unrealized Loss on Investments (net of deferred income taxes)....................... (5,685)
Accumulated Earnings................................................................ 94,287
-------------
Total Shareholder's Equity............................................................... 785,072
-------------
Total Deferred Premium Revenue and Shareholder's Equity.................................. $ 1,136,252
-------------
-------------
</TABLE>
S-60
<PAGE>
<PAGE>
For further information concerning the Insurer, see the Consolidated
Financial Statements of the Insurer and its subsidiaries, and the notes thereto,
incorporated by reference herein. Copies of the statutory quarterly and annual
financial statements filed with the State of New York Insurance Department by
the Insurer are available upon request to the State of New York Insurance
Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under 'Incorporation of Certain
Information by Reference' in the Prospectus, the consolidated financial
statements of the Insurer and subsidiaries included in or as exhibits to the
following documents which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this Prospectus
Supplement, which together with the Prospectus, forms a part of the Depositor's
Registration Statement: (a) the Annual Report on Form 10-K for the year ended
December 31, 1995 and (b) the Quarterly Report on Form 10-Q for the period ended
June 30, 1996.
All financial statements of the Insurer and subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Class
A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be directed to the Secretary, Merrill
Lynch Mortgage Investors, Inc.
.
INSURANCE REGULATION
The Insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the Insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the Insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ('single risks')
and the volume of transactions ('aggregate risks') that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC under the Code.
For federal income tax purposes, (i) the Residual Certificates will be the
sole class of 'residual interests' in the REMIC and (ii) the Class A
Certificates will be the 'regular interests' in the REMIC and will be treated as
debt instruments of the REMIC. See 'Certain Federal Income Tax
Consequences -- REMIC -- Classification of REMICs' in the Prospectus.
For federal income tax reporting purposes, the Class A 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 100% of the
Prepayment Vector, in the case of the Fixed
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<PAGE>
Rate Mortgage Loans, or at a constant rate of 20% CPR, in the case of the
Adjustable Rate Mortgage Loans. No representation is made that the Mortgage
Loans will prepay at either such rate or at any other rate. See 'Certain Federal
Income Tax Consequences -- REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount' in the Prospectus.
The Internal Revenue Service (the 'IRS') has issued regulations (the 'OID
Regulations') under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on an adjustable rate. Because of
the uncertainty concerning the application of Section 1272(a)(6) of the Code to
such Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Class A Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Class A Certificates are advised to
consult their tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue discount
with respect to the Class A Certificates if such Certificates are required to be
treated as issued with original issue discount generally would be to report all
income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value of
the applicable Index will remain constant for purposes of determining the
original yield to maturity of, and projecting future distributions on such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the Prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable Index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
'Certain Federal Income Tax Consequences -- REMICs -- Taxation of Owners of
REMIC Regular Certificates -- Original Issue Discount' in the Prospectus.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of the Class A Certificates should consult their own
tax advisors regarding the possibility of making an election to amortize such
premium. See 'Certain Federal Income Tax Consequences -- REMICs -- Taxation of
Owners of REMIC Regular Certificates -- Premium' in the Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and 'real estate assets' under Section 856(c)(5)(A)
of the Code, generally in the same proportion that the assets in the Trust Fund
would be so treated. In addition, interest on the Class A 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 Class A
Certificates are treated as 'real estate assets' under Section 856(c)(5)(A) of
the Code. The Class A Certificates (other than the Residual Certificates) also
will be treated as 'qualified mortgages' under Section 860G(a)(3) of the Code.
See 'Certain Federal Income Tax Consequences -- REMICs -- Characterization of
Investments in REMIC Certificates' in the Prospectus.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Section 593(d) of the Code to any taxable year beginning after December 31,
1995.
It is not anticipated that the Trust Fund will engage in any transactions
that would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust Fund, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to
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<PAGE>
REMIC compliance under the Agreement, (ii) the Master Servicer, if the Master
Servicer has breached its obligations with respect to REMIC compliance under the
Agreement, and (iii) otherwise by the Trust Fund, with a resulting reduction in
amounts otherwise distributable to holders of the Class A Certificates. See
'Description of the Certificates -- General' and 'Certain 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 or the Master Servicer. See 'Certain
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 Class A Certificates, see 'Certain Federal Income Tax
Consequences -- REMICs' in the Prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Class A Certificates will be applied by the Depositor to the purchase price of
the Mortgage Loans and expenses connected with pooling the Mortgage Loans and
issuing the Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the Terms Agreement between the Depositor and Merrill Lynch, Pierce, Fenner
& Smith Incorporated (the 'Underwriter'), the Class A Certificates will be
purchased from the Depositor by the Underwriter, an affiliate of the Depositor,
upon issuance.
The Underwriter has advised the Depositor that it proposes initially to
offer the Class A Certificates to the public at the price set forth on the cover
page hereof, and to certain dealers at such price less a concession not in
excess of 0.20% of the Certificate denominations for the Class A Certificates.
The Underwriter may allow and such dealers may reallow a concession not in
excess of 0.125% of the Certificate denominations to certain other dealers.
After the initial public offering, the public offering price and such
concessions may be changed. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Class A Certificates may be
deemed to be underwriters and any commissions received by them and any profit on
the resale of the Class A Certificates positioned by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933.
All of the Mortgage Loans evidenced by the Certificates will have been
acquired by the Depositor in a privately negotiated transaction with the
Mortgage Loan Seller.
The Underwriter has represented and agreed that (i) it has not offered or
sold and, prior to the expiration of the period of six months from the Closing
Date, will not offer or sell any Class A Certificates to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulation 1995; (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Class A
Certificates in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the Class A
Certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995,
or is a person to whom such document may otherwise lawfully be issued or passed
on.
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LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be passed
upon for the Mortgage Loan Seller and the Depositor by Thacher Proffitt & Wood,
New York, New York and for the Underwriter by Brown & Wood LLP, New York, New
York.
EXPERTS
The consolidated balance sheets of Financial Security Assurance, Inc. and
Subsidiaries as of December 31, 1995 and 1994 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, 1995 incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., 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 Class A
Certificates be rated 'AAA' by Standard & Poor's Ratings Services, a Division of
the McGraw-Hill Companies, Inc. ('Standard & Poor's') and 'Aaa' by Moody's
Investors Service, Inc. ('Moody's').
The ratings of Moody's and Standard & Poor's assigned to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which such prepayments will differ from that
originally anticipated. The ratings assigned by Moody's and Standard & Poor's on
the Class A Certificates are based in part upon the Insurer's claims paying
ability. Any change in the ratings of the Insurer by Standard & Poor's and
Moody's may result in a change in the ratings on the Class A Certificates. The
ratings do not address the possibility that Certificateholders might suffer a
lower than anticipated yield.
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
Class A 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 Class A Certificates.
The Depositor has not requested that any rating agency rate the Class A
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Class A Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Class A Certificates as stated above.
LEGAL INVESTMENT
The Class A Certificates will constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') so
long as they are rated in at least the second highest rating category by the
Rating Agency, and, as such, are legal investments for certain entities to the
extent provided in SMMEA. SMMEA provided the states could override its
provisions on legal investment and restrict or condition investment in mortgage
related securities by taking statutory action on or prior to October 3, 1991.
Certain states have enacted legislation which overrides the preemption
provisions of SMMEA.
The Depositor makes no representations as to the proper characterization of
the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all institutions
whose investment
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<PAGE>
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Class A
Certificates constitute a legal investment under SMMEA or is subject to
investment, capital or other restrictions. See 'Legal Investment' in the
Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, that is subject to the Employee
Retirement arrangements are invested, that is subject to the Employee Retirement
Income Security Act of 1974, as amended ('ERISA'), or Section 4975 of the Code
should carefully review with its legal advisors whether the purchase or holding
of Class A Certificates could give rise to a transaction that is prohibited or
is not otherwise permitted either under ERISA or Section 4975 of the Code.
The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption 90-29 (the 'Exemption'), on May 24, 1990 to the
Underwriter, which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 501(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
mortgage pass-through certificates underwritten by an Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section 'ERISA Considerations,'
the term 'Underwriter' shall include (a) Merrill Lynch, Pierce, Fenner & Smith
Incorporated, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Merrill
Lynch, Pierce, Fenner & Smith Incorporated and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by certain employee benefit plans
subject to Section 4975 of the Code (each, a 'Plan'), must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests evidenced
by the Class A Certificates must not be subordinate to the rights and interests
evidenced by the other certificates of the same trust. Third, the Class A
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Corporation,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch
Investors Service, Inc. Fourth, the Trustee cannot be an affiliate of any member
of the 'Restricted Group,' which consists of any Underwriter, the Depositor, the
Master Servicer, each sub-servicer and any mortgagor with respect to the
Mortgage Loans constituting more than 5% of the aggregate unamortized principal
balance of the Mortgage Loans as of the date of initial issuance of the Class A
Certificates. Fifth, the sum of all payments made to and retained by the
Underwriter must represent not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the Underwriter must represent not more than reasonable compensation
for underwriting the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Mortgage Loans to
the Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Agreement and reimbursement of
such person's reasonable compensation for such person's services under the
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, the investing Plan must be an accredited investor as defined
in Rule 501 (a)(1) of Regulation D of the Securities and Exchange Commission
under the Securities Act of 1933, as amended.
Because the Class A Certificates are not subordinate to any other class of
Certificates, the second general condition set forth above is satisfied with
respect to such Certificates. It is a condition of the
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issuance of the Class A Certificates that they be rated not lower than 'AAA' by
Standard & Poor's Ratings Services ('Standard & Poor's') and 'Aaa' by Moody's
Investors Service, Inc. ('Moody's'). A fiduciary of a Plan contemplating
purchasing a Class A Certificate in the secondary market must make its own
determination that at the time of such acquisition, the Class A Certificates
continue to satisfy the third general condition set forth above. The Depositor
expects that the fourth general condition set forth above will be satisfied with
respect to the Class A Certificates. A fiduciary of a Plan contemplating
purchasing a Class A Certificate must make its own determination that the first,
third, fifth and sixth general conditions set forth above will be satisfied with
respect to such Class A Certificate.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute 'certificates' for purposes
of the Exemption and (b) that the specific and general conditions of the
Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any prohibited transaction exemptions, in
particular, Prohibited Transaction Class Exemption 83-1. See 'ERISA
Considerations' in the Prospectus.
Any Plan fiduciary considering whether to purchase a Class A Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment.
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PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
- ----------------------------------------------------------
The Asset Backed Certificates (the 'Certificates') and Asset Backed Notes
(the 'Notes' and, together with the Certificates, the 'Securities') offered
hereby and by Supplements to this Prospectus (the 'Offered Securities') will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the 'Trust Fund') consisting of one or
more segregated pools of various types of single family and/or multifamily
mortgage loans (or certain balances thereof) (collectively, the 'Mortgage
Loans'), unsecured home improvement installment sales contracts and installment
loans ('Unsecured Home Improvement Loans'), mortgage participations ('Mortgage
Participations'), mortgage pass-through certificates or mortgage-backed
securities evidencing interests therein or secured thereby (the 'MBS'),
manufactured housing installment sale contracts or installment loan agreements
('Contracts'), certain direct obligations of the United States, agencies thereof
or agencies created thereby (the 'Government Securities'), certain small
business loans described herein or a combination of Mortgage Loans, Unsecured
Home Improvement Loans, Mortgage Participations, MBS, Contracts, Government
Securities and/or such small business loans (with respect to any series,
collectively, 'Assets'). The Mortgage Loans, Mortgage Participations and MBS are
collectively referred to herein as the 'Mortgage Assets.' If a series of
Securities includes Notes, such Notes will be issued and secured pursuant to an
indenture and will represent indebtedness of the Trust Fund. If so specified in
the related Prospectus Supplement, the Trust Fund for a series of Securities may
include letters of credit, insurance policies, guarantees, reserve funds or
other types of credit support, or any combination thereof (with respect to any
series, collectively, 'Credit Support'), and currency or interest rate exchange
agreements and other financial assets, or any combination thereof (with respect
to any series, collectively, 'Cash Flow Agreements'). See 'Description of the
Trust Funds,' 'Description of the Securities' and 'Description of Credit
Support.'
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------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Offered Securities of any
series unless accompanied by the Prospectus Supplement for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
'Plan of Distribution' herein and in the related Prospectus Supplement.
------------------------
MERRILL LYNCH & CO.
The date of this Prospectus is September 20, 1996.
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Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series; (vi)
provide for distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of two
or more components thereof with one or more of the characteristics described in
this paragraph, to the extent of available funds, in each case as described in
the related Prospectus Supplement. Any such classes may include classes of
Offered Securities. See 'Description of the Securities.'
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of any series will be made only from the assets of the related Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
any Master Servicer, any Sub-Servicer or any of their respective affiliates,
except to the limited extent described herein and in the related Prospectus
Supplement. Neither the Securities nor any assets in the related Trust Fund will
be guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the timing
of receipt of such payments as described under the caption 'Yield
Considerations' herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
'real estate mortgage investment conduit' for federal income tax purposes. See
also 'Certain Federal Income Tax Consequences' herein.
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION 'SPECIAL CONSIDERATIONS' HEREIN AND SUCH INFORMATION AS MAY BE SET FORTH
UNDER THE CAPTION 'RISK FACTORS' IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE
PURCHASING ANY OFFERED SECURITY.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Securities of each series will, among other things, set forth
with respect to such Securities, as appropriate: (i) a description of the class
or classes of Securities, the payment provisions with respect to each such class
and the Pass-Through Rate or interest rate or method of determining the
Pass-Through Rate or interest rate with respect to each such class; (ii) the
aggregate principal amount and distribution dates relating to such series and,
if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of
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the assets included therein, including the Assets and any Credit Support and
Cash Flow Agreements (with respect to the Securities of any series, the 'Trust
Assets'); (iv) the circumstances, if any, under which the Trust Fund may be
subject to early termination; (v) additional information with respect to the
method of distribution of such Certificates; (vi) whether one or more REMIC
elections will be made and designation of the regular interests and residual
interests; (vii) the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Securities; (viii) information as to
any Master Servicer, any Sub-Servicer and the Trustee, as applicable; (ix)
information as to the nature and extent of subordination with respect to any
class of Securities that is subordinate in right of payment to any other class;
and (x) whether such Securities will be initially issued in definitive or book-
entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Securities. This Prospectus and the Prospectus Supplement relating to each
series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission 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, Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus and any Prospectus Supplement hereto at any time does not imply that
information herein is correct as of any time subsequent to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or unless
otherwise provided in the related Prospectus Supplement, such reports will be
sent on behalf of the related Trust Fund to Cede & Co. ('Cede'), as nominee of
The Depository Trust Company ('DTC') and registered holder of the Offered
Securities, pursuant to the applicable Agreement. Such reports may be available
to holders of interests in the Securities (the 'Securityholders') upon request
to their respective DTC participants. See 'Description of the Securities --
Reports to Securityholders' and 'Description of the Agreements -- Evidence as to
Compliance.' The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), the rules and
regulations of the Commission thereunder, as interpreted by the staff of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Securities evidencing interests therein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more classes of Offered Securities, a
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copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of such
classes of such Offered Securities, other than the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests to the Depositor should be directed in writing to Merrill
Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial
Center -- North Tower, 10th Floor, New York, New York 10281-1310, Attention:
Secretary, or by telephone at (212) 449-0357. The Depositor has determined that
its financial statements are not material to the offering of any Offered
Securities.
TABLE OF CONTENTS
<TABLE>
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Prospectus Supplement.......................... 2
Available Information.......................... 3
Incorporation of Certain Information by
Reference.................................... 3
Summary of Prospectus.......................... 5
Special Considerations......................... 13
Description of the Trust Funds................. 19
Use of Proceeds................................ 25
Yield Considerations........................... 26
The Depositor.................................. 30
Description of the Securities.................. 31
Description of the Agreements.................. 38
Description of Credit Support.................. 58
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Certain Legal Aspects of Mortgage Loans........ 61
Certain Legal Aspects of the Contracts......... 71
Certain Federal Income Tax Consequences........ 75
State Tax Considerations....................... 105
ERISA Considerations........................... 105
Legal Investment............................... 108
Plan of Distribution........................... 110
Legal Matters.................................. 111
Financial Information.......................... 111
Rating......................................... 111
Index of Principal Definitions................. 112
</TABLE>
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
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Title of Certificates..................... Asset-Backed Certificates (the 'Certificates') and Asset Backed Notes
(the 'Notes' and, together with the Certificates, the
'Securities'), issuable in series.
Depositor................................. Merrill Lynch Mortgage Investors, Inc. (the 'Depositor'), a wholly
owned subsidiary of Merrill Lynch Mortgage Capital, Inc., which is
a wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc. The
Depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Neither Merrill Lynch & Co., Inc. nor any of its
affiliates, including the Depositor and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, will insure or guarantee the
Certificates or the Mortgage Loans or be otherwise obligated in
respect thereof.
Master Servicer........................... The master servicer or master servicers (each, a 'Master Servicer'),
if any, or a servicer for substantially all the Mortgage Loans for
each series of Securities, which servicer or master servicer(s) may
be affiliates of the Depositor, will be named in the related
Prospectus Supplement. See 'Description of the Agreements' and
' -- Collection and Other Servicing Procedures.'
Trustee................................... The trustee (the 'Trustee') for each series of Certificates will be
named in the related Prospectus Supplement. See 'Description of the
Agreements -- The Trustee.'
The Trust Assets.......................... Each series of Certificates will represent in the aggregate the
entire beneficial ownership interest in a Trust Fund. If a series
of Securities includes Notes, such Notes will represent
indebtedness of the Trust Fund and will be secured by a security
interest in the Assets of the Trust Fund. A Trust Fund will consist
primarily of any of the following assets (the Mortgage Assets,
Unsecured Home Improvement Loans, Contracts, Government Securities
and the small business loans described herein may be referred to
collectively or individually as 'Assets'):
(a) Mortgage Assets.................. The Mortgage Assets with respect to a series of Certificates will
consist of a pool of single family and/or multifamily loans (or
certain balances thereof) (collectively, the 'Mortgage Loans'),
mortgage participations ('Mortgage Participations') or mortgage
pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by Mortgage Loans (collectively,
the 'MBS') or a combination of Mortgage Loans, Mortgage
Participations and/or MBS. The Mortgage Loans will not be
guaranteed or insured by the Depositor or any of its affiliates or,
unless otherwise provided in the Prospectus Supplement, by any
governmental agency or instrumentality or other person. The
Mortgage Loans will be secured by first and/or junior liens on (i)
one- to four-family residential properties or security interests in
shares issued by cooperative housing corporations ('Single Family
Properties') and/or (ii) residential properties consisting of five
or more dwelling units, including mixed residential and commercial
structures ('Multifamily Properties'). The Mortgage Loans may in-
clude (i) closed-end and/or revolving home equity loans or certain
balances thereof ('Home Equity Loans') and/or (ii)
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home improvement installment sales contracts and installment loan
agreements ('Home Improvement Contracts'). The Mortgaged Properties
may be located in any one of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico. The Prospectus
Supplement will indicate additional jurisdictions (which may be
outside the United States), if any, in which the Mortgaged
Properties may be located. Unless otherwise provided in the related
Prospectus Supplement, all Mortgage Loans will have individual
principal balances at origination of not less than $25,000 and
original terms to maturity of not more than 40 years. All Mortgage
Loans will have been originated by persons other than the
Depositor, and all Mortgage Assets will have been purchased, either
directly or indirectly, by the Depositor on or before the date of
initial issuance of the related series of Certificates. The related
Prospectus Supplement will indicate if any such persons are
affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of interest thereon at an
interest rate (a 'Mortgage Rate') that is fixed over its term or
that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time at the mortgagor's
election, in each case as described in the related Prospectus
Supplement. Adjustable Mortgage Rates on the Mortgage Loans in a
Trust Fund may be based on one or more indices. Each Mortgage Loan
may provide for scheduled payments to maturity, payments that
adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events, and may
provide for negative amortization or accelerated amortization, in
each case as described in the related Prospectus Supplement. Each
Mortgage Loan may be fully amortizing or require a balloon payment
due on its stated maturity date, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment or require payment of a premium or a
yield maintenance penalty in connection with a prepayment, in each
case as described in the related Prospectus Supplement. The
Mortgage Loans may provide for payments of principal, interest or
both, on due dates that occur monthly, quarterly, semi-annually or
at such other interval as is specified in the related Prospectus
Supplement. See 'Description of the Trust Funds -- Assets.'
(b) Unsecured Home Improvement
Loans.............................. The Assets with respect to a series of Securities may consist of or
include home improvement installment sales contracts or installment
loans that are unsecured ('Unsecured Home Improvement Loans'). The
Unsecured Home Improvement Loans may have any of the features
described under '(a) Mortgage Assets' above, except that they will
not be secured by a lien on or other security interest in any
property. Unless the context otherwise requires, references in this
Prospectus to Mortgage Loans, Whole Loans and related terms shall
include Unsecured Home Improvement Loans and related terms to the
extent relevant (e.g., a reference to a Mortgaged Property or
hazard insurance does not relate to an Unsecured Home Improvement
Contract).
(c) Contracts........................ The Contracts with respect to a series of Securities will consist of
manufactured housing installment sale contracts and installment
loan agreements secured by a security interest in a new or used
manufactured home (each, a 'Manufactured Home'), and, to the
extent, if any, indicated in the related Prospectus Supplement, by
real property. The Contracts will
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not be insured or guaranteed by the Depositor or any of its
affiliates or, unless otherwise specified in the related Pro-
spectus Supplement, by any governmental agency or instrumentality
or any other person. The Manufactured Homes may be located in any
of the fifty states or any other jurisdiction specified in the
related Prospectus Supplement. All Contracts will have been
originated by persons other than the Depositor, and all Contracts
will have been purchased, either directly or indirectly, by the
Depositor on or before the date of initial issuance of the related
series of Certificates. The related Prospectus Supplement will
indicate if any such persons are affiliates of the Depositor. Each
Contract may provide for an annual percentage rate thereon (a
'Contract Rate') that is fixed over its term or that adjusts as
described in the related Prospectus Supplement. The manner of
determining scheduled payments due on the Contract will be
described in the Prospectus Supplement. The Prospectus Supplement
will describe the minimum principal balance of the Contracts at
origination and the maximum original term to maturity of the
Contracts.
(d) Government Securities............ If so provided in the related Prospectus Supplement, the Trust Fund
may include, in addition to Mortgage Assets and/or Contracts,
certain direct obligations of the United States, agencies thereof
or agencies created thereby which provide for payment of interest
and/or principal (collectively, 'Government Securities').
(e) SBA Loans and SBA 504 Loans...... If so provided in the related Prospectus Supplement, the Trust Fund
may include (i) the unguaranteed portion of loans ('SBA Loans')
originated under the general business loan program (the 'Section
7(a) Program') of the U.S. Small Business Association (the 'SBA')
created pursuant to Section 7(a) of the Small Business Act of 1953
(the 'SBA Act') and/or (ii) loans ('SBA 504 Loans') originated
under the SBA's 504 program (the 'SBA 504 Loan Program'). The loans
originated by the originators under the SBA 504 Loan Program are
not guaranteed by the SBA. Unless the context otherwise requires,
references in this Prospectus to Mortgage Loans and related terms
shall include SBA Loans and SBA 504 Loans and related terms to the
extent relevant (e.g., a reference to a Mortgaged Property or
hazard insurance does not relate to a SBA Loan or a SBA 504 Loan).
(f) Collection Accounts.............. Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person
or persons designated in the related Prospectus Supplement will, to
the extent described herein and in such Prospectus Supplement,
deposit all payments and collections received or advanced with
respect to the Assets and other assets in the Trust Fund. Such an
account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in
each case as described in the related Prospectus Supplement. See
'Description of the Agreements -- Collection Account and Related
Accounts.'
(g) Credit Support................... If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the
related Trust Fund may be provided to one or more classes of
Securities of the related series in the form of subordination of
one or more other classes of Securities of such series, which other
classes may include one or more
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classes of Offered Securities, or by one or more other types of
credit support, such as a letter of credit, insurance policy,
guarantee, reserve fund or another type of credit support, or a
combination thereof (any such coverage with respect to the
Securities of any series, 'Credit Support'). The amount and types
of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to
each type of Credit Support, if any, will be described in the
Prospectus Supplement for a series of Securities. The Prospectus
Supplement for any series of Securities evidencing an interest in a
Trust Fund that includes MBS will describe any similar forms of
credit support that are provided by or with respect to, or are
included as part of the trust fund evidenced by or providing
security for, such MBS. See 'Special Considerations -- Credit
Support Limitations' and 'Description of Credit Support.'
(h) Cash Flow Agreements............. If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which
moneys held in the funds and accounts established for the related
series will be invested at a specified rate. The Trust Fund may
also include certain other agreements, such as interest rate
exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to
reduce the effects of interest rate or currency exchange rate
fluctuations on the Assets or on one or more classes of Securities.
(Currency exchange agreements might be included in the Trust Fund
if some or all of the Mortgage Assets (such as Mortgage Loans
secured by Mortgaged Properties located outside the United States)
were denominated in a non-United States currency.) The principal
terms of any such guaranteed investment contract or other agreement
(any such agreement, a 'Cash Flow Agreement'), including, without
limitation, provisions relating to the timing, manner and amount of
payments thereunder and provisions relating to the termination
thereof, will be described in the Prospectus Supplement for the
related series. In addition, the related Prospectus Supplement will
provide certain information with respect to the obligor under any
such Cash Flow Agreement. The Prospectus Supplement for any series
of Securities evidencing an interest in a Trust Fund that includes
MBS will describe any cash flow agreements that are included as
part of the trust fund evidenced by or providing security for such
MBS. See 'Description of the Trust Funds -- Cash Flow Agreements.'
(i) Pre-Funding Account.............. To the extent provided in a Prospectus Supplement, the Depositor will
be obligated (subject only to the availability thereof) to sell at
a predetermined price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to the
satisfaction of certain conditions described in the applicable
Agreement), additional Assets (the 'Subsequent Assets') from time
to time (as frequently as daily) within the number of months
specified in the Prospectus Supplement after the issuance of such
series of Securities having an aggregate principal balance approxi-
mately equal to the amount on deposit in the Pre-Funding Account
(the 'Pre-Funded Amount') for such series on date of such issuance.
Description of Securities................. Each series of Certificates will evidence an interest in the related
Trust Fund and will be issued pursuant to a pooling and servicing
agreement or a trust agreement. Pooling and servicing agreements
and trust agreements are referred to herein as the 'Agreements.' If
a series of Securities includes Notes, such Notes will represent
indebtedness of the related
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Trust Fund and will be secured by a security interest in the Assets
of the Trust Fund (or a specified group thereof) pursuant to an
indenture.
Each series of Securities will include one or more classes. Each
class of Securities (other than certain Stripped Interest
Securities, as defined below) will have a stated principal amount
(a 'Security Balance') and except for certain Stripped Principal
Securities, as defined below, will accrue interest thereon based on
a fixed, variable or adjustable interest rate (in the case of
Certificates, a 'Pass-Through Rate'). The related Prospectus
Supplement will specify the Security Balance, if any, and the
Pass-Through Rate or interest rate for each class of Securities or,
in the case of a variable or adjustable Pass-Through Rate or
interest rate, the method for determining the Pass-Through Rate or
interest rate.
Distributions on Securities............... Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon
based on fixed, variable or adjustable rates; (ii) be senior
(collectively, 'Senior Securities') or subordinate (collectively,
'Subordinate Securities') to one or more other classes of
Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions
(collectively, 'Stripped Principal Securities'); (iv) be entitled
to interest distributions, with disproportionately low, nominal or
no principal distributions (collectively, 'Stripped Interest
Securities'); (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities
of such series (collectively, 'Accrual Securities'); (vi) provide
for distributions of principal as described in the related
Prospectus Supplement; and/or (vii) provide for distributions based
on a combination of two or more components thereof with one or more
of the characteristics described in this paragraph, including a
Stripped Principal Security component and a Stripped Interest
Security component, to the extent of available funds, in each case
as described in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections
from a designated portion of the Mortgage Loans in the related
Mortgage Pool or Contracts in the related Contract Pool (each such
portion of Mortgage Loans, a 'Mortgage Loan Group' and each such
portion of the Contracts, a 'Contract Group'). See 'Description of
the Securities -- General.' Any such classes may include classes of
Offered Securities. With respect to Securities with two or more
components, references herein to Security Balance, notional amount
and Pass-Through Rate or interest rate refer to the principal
balance, if any, notional amount, if any, and the Pass-Through Rate
or interest rate, if any, for any such component.
The Securities will not be guaranteed or insured by the Depositor or
any of its affiliates, by any governmental agency or
instrumentality or by any other person, unless otherwise provided
in the related Prospectus Supplement. See 'Special
Considerations -- Limited Assets' and 'Description of the
Securities.'
(a) Interest......................... Interest on each class of Offered Securities (other than Stripped
Principal Securities and certain classes of Stripped Interest
Securities) of each series will accrue at the applica-
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ble Pass-Through Rate or interest rate on the outstanding Security
Balance thereof and will be distributed to Securityholders as
provided in the related Prospectus Supplement. The specified date
on which distributions are to be made is a 'Distribution Date.'
Distributions with respect to interest on Stripped Interest
Securities may be made on each Distribution Date on the basis of a
notional amount as described in the related Prospectus Supplement.
Distributions of interest with respect to one or more classes of
Securities may be reduced to the extent of certain delinquencies,
losses, prepayment interest shortfalls, and other contingencies
described herein and in the related Prospectus Supplement. See
'Special Considerations -- Average Life of Securities; Prepayments;
Yields,' 'Yield Considerations' and 'Description of the
Securities -- Distributions of Interest on the Securities.'
(b) Principal........................ The Securities of each series initially will have an aggregate
Security Balance no greater than the outstanding principal balance
of the Assets as of, unless the related Prospectus Supplement
provides otherwise, the close of business on the first day of the
month of formation of the related Trust Fund (the 'Cut-off Date'),
after application of scheduled payments due on or before such date,
whether or not received. The Security Balance of a Security
outstanding from time to time represents the maximum amount that
the holder thereof is then entitled to receive in respect of
principal from future cash flow on the assets in the related Trust
Fund. Unless otherwise provided in the related Prospectus
Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled
thereto until the Security Balances of such Securities have been
reduced to zero. Unless otherwise specified in the related
Prospectus Supplement, distributions of principal of any class of
Securities will be made on a pro rata basis among all of the
Securities of such class or by random selection, as described in
the related Prospectus Supplement or otherwise established by the
related Trustee. Stripped Interest Securities with no Security
Balance will not receive distributions in respect of principal. See
'Description of the Securities -- Distributions of Principal of the
Securities.'
Advances.................................. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be obligated as part of its servicing
responsibilities to make certain advances that in its good faith
judgment it deems recoverable with respect to delinquent scheduled
payments on the Whole Loans or Contracts in such Trust Fund.
Neither the Depositor nor any of its affiliates will have any
responsibility to make such advances. Advances made by a Master
Servicer are reimbursable generally from subsequent recoveries in
respect of such Whole Loans or Contracts and otherwise to the
extent described herein and in the related Prospectus Supplement.
If and to the extent provided in the Prospectus Supplement for any
series, the Master Servicer will be entitled to receive interest on
its outstanding advances, payable from amounts in the related Trust
Fund. The Prospectus Supplement for any series of Securities
evidencing an interest in a Trust Fund that includes MBS will
describe any corresponding advancing obligation of any person in
connection with such MBS. See 'Description of the
Securities -- Advances in Respect of Delinquencies.'
Termination............................... If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the Assets in the related Trust
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Fund by the party specified therein, under the circumstances and in
the manner set forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of the Security Balance
of a specified class or classes of Securities to a specified
percentage or amount or on and after a date specified in such
Prospectus Supplement, the party specified therein will solicit
bids for the purchase of all of the Assets of the Trust Fund, or of
a sufficient portion of such Assets to retire such class or
classes, or purchase such Assets at a price set forth in the
related Prospectus Supplement. In addition, if so provided in the
related Prospectus Supplement, certain classes of Securities may be
purchased subject to similar conditions. See 'Description of the
Securities -- Termination.'
Registration of Securities................ If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities will initially be represented by
one or more certificates or notes, as applicable, registered in the
name of Cede & Co., as the nominee of DTC. No person acquiring an
interest in Offered Securities so registered will be entitled to
receive a definitive certificate or note, as applicable,
representing such person's interest except in the event that
definitive certificates or notes, as applicable, are issued under
the limited circumstances described herein. See 'Special Considera-
tions -- Book-Entry Registration' and 'Description of the
Securities -- Book-Entry Registration and Definitive Securities.'
Tax Status of the Certificates............ The Certificates of each series will constitute, as specified in the
related Prospectus Supplement, either (i) 'regular interests'
('REMIC Regular Certificates') and 'residual interests' ('REMIC
Residual Certificates') in a Trust Fund treated as a real estate
mortgage investment conduit ('REMIC') under Sections 860A through
860G of the Internal Revenue Code of 1986, as amended (the 'Code'),
(ii) interests ('Grantor Trust Certificates') in a Trust Fund
treated as a grantor trust under applicable provisions of the Code
or (iii) an interest in a Trust Fund treated as a partnership for
purposes of federal and state income tax.
(a) REMIC............................ REMIC Regular Certificates generally will be treated as debt
obligations of the applicable REMIC for federal income tax
purposes. Certain REMIC Regular Certificates may be issued with
original issue discount for federal income tax purposes. See
'Certain Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
The Offered Certificates evidencing an interest in a Trust Fund
containing Mortgage Loans (not including Unsecured Home Improvement
Loans, SBA Loans and SBA 504 Loans) will be treated as (i)
'qualifying real property loans' within the meaning of Section
593(d)(1) of the Internal Revenue Code of 1986, as amended (the
'Code'), (ii) assets described in section 7701(a)(19)(C) of the
Code and (iii) 'real estate assets' within the meaning of Section
856(c)(5)(A) of the Code, in each case to the extent described
herein and in the Prospectus. See 'Certain Federal Income Tax
Consequences' herein and in the related Prospectus Supplement.
(b) Grantor Trust.................... If the related Prospectus Supplement specifies that the related Trust
Fund will be a grantor trust, the Trust Fund will be classified as
a grantor trust and not as an association taxable as a corporation
for federal income tax purposes, and therefore holders of
Certificates will be treated as the
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owners of undivided pro rata interests in the Assets held by the
Trust Fund.
(c) Partnership...................... If so specified in a Prospectus Supplement, the related Trust Fund
will be treated as a partnership for purposes of federal and state
income tax, and each Certificateholder, by the acceptance of a
Certificate of such Trust Fund, will agree to treat the Trust Fund
as a partnership in which such Certificateholder is a partner for
federal income and state tax purposes. Alternative
characterizations of such Trust Fund and such Certificates are
possible, but would not result in materially adverse tax
consequences to Certificateholders.
Investors are advised to consult their tax advisors and to review
'Certain Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
Tax Status of Notes....................... Unless otherwise specified in the related Prospectus Supplement,
Notes of a series will be treated as indebtedness for federal and
state income tax purposes and the Noteholder, in accepting the
Note, will agree to treat such Note as indebtedness. See 'Certain
Federal Income Tax Consequences' herein and in such Prospectus
Supplement.
Investors are advised to consult their tax advisors and to review
'Certain Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
ERISA Considerations...................... A fiduciary of an employee benefit plan and certain other retirement
plans and arrangements, including individual retirement accounts,
annuities, Keogh plans, and collective investment funds and
separate accounts in which such plans, accounts, annuities or
arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or
Section 4975 of the Code should carefully review with its legal
advisors whether the purchase or holding of Offered Securities
could give rise to a transaction that is prohibited or is not
otherwise permissible either under ERISA or Section 4975 of the
Code. See 'ERISA Considerations' herein and in the related Prospec-
tus Supplement. Certain classes of Securities may not be
transferred unless the Trustee and the Depositor are furnished with
a letter of representations or an opinion of counsel to the effect
that such transfer will not result in a violation of the prohibited
transaction provisions of ERISA and the Code and will not subject
the Trustee, the Depositor or the Master Servicer to additional
obligations. See 'Description of the Securities -- General' and
'ERISA Considerations.'
Legal Investment.......................... Each Prospectus Supplement will specify which class or classes of
Offered Securities, if any, will constitute 'mortgage-related
securities' for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA'). Institutions whose investment
activities are subject to legal investment laws and regulations or
review by certain regulatory authorities may be subject to
restrictions on investment in certain classes of the Offered
Securities. See 'Legal Investment' herein.
Rating.................................... At the date of issuance, as to each series, each class of Offered
Securities will be rated not lower than investment grade by one or
more nationally recognized statistical rating agencies (each, a
'Rating Agency'). See 'Rating' herein.
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SPECIAL CONSIDERATIONS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors.
LIMITED LIQUIDITY
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the Offered
Securities, but has no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding.
LIMITED ASSETS
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only obligations
with respect to the Securities or the Assets will be the obligations (if any) of
the Warranting Party (as defined herein) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans or
Contracts, the Master Servicer's and any Sub-Servicer's servicing obligations
under the related Agreement (including the limited obligation to make certain
advances in the event of delinquencies on the Mortgage Loans or Contracts, but
only to the extent deemed recoverable) and, if and to the extent expressly
described in the related Prospectus Supplement, certain limited obligations of
the Master Servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible ARM Loan (as defined herein)
upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Mortgage Assets or Contracts
may have been made and/or assigned in connection with transfers of such Mortgage
Assets or Contracts prior to the Closing Date, the rights of the Trustee and the
Securityholders with respect to such representations or warranties will be
limited to their rights as an assignee thereof. Unless otherwise specified in
the related Prospectus Supplement, none of the Depositor, the Master Servicer or
any affiliate thereof will have any obligation with respect to representations
or warranties made by any other entity. Unless otherwise specified in the
related Prospectus Supplement, neither the Securities nor the underlying Assets
will be guaranteed or insured by any governmental agency or instrumentality, or
by the Depositor, the Master Servicer, any Sub-Servicer or any of their
affiliates. Proceeds of the assets included in the related Trust Fund for each
series of Securities (including the Assets and any form of credit enhancement)
will be the sole source of payments on the Securities, and there will be no
recourse to the Depositor or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a series
of Securities will not have any claim against or security interest in the Trust
Funds for any other series. If the related Trust Fund is insufficient to make
payments on such Securities, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement. In the event of such withdrawal, such amounts will not be
available for future payment of principal of or interest on the Securities. If
so provided in the Prospectus Supplement for a series of Securities consisting
of one or more classes of Subordinate Securities, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Securities, and, thereafter, by the remaining
classes of Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
AVERAGE LIFE OF SECURITIES; PREPAYMENTS; YIELDS
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may
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affect the average life of each class of related Securities. The rate of
principal payments on pools of mortgage loans or manufactured housing contracts
varies between pools and from time to time is influenced by a variety of
economic, demographic, geographic, social, tax, legal and other factors. There
can be no assurance as to the rate of prepayment on the Assets in any Trust Fund
or that the rate of payments will conform to any model described herein or in
any Prospectus Supplement. If prevailing interest rates fall significantly below
the applicable mortgage interest rates, principal prepayments are likely to be
higher than if prevailing rates remain at or above the rates borne by the
Mortgage Loans underlying or comprising the Mortgage Assets in any Trust Fund.
As a result, the actual maturity of any class of Securities evidencing an
interest in a Trust Fund containing Mortgage Assets could occur significantly
earlier than expected. The relationship of prevailing interest rates and
prepayment rates on Contracts will be discussed in the related Prospectus
Supplement. In addition, certain prepayments may result in the collection of
less interest than would otherwise be the case in the month of prepayment.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the amount of
principal, as with certain classes of Stripped Interest Securities, a holder
might, in some prepayment scenarios, fail to recoup its original investment. A
series of Securities may include one or more classes of Securities, including
classes of Offered Securities, that provide for distribution of principal
thereof from amounts attributable to interest accrued but not currently
distributable on one or more classes of Accrual Securities and, as a result,
yields on such Securities will be sensitive to (a) the provisions of such
Accrual Securities relating to the timing of distributions of interest thereon
and (b) if such Accrual Securities accrue interest at a variable or adjustable
Pass-Through Rate or interest rate, changes in such rate. See 'Yield
Considerations' herein and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, 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. In addition, in the case
of Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of deferred interest, the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are
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not covered by the applicable Credit Support, if any, holders of Securities of
the series evidencing interests in the related 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. Certain of the types of
Mortgage Loans may involve additional uncertainties not present in traditional
types of loans. For example, certain of the Mortgage Loans provide for
escalating or variable payments by the mortgagor under the Mortgage Loan, as to
which the mortgagor is generally qualified on the basis of the initial payment
amount. In some instances the mortgagors' income may not be sufficient to enable
them to continue to make their loan payments as such payments increase and thus
the likelihood of default will increase. In addition to the foregoing, 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. The Mortgage Loans underlying certain series of
Certificates may be concentrated in these regions, and such concentration may
present risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Furthermore, the rate of
default on Mortgage Loans that are refinance or limited documentation mortgage
loans, and on Mortgage Loans with high Loan-to-Value Ratios, may be higher than
for other types of Mortgage Loans. Additionally, a decline in the value of the
Mortgaged Properties will increase the risk of loss particularly with respect to
any related junior Mortgage Loans. See ' -- Junior Mortgage Loans.'
Mortgage Loans secured by 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 secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property
typically is directly related to the net operating income derived from such
property. If the net operating income of the property is reduced (for example,
if rental or occupancy rates decline or real estate tax rates or other operating
expenses increase), the borrower's ability to repay the loan may be impaired. In
addition, the concentration of default, foreclosure and loss risk for a pool of
Mortgage Loans secured by Multifamily Properties may be greater than for a pool
of Mortgage Loans secured by Single Family Properties of comparable aggregate
unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans.
If applicable, certain legal aspects of the Mortgage Loans for a series of
Certificates may be described in the related Prospectus Supplement. See also
'Certain Legal Aspects of Mortgage Loans' herein.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the 'Balloon Mortgage Loans') as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Mortgaged Property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related Mortgaged Property, the financial
condition of the mortgagor, the value of the Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for single
family or multifamily real properties generally.
JUNIOR MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the 'senior lien'),
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 lien
to satisfy fully both the senior lien
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and the Mortgage Loan. In the event that a holder of the senior lien forecloses
on a Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the senior lien. The claims of the holder of
the senior lien will be satisfied in full out of proceeds of the liquidation of
the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage Loan.
If the Master Servicer were to foreclose on any Mortgage Loan, it would do so
subject to any related senior lien. In order for the debt related to the
Mortgage Loan to be paid in full at such sale, a bidder at the foreclosure sale
of such Mortgage Loan would have to bid an amount sufficient to pay off all sums
due under the Mortgage Loan and the senior lien or purchase the Mortgaged
Property subject to the senior lien. In the event that such proceeds from a
foreclosure or similar sale of the related Mortgaged Property were insufficient
to satisfy both loans in the aggregate, the Trust Fund, as the holder of the
junior lien, and, accordingly, holders of the Certificates, would bear the risk
of delay in distributions while a deficiency judgment against the borrower was
being obtained and the risk of loss if the deficiency judgment were 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 mortgage.
CONTRACTS AND MANUFACTURED HOMES IN GENERAL
An investment in Certificates evidencing an interest in a Trust Fund
containing Contracts may be affected by, among other things, a downturn in
national, regional or local economic conditions. The geographic location of the
Manufactured Homes in any Contract Pool at origination of the related Contract
will be set forth in the related Prospectus Supplement under 'The Contract
Pool'. Regional and local economic conditions are often volatile and,
historically, regional and local economic conditions, as well as national
economic conditions, have affected the delinquency, loan loss and repossession
experience of manufactured housing installment sales contracts and/or
installment loan contracts (hereinafter generally referred to as 'contracts' or
'manufactured housing contracts'). Moreover, regardless of its location,
manufactured housing generally depreciates in value. Thus, such Securityholders
should expect that, as a general matter, the market value of any Manufactured
Home will be lower than the outstanding principal balance of the related
Contract. Sufficiently high delinquencies and liquidation losses on the
Contracts in a Contract Pool will have the effect of reducing, and could
eliminate, the protection against loss afforded by any credit enhancement
supporting any class of the related Securities. If such protection is eliminated
with respect to a class of Securities, the holders of such Securities will bear
all risk of loss on the related Contracts and will have to rely on the value of
the related Manufactured Homes for recovery of the outstanding principal of and
unpaid interest on any defaulted Contracts in the related Contract Pool. See
'Description of Credit Support.'
SECURITY INTERESTS AND CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The Asset Seller in respect of a Contract will represent that such Contract
is secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, the Master Servicer will not amend any certificates of title to change
the lienholder specified therein from the Asset Seller to the Trustee and will
not deliver any certificate of title to the Trustee or note thereon the
Trustee's interest. Consequently, in some states, in the absence of such an
amendment, the assignment to the Trustee of the security interest in the
Manufactured Home may not be effective or such security interest may not be
perfected and, in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller or a trustee in bankruptcy of
the Asset Seller. In addition, numerous federal and state consumer protection
laws
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impose requirements on lending under installment sales contracts and installment
loan agreements such as the Contracts, and the failure by the lender or seller
of goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees may
be subject to set-off as result of such lender's or seller's noncompliance.
These laws would apply to the Trustee as assignee of the Contracts. The Asset
Seller of the Contracts to the Depositor will warrant that each Contract
complies with all requirements of law and will make certain warranties relating
to the validity, subsistence, perfection and priority of the security interest
in each Manufactured Home securing a Contract. A breach of any such warranty
that materially adversely affects any Contract would create an obligation of the
Asset Seller to repurchase such Contract unless such breach is cured. If the
Credit Support is exhausted and recovery of amounts due on the Contracts is
dependent on repossession and resale of Manufactured Homes securing Contracts
that are in default, certain other factors may limit the ability of the
Certificateholders to realize upon the Manufactured Home or may limit the amount
realized to less than the amount due. See 'Certain Legal Aspects of the
Contracts.'
UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Trust Fund will not be secured by an interest in the related real
estate or any other property, and the Trust Fund will be a general unsecured
creditor as to such obligations. In the event of a default under an Unsecured
Home Improvement Loan, the related Trust Fund will have recourse only against
the borrower's assets generally, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating to
a borrower on an Unsecured Home Improvement Loan, the obligations of the
borrower under such Unsecured Home Improvement Loan may be discharged in their
entirety, notwithstanding the fact that the portion of such borrower's assets
made available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or contract originator or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a 'Covered
Trust'), holders of Securities evidencing an interest in a Covered Trust will be
subject to the risk that such Credit Support will be exhausted by the claims of
other Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the
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loss experience on the related Assets will not exceed such assumed levels. See
' -- Limited Nature of Ratings,' 'Description of the Securities' and
'Description of Credit Support.'
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Securities by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable Credit Support provider, or as
a result of losses on the related Assets substantially in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Depositor, the Master Servicer or any of their affiliates will have
any obligation to replace or supplement any Credit Support or to take any other
action to maintain any rating of any series of Securities.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES; EFFECT OF LOSSES ON THE ASSETS
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Master Servicer (to the extent that the Master Servicer is
paid its servicing fee, including any unpaid servicing fees with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed advances
and unreimbursed liquidation expenses) and the Senior Securityholders to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Securities. See 'Description of the Securities -- General' and
' -- Allocation of Losses and Shortfalls.'
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in 'Certain Federal Income Tax
Consequences -- REMICs.' Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. Individual holders of REMIC
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, REMIC Residual Certificates are
subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the REMIC Residual Certificate may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Certificate should be
aware that recently issued temporary regulations provide restrictions on the
ability to mark-to-market certain 'negative value' REMIC residual interests. See
'Certain Federal Income Tax Consequences -- REMICs.'
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates registered
in the name of Cede, the nominee for DTC, and will not be registered in the
names of the Securityholders or their nominees. Because of this, unless and
until Definitive Securities are issued, Securityholders will not be recognized
by the Trustee as 'Securityholders' (as that term is to be used in the related
Agreement). Hence, until such time,
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Securityholders will be able to exercise the rights of Securityholders only
indirectly through DTC and its participating organizations. See 'Description of
the Securities -- Book-Entry Registration and Definitive Securities.'
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the 'Assets') will include (i)
single family and/or multifamily mortgage loans (or certain balances thereof)
(collectively, the 'Mortgage Loans'), including without limitation, Home Equity
Loans and Home Improvement Contracts, (ii) unsecured home improvement loans
('Unsecured Home Improvement Loans'), (iii) mortgage participations ('Mortgage
Participations'), (iv) pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by one or more Mortgage Loans or
other similar participations, certificates or securities ('MBS'), (v)
manufactured housing installment sale contracts and installment loan agreements
(the 'Contracts'), (vi) direct obligations of the United States, agencies
thereof or agencies created thereby which are not subject to redemption prior to
maturity at the option of the issuer and are (a) interest-bearing securities,
(b) non-interest-bearing securities, (c) originally interest-bearing securities
from which coupons representing the right to payment of interest have been
removed, or (d) interest-bearing securities from which the right to payment of
principal has been removed (the 'Government Securities'), (vii) certain small
business loans defined below ('SBA Loans' and 'SBA 504 Loans') or (viii) a
combination of Mortgage Loans, Unsecured Home Improvement Loans, Mortgage
Participations, Contracts, MBS and Government Securities. As used herein,
'Mortgage Loans' refers to both whole Mortgage Loans (or certain balances
thereof) and Mortgage Loans underlying Mortgage Participations or MBS. Mortgage
Loans that secure, or interests in which are evidenced by, MBS are herein
sometimes referred to as 'Underlying Mortgage Loans.' Mortgage Loans (or certain
balances thereof) that are not Underlying Mortgage Loans are sometimes referred
to as 'Whole Loans.' Any pass-through certificates or other asset-backed
certificates in which an MBS evidences an interest or which secure an MBS are
sometimes referred to herein also as MBS or as 'Underlying MBS.' Mortgage Loans,
Mortgage Participations and MBS are sometimes referred to herein as 'Mortgage
Assets.' The Mortgage Assets will not be guaranteed or insured by Merrill Lynch
Mortgage Investors, Inc. (the 'Depositor') or any of its affiliates or, unless
otherwise provided in the Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. Each Asset will be selected by the
Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (an 'Asset Seller'), which
may be an affiliate of the Depositor and, with respect to Assets, which prior
holder may or may not be the originator of such Mortgage Loan or Contract or the
issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
MORTGAGE LOANS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to four-family residential property (a 'Single Family Property' and
the related Mortgage Loan a 'Single Family Mortgage Loan') or a residential
property consisting of five or more dwelling units in multi-story structures (a
'Multifamily Property' and the related Mortgage Loan a 'Multifamily Mortgage
Loan') or (ii) a security interest in shares issued by private cooperative
housing corporations ('Cooperatives'). If so specified in the related Prospectus
Supplement, a Mortgaged Property may include some commercial use. Mortgaged
Properties will be located, unless otherwise specified in the related Prospectus
Supplement, in any one
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of the fifty states, the District of Columbia or the Commonwealth of Puerto
Rico. To the extent specified in the related Prospectus Supplement, the Mortgage
Loans will be secured by first and/or junior mortgages or deeds of trust or
other similar security instruments creating a first or junior lien on Mortgaged
Property. The Mortgaged Properties may include apartments owned by Cooperatives.
The Mortgaged Properties may include leasehold interests in properties, the
title to which is held by third party lessors. Unless otherwise specified in the
Prospectus Supplement, the term of any such leasehold shall exceed the term of
the related mortgage note by at least five years. Each Mortgage Loan will have
been originated by a person (the 'Originator') other than the Depositor. The
related Prospectus Supplement will indicate if any Originator is an affiliate of
the Depositor. The Mortgage Loans will be evidenced by promissory notes (the
'Mortgage Notes') secured by mortgages, deeds of trust or other security
instruments (the 'Mortgages') creating a lien on the Mortgaged Properties.
LOAN-TO-VALUE RATIO
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The 'Value' of a
Mortgaged Property, other than with respect to Refinance Loans, is generally the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. 'Refinance Loans' are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The Value of a Mortgaged Property as of the date of initial issuance of
the related series of Certificates may be less than the value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ('ARM Loans'), the index, the frequency of the
adjustment dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan and (x) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. If specific information respecting
the Mortgage Loans 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 as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ('Home Equity Loans'), which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) home improvement
installment sales contracts or installment loan agreements (the 'Home
Improvement Contracts') originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. Except as otherwise
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described in the related Prospectus Supplement, the home improvements purchased
with the Home Improvement Contracts will generally be replacement windows, house
siding, roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods and solar heating panels. The related Prospectus Supplement will specify
whether the Home Improvement Contracts are partially insured under Title I of
the National Housing Act and, if so, the limitations on such insurance.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will (i) have individual principal balances at origination of not
less than $25,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such other interval
as is specified in the related Prospectus Supplement. Each Mortgage Loan may
provide for no accrual of interest or for accrual of interest thereon at an
interest rate (a 'Mortgage Rate') that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a 'Lock-out Period' and, the date of expiration
thereof, a 'Lock-out Date') or require payment of a premium or a yield
maintenance penalty (a 'Prepayment Premium') in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
holders of any class or classes of Offered Securities will be entitled to all or
a portion of any Prepayment Premiums collected in respect of Mortgage Loans, the
related Prospectus Supplement will specify the method or methods by which any
such amounts will be allocated.
MORTGAGE PARTICIPATIONS
Mortgage Participations will evidence an undivided participation interest
in Underlying Mortgage Loans. To the extent available to the Depositor, the
related Prospectus Supplement will contain information in respect of the
Underlying Mortgage Loans substantially similar to the information described
above in respect of Mortgage Loans. Such Prospectus Supplement will also specify
the amount of the participation interest and describe the servicing provisions
of the participation and servicing agreements.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related Prospectus Supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate. Unless the context otherwise requires,
references in this Prospectus to Mortgage Loans, Whole Loans and related terms
shall include Unsecured Home Improvement Loans and related terms to the extent
relevant (e.g., a reference to a Mortgaged Property or hazard insurance does not
relate to an Unsecured Home Improvement Loan).
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a trust agreement, an indenture or similar agreement (an 'MBS
Agreement'). A seller (the 'MBS Issuer') and/or servicer (the 'MBS Servicer') of
the underlying Mortgage Loans (or Underlying MBS) will have entered into
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the MBS Agreement with a trustee or a custodian under the MBS Agreement (the
'MBS Trustee'), if any, or with the original purchaser of the interest in the
underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made on
MBS on the dates specified in the related Prospectus Supplement. The MBS may be
issued in one or more classes with characteristics similar to the classes of
Securities described in this Prospectus. Any principal or interest distributions
will be made on the MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer
or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms of
credit support similar to that described for the Securities under 'Description
of Credit Support' may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Underlying Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any Rating Agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing interests
in Mortgage Assets that include MBS will specify, to the extent available to the
Depositor, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included in
the Trust Fund, (ii) the original and remaining term to stated maturity of the
MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS, (viii) the terms on
which the related Underlying Mortgage Loans or Underlying MBS for such MBS or
the MBS may, or are required to, be purchased prior to their maturity, (ix) the
terms on which Mortgage Loans or Underlying MBS may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) the type of information in respect of the Underlying Mortgage
Loans described under ' -- Mortgage Loans -- Mortgage Loan Information in
Prospectus Supplements' above, and the type of information in respect of the
Underlying MBS described in this paragraph, (xii) the characteristics of any
cash flow agreements that are included as part of the trust fund evidenced or
secured by the MBS and (xiii) whether the MBS is in certificated form or held
through a depository such as The Depository Trust Company or the Participants
Trust Company.
CONTRACTS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Contract will be secured by a security interest in a new or used Manufactured
Home. Such Prospectus Supplement will specify the states or other jurisdictions
in which the Manufactured Homes are located as of the related Cut-off Date. The
method of computing the 'Loan-to-Value Ratio' of a Contract will be described in
the related Prospectus Supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain certain information, as of the
dates specified in such Prospectus Supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date, (ii) whether the Manufactured Homes were new or used as
of the origination of the related Contracts,
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(iii) the weighted average (by principal balance) of the original and remaining
terms to maturity of the Contracts, (iv) the earliest and latest origination
date and maturity date of the Contracts, (v) the range of the Loan-to-Value
Ratios at origination of the Contracts, (vi) the Contract Rates or range of
Contract Rates and the weighted average Contract Rate borne by the Contracts,
(vii) the state or states in which most of the Manufactured Homes are located at
origination, (viii) information with respect to the prepayment provisions, if
any, of the Contracts, (ix) with respect to Contracts with adjustable Contract
Rates ('ARM Contracts'), the index, the frequency of the adjustment dates, and
the maximum Contract Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Contract, and (x) information
regarding the payment characteristics of the Contracts. If specific information
respecting the Contracts 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 as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance.
PAYMENT PROVISIONS OF THE CONTRACTS
Unless otherwise specified in the related Prospectus Supplement, all of the
Contracts will (i) have individual principal balances at origination of not less
than $1,000, (ii) have original terms to maturity of not more than 40 years and
(iii) provide for payments of principal, interest or both, on due dates that
occur monthly or at such other interval as is specified in the related
Prospectus Supplement. Each Contract may provide for no accrual of interest or
for accrual of interest thereon at an annual percentage rate (a 'Contract Rate')
that is fixed over its term or that adjusts from time to time, or as otherwise
specified in the related Prospectus Supplement. Each Contract may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Contract Rate as otherwise described in the related
Prospectus Supplement.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing interests
in Assets of a Trust Fund that include Government Securities will specify, to
the extent available, (i) the aggregate approximate initial and outstanding
principal amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund, (ii) the original and
remaining terms to stated maturity of the Government Securities, (iii) whether
such Government Securities are entitled only to interest payments, only to
principal payments or to both, (iv) the interest rates of the Government
Securities or the formula to determine such rates, if any, (v) the applicable
payment provisions for the Government Securities and (vi) to what extent, if
any, the obligation evidenced thereby is backed by the full faith and credit of
the United States.
SBA LOANS
The SBA Loans will consist of the Unguaranteed Interests (as defined below)
in loans originated under Section 7(a) (the 'Section 7(a) Program') of the Small
Business Act of 1953 (the 'SBA Act'), which Act created the Small Business
Administration (the 'SBA'). The Section 7(a) Program was intended to encourage
lenders to provide loans to existing qualifying small businesses. Loans made
under the Section 7(a) Program can be used to construct, purchase, expand or
convert facilities or to purchase building equipment, leaseholds or materials.
Money lent under the Section 7(a) Program also can be used for working capital.
The SBA Loans are partially guaranteed by the SBA pursuant to a Small
Business Administration Loan Guaranty Agreement between the originator and the
SBA and pursuant to pertinent SBA regulations found at 13 C.F.R. parts 120 and
122. As to any SBA Loan, the right to receive the guaranteed portion of the
principal balance thereof together with interest thereon at a per annum rate in
effect from time to time plus a fee paid to the SBA's fiscal and transfer agent
is referred to herein as the 'Guaranteed Interest.' The Guaranteed Interest
varies from SBA Loan to SBA Loan, will not be
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included in the related Trust Fund and Securityholders will have no right or
interest therein. As to any SBA Loan, the 'Unguaranteed Interest' will equal all
payments and other recoveries on such SBA Loan not constituting the Guaranteed
Interest therein.
The SBA administers three levels of lender participation in the Section
7(a) Program. Under the first level, known as the 'Guaranteed Participant
Program,' the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guarantee the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications.
Under the second level of lender participation, known as the 'Certified
Lender Program,' the lender (the 'Certified Lender') gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Under the third level of lender participation, known as the 'Preferred
Lender Program', the lender (the 'Preferred Lender') has the authority to
approve a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the Certified Lender Program and involve meeting additional
portfolio quality and volume requirements. In addition, before being granted
preferred lender status under the Preferred Lender Program in a particular SBA
district, the lender must have been a Certified Lender under the Certified
Lender Program in such SBA district for at least 12 months.
Unless the context otherwise requires, references in this Prospectus to
Mortgage Loans, Whole Loans and related terms shall include SBA Loans and
related terms to the extent relevant (e.g., a reference to a Mortgaged Property
or hazard insurance does not relate to a SBA Loan).
SBA 504 LOANS
The SBA 504 Loans will consist of loans originated by the originators under
the SBA 504 Loan Program (the 'SBA 504 Loan Program'). The SBA 504 Loan Program
was established under the SBA Act to encourage lenders to provide fixed asset
financing to existing qualifying small businesses. SBA 504 Loans may be used for
plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing. The Originators provide at least 50% of project
costs in a conventional loan agreement with borrowers, with the SBA providing
the remainder of the financing. Each loan by the Originators must be approved by
the SBA.
The funds used by the SBA to originate its portion of a project generated
pursuant to the SBA 504 Loan Program are generated by issuing SBA-guaranteed
debentures on behalf of a certified development company (a 'CDC'). A CDC is a
non-profit organization sponsored by private interests or by state or local
governments. The debentures are pooled monthly and sold through a certificate
mechanism to the public market. The loans originated by the Originators under
the SBA 504 Loan Program are not guaranteed by the SBA.
Unless the context otherwise requires, references in this Prospectus to
Mortgage Loans, Whole Loans and related terms shall include SBA 504 Loans and
related terms to the extent relevant (e.g., a reference to a Mortgaged Property
or hazard insurance does not relate to a SBA 504 Loan).
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the 'Subsequent Assets') from time to
time (as frequently as
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daily) within the number of months specified in the related Prospectus
Supplement after the issuance of such series of Securities having an aggregate
principal balance approximately equal to the amount on deposit in the
Pre-Funding Account (the 'Pre-Funded Amount') for such series on the date of
such issuance.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See 'Description of the
Agreements -- Collection Account and Related Accounts.'
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
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, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with respect to the
Securities of any series, 'Credit Support'). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a series of Securities. See 'Special
Considerations -- Credit Support Limitations' and 'Description of Credit
Support.'
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets or
on one or more classes of Securities. (Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Assets (such as
Mortgage Loans secured by Mortgaged Properties located outside the United
States) were denominated in a non-United States currency.) The principal terms
of any such guaranteed investment contract or other agreement (any such
agreement, a 'Cash Flow Agreement'), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement.
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 Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell 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 Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
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YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related Trust Fund (which may be affected by prepayments,
defaults, liquidations or repurchases). See 'Special Considerations.'
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under ' -- Pass-Through Rate and Interest Rate,' if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Rates and the stated
pass-through or pay-through interest rate of certain MBS may be a number of
percentage points higher or lower than certain of the Underlying Mortgage Loans.
The rate of principal payments on some or all of the classes of Securities of a
series will correspond to the rate of principal payments on the Assets in the
related Trust Fund and is likely to be affected by the existence of Lock-out
Periods and Prepayment Premium provisions of the Mortgage Loans underlying or
comprising such Assets, and by the extent to which the servicer of any such
Mortgage Loan is able to enforce such provisions. Mortgage Loans with a Lock-out
Period or a Prepayment Premium provision, to the extent enforceable, generally
would be expected to experience a lower rate of principal prepayments than
otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Premiums.
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Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal amounts
of manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly smaller effect on the amount of
the monthly payments on manufactured housing contracts than on the amount of the
monthly payments on mortgage loans secured by site-built homes. Consequently,
changes in interest rates may play a smaller role in prepayment behavior of
manufactured housing contracts than they do in the prepayment behavior of loans
secured by mortgage on site-built homes. Conversely, local economic conditions
and certain of the other factors mentioned above may play a larger role in the
prepayment behavior of manufactured housing contracts than they do in the
prepayment behavior of loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield on
one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan or a Contract, the obligor is charged
interest on the principal amount of the Mortgage Loan or Contract so prepaid for
the number of days in the month actually elapsed up to the date of the
prepayment. Unless otherwise specified in the related Prospectus Supplement, the
effect of prepayments in full will be to reduce the amount of interest paid in
the following month to holders of Securities entitled to payments of interest
because interest on the principal amount of any Mortgage Loan or Contract so
prepaid will be paid only to the date of prepayment rather than for a full
month. Unless otherwise specified in the related Prospectus Supplement, a
partial prepayment of principal is applied so as to reduce the outstanding
principal balance of the related Mortgage Loan or Contract as of the Due Date in
the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Assets
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans or Contracts comprising or underlying
the Assets in a particular Trust Fund will generally accelerate the rate at
which principal is paid on some or all of the classes of the Securities of the
related series.
If so provided in the Prospectus Supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
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Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Securities of a series will be influenced by the rate at which principal on the
Mortgage Loans or Contracts comprising or underlying the Assets is paid to such
class, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term 'prepayment' includes prepayments, in whole or in part,
and liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Mortgage Loans or Contracts comprising or
underlying the Assets in a Trust Fund. If any Mortgage Loans or Contracts
comprising or underlying the Assets in a particular Trust Fund have actual terms
to maturity less than those assumed in calculating final scheduled Distribution
Dates for the classes of Securities of the related series, one or more classes
of such Securities may be fully paid prior to their respective final scheduled
Distribution Dates, even in the absence of prepayments. Accordingly, the
prepayment experience of the Assets will, to some extent, be a function of the
mix of Mortgage Rates or Contract Rates and maturities of the Mortgage Loans or
Contracts comprising or underlying such Assets. See 'Description of the Trust
Funds.'
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ('CPR') prepayment model
or the Standard Prepayment Assumption ('SPA') prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE ASSET OR CONTRACT
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity, and because the ability of a
mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Mortgage Loans having balloon payments may default at
maturity. In the case of defaults, recovery of proceeds may be delayed by, among
other things, bankruptcy of the mortgagor or adverse conditions in the market
where the property is located. In order to minimize losses on defaulted Mortgage
Loans, the servicer may, to the extent and under the circumstances set forth in
the related Prospectus Supplement, be permitted to modify Mortgage Loans that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or
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modification that extends the maturity of a Mortgage Loan will tend to extend
the weighted average life of the Securities, thereby lengthening the period of
time elapsed from the date of issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be 'stepped up' during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor under each Mortgage Loan or Contract generally will be qualified on
the basis of the Mortgage Rate or Contract Rate in effect at origination. The
repayment of any such Mortgage Loan or Contract may thus be dependent on the
ability of the mortgagor or obligor to make larger level monthly payments
following the adjustment of the Mortgage Rate or Contract Rate. In addition,
certain Mortgage Loans may be subject to temporary buydown plans ('Buydown
Mortgage Loans') pursuant to which the monthly payments made by the mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments thereon (the 'Buydown Period'). The periodic increase in the
amount paid by the mortgagor of a Buydown Mortgage Loan during or at the end of
the applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related class or
classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Securities,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Securities were purchased.
DEFAULTS
The rate of defaults on the Mortgage Loans or Contracts will also affect
the rate, timing and amount of principal payments on the Assets and thus the
yield on the Securities. In general, defaults on mortgage loans or contracts are
expected to occur with greater frequency in their early years. The rate of
default on Mortgage Loans which are refinance or limited documentation mortgage
loans, and on Mortgage Loans with high Loan-to-Value Ratios, may be higher than
for other types of Mortgage Loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans and Contracts will
be affected by the general economic condition of the region of the country in
which the related Mortgage Properties or Manufactured Homes are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their
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terms will affect the weighted average life of the Mortgage Loans or Contracts
comprising or underlying the Assets and that of the related series of
Securities.
REFINANCING
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan or Contract in any Trust Fund by
accepting prepayments thereon and permitting a new loan secured by a mortgage on
the same property. In the event of such a refinancing, the new loan would not be
included in the related Trust Fund and, therefore, such refinancing would have
the same effect as a prepayment in full of the related Mortgage Loan or
Contract. A Sub-Servicer or the Master Servicer may, from time to time,
implement programs designed to encourage refinancing. Such programs may include,
without limitation, modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. In addition, Sub-Servicers
may encourage the refinancing of Mortgage Loans or Contracts, including
defaulted Mortgage Loans or Contracts, that would permit creditworthy borrowers
to assume the outstanding indebtedness of such Mortgage Loans or Contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include 'due-on-sale' clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See 'Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses' and
'Description of the Agreements -- Due-on-Sale Provisions.' Unless otherwise
specified in the related Prospectus Supplement, the Contracts, in general,
prohibit the sale or transfer of the related Manufactured Homes without the
consent of the Master Servicer and permit the acceleration of the maturity of
the Contracts by the Master Servicer upon any such sale or transfer that is not
consented to. Unless otherwise specified in the related Prospectus Supplement,
it is expected that the Master Servicer will permit most transfers of
Manufactured Homes and not accelerate the maturity of the related Contracts. In
certain cases, the transfer may be made by a delinquent obligor in order to
avoid a repossession of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the Master Servicer desires to accelerate the
maturity of the related Contract, the Master Servicer's ability to do so will
depend on the enforceability under state law of the 'due-on-sale' clause. See
'Certain Legal Aspects of the Contracts -- Transfers of Manufactured Homes;
Enforceability of 'Due-on-Sale' Clauses.'
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal executive
offices of the Depositor are located at 250 Vesey Street, World Financial
Center, North Tower, 10th Floor, New York, New York 10218-1310. Its telephone
number is (212) 449-0357.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an 'Indenture'). Each
series of Securities will consist of one or more classes of Securities that may
(i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, 'Senior Securities') or
subordinate (collectively, 'Subordinate Securities') to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, 'Stripped Principal
Securities'); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
'Stripped Interest Securities'); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities of such series
(collectively, 'Accrual Securities'); (vi) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If so
specified in the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a 'Mortgage Loan Group') or a designated portion of
Contracts in the related Contract Pool (each such portion of Contracts, a
'Contract Group'). Any such classes may include classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
('Definitive Securities') or in book-entry form ('Book-Entry Securities'), as
provided in the related Prospectus Supplement. See 'Special
Considerations -- Book-Entry Registration' and 'Description of the
Securities -- Book-Entry Registration and Definitive Securities.' Definitive
Securities will be exchangeable for other Securities of the same class and
series of a like aggregate Security Balance, notional amount or percentage
interest but of different authorized denominations. See 'Special
Considerations -- Limited Liquidity' and ' -- Limited Assets.'
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the 'Record Date'), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the 'Determination Date'). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
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payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the 'Available
Distribution Amount' for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a 'Due Period' with respect to
any Distribution Date will commence on the second day of the month in
which the immediately preceding Distribution Date occurs, or the day
after the Cut-off Date in the case of the first Due Period, and will end
on the first day of the month of the related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest thereon
and related Prepayment Premiums, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received subsequent to the
related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment Period;
and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the 'Pass-Through Rate' in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
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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.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
'Accrued Security Interest' will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal. Unless otherwise provided
in the related Prospectus Supplement, the Accrued Security Interest on a series
of Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on the
Mortgage Loans or Contracts comprising or underlying the Assets in the Trust
Fund for such series. The particular manner in which such shortfalls are to be
allocated among some or all of the classes of Securities of that series will be
specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Loans or Contracts comprising or underlying the Assets
in the related Trust Fund. Unless otherwise provided in the related Prospectus
Supplement, any reduction in the amount of Accrued Security Interest otherwise
distributable on a class of Securities by reason of the allocation to such class
of a portion of any deferred interest on the Mortgage Loans or Contracts
comprising or underlying the Assets in the related Trust Fund will result in a
corresponding increase in the Security Balance of such class. See 'Special
Considerations -- Average Life of Securities; Prepayments; Yields' and 'Yield
Considerations.'
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a 'Security Balance' which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
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accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under ' -- General' above. To such extent, the
descriptions set forth under ' -- Distributions of Interest on the Securities'
and ' -- Distributions of Principal of the Securities' above also relate to
components of such a class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate or
interest rate, if any, on any such component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment Premiums
that are collected on the Mortgage Assets in the related Trust Fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See 'Description of Credit
Support' for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans or Contracts in such Trust Fund during the related Due Period
and were delinquent on the related Determination Date, subject to the Master
Servicer's (or another entity's) good faith determination that such advances
will be reimbursable from Related Proceeds (as defined below). In the case of a
series of Securities that includes one or more classes of Subordinate Securities
and if so provided in the related Prospectus Supplement, the Master Servicer's
(or another entity's) advance obligation may be limited only to the portion of
such delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of such Subordinate
Securities. See 'Description of Credit Support.'
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans or Contracts (including amounts received under any form of
Credit Support) respecting which such advances were made (as to any Mortgage
Loan or Contract, 'Related Proceeds')
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and, if so provided in the Prospectus Supplement, out of any amounts otherwise
distributable on one or more classes of Subordinate Securities of such series;
provided, however, that any such advance will be reimbursable from any amounts
in the Collection Account prior to any distributions being made on the
Securities to the extent that the Master Servicer (or such other entity) shall
determine in good faith that such advance (a 'Nonrecoverable Advance') is not
ultimately recoverable from Related Proceeds or, if applicable, from collections
on other Assets otherwise distributable on such Subordinate Securities. If
advances have been made by the Master Servicer from excess funds in the
Collection Account, the Master Servicer is required to replace such funds in the
Collection Account on any future Distribution Date to the extent that funds in
the Collection Account on such Distribution Date are less than payments required
to be made to Securityholders on such date. If so specified in the related
Prospectus Supplement, the obligations of the Master Servicer (or another
entity) to make advances may be secured by a cash advance reserve fund, a surety
bond, a letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at the
rate specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b)
two scheduled payments are delinquent, (c) three or more scheduled payments
are delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan or Contract liquidated during
the related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to the Master Servicer (or any other entity) in
respect of such Mortgage Loan and (b) the amount of any loss to
Securityholders;
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(ix) with respect to each REO Property relating to a Whole Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the loan number of the related Mortgage Loan or Contract and
(b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan or Contract immediately following such Distribution Date
(calculated as if such Mortgage Loan or Contract were still outstanding
taking into account certain limited modifications to the terms thereof
specified in the Agreement), (c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on related
servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the
amount of any loss to Securityholders in respect of the related Mortgage
Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Securities or for such other specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Securities. The Master Servicer or the Trustee,
as specified in the related Prospectus Supplement, will forward or cause to be
forwarded to each holder, to the Depositor and to such other parties as may be
specified in the Agreement, a copy of any statements or reports received by the
Master Servicer or the Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Securities will describe any
additional information to be included in reports to the holders of such
Securities.
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Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See 'Description of the
Securities -- Book-Entry Registration and Definitive Securities.'
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan or Contract subject thereto and (ii) the purchase
of all of the assets of the Trust Fund by the party entitled to effect such
termination, under the circumstances and in the manner set forth in the related
Prospectus Supplement. In no event, however, will the trust created by the
Agreement continue beyond the date specified in the related Prospectus
Supplement. Written notice of termination of the Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice of
termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ('DTC').
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the Uniform Commercial Code ('UCC') and a
'clearing agency' registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ('Participants') and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ('Indirect Participants').
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Book-Entry Securities
may do so only through Participants and Indirect Participants. In addition, such
investors ('Security Owners') will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format, Security
Owners will receive payments after the related Distribution Date because, while
payments are required to be forwarded to Cede & Co., as
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nominee for DTC ('Cede'), on each such date, DTC will forward such payments to
its Participants which thereafter will be required to forward them to Indirect
Participants or Security Owners. Unless otherwise provided in the related
Prospectus Supplement, the only 'Securityholder' (as such term is used in the
Agreement) will be Cede, as nominee of DTC, and the Security Owners will not be
recognized by the Trustee as Securityholders under the Agreement. Security
Owners will be permitted to exercise the rights of Securityholders under the
related Agreement, Trust Agreement or Indenture, as applicable, only indirectly
through the Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Unless otherwise specified in the related Prospectus Supplement, Securities
initially issued in book-entry form will be issued in fully registered,
certificated form to Security Owners or their nominees ('Definitive
Securities'), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for reregistration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are REMIC
Certificates or Grantor Trust Certificates will be issued, and the related Trust
Fund will be created, pursuant to a pooling and servicing agreement (a 'Pooling
and Servicing Agreement') among the Depositor, the Master Servicer and the
Trustee. The Assets of such Trust Fund will be transferred to the Trust Fund and
thereafter serviced in accordance with the terms of the Pooling and Servicing
Agreement. In the context of the conveyance and servicing of the related Assets,
the Pooling and Servicing Agreement may be referred to herein as the
'Agreement'. Notwithstanding the foregoing, if the Assets of the Trust Fund for
such a series consists only of Government Securities or MBS, such Assets will be
conveyed to the Trust Fund and administered pursuant to a trust agreement
between the Depositor and the Trustee (a 'Trust Agreement'), which may also be
referred to herein as the 'Agreement.'
Certificates That Are Partnership Interests for Tax Purposes and Notes.
Certificates that are partnership interests for tax purposes will be issued, and
the related Trust Fund will be created, pursuant to a Trust Agreement between
the Depositor and the Trustee. The Assets of the related Trust
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Fund will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a 'Servicing Agreement') between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing Agreement may be referred to herein as the
'Agreement.'
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the 'Indenture') between the related Trust Fund and an indenture
trustee (the 'Indenture Trustee') named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist only
of MBS or Government Securities, such Assets will be conveyed to the Trust Fund
and administered in accordance with the terms of the Trust Agreement, which in
such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series of
Securities will be named in the related Prospectus Supplement. In any series of
Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups or Contract Groups, each corresponding to a
particular Master Servicer; and, if the related Prospectus Supplement so
specifies, the servicing obligations of each such Master Servicer will be
limited to the Whole Loans in such corresponding Mortgage Loan Group or the
Contracts in the corresponding Contract Group. In lieu of appointing a Master
Servicer, a servicer may be appointed pursuant to the Agreement for any Trust
Fund. Such servicer will service all or a significant number of Whole Loans or
Contracts directly without a Sub-Servicer. Unless otherwise specified in the
related Prospectus Supplement, the obligations of any such servicer shall be
commensurate with those of the Master Servicer described herein. References in
this Prospectus to Master Servicer and its rights and obligations, unless
otherwise specified in the related Prospectus Supplement, shall be deemed to
also be references to any servicer servicing Whole Loans or Contracts directly.
A manager or administrator may be appointed pursuant to the Trust Agreement for
any Trust Fund to administer such Trust Fund. 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. Forms of a Pooling and Servicing
Agreement, a Sale and Servicing Agreement and a Trust Agreement have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of 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 Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term 'Security' refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreement (without exhibits) relating to any series of
Securities without charge upon written request of a holder of a Security of such
series addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Certificates to the Depositor in exchange for the Assets and the other
assets comprising the Trust Fund for such series. Each Asset will be identified
in a schedule appearing as an exhibit to the related Agreement. Unless otherwise
provided in the related Prospectus Supplement, such schedule will include
detailed information (i) in respect of each Whole Loan included in the related
Trust Fund, including without limitation, the address of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Value and
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Loan-to-Value Ratio as of the date indicated and payment and prepayment
provisions, if applicable; (ii) in respect of each Contract included in the
related Trust Fund, including without limitation the Contract number, the
outstanding principal amount and the Contract Rate; and (iii) in respect of each
MBS included in the related Trust Fund, including without limitation, the MBS
Issuer, MBS Servicer and MBS Trustee, the pass-through or bond rate or formula
for determining such rate, the issue date and original and remaining term to
maturity, if applicable, the original and outstanding principal amount and
payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan that
is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Master Servicer and the
Depositor, and the Master Servicer shall immediately notify the relevant Asset
Seller. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller will fulfill this repurchase or substitution obligation, and neither the
Master Servicer nor the Depositor will be obligated to repurchase or substitute
for such Mortgage Loan if the Asset Seller defaults on its obligation. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans, Home Improvement Contracts and Unsecured Home Improvement Loans will not
be delivered to the Trustee (or a custodian), but will be retained by the Master
Servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the Trustee will not be recorded, unless otherwise provided
in the related Prospectus Supplement.
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With respect to each Contract, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer (which may also be the Asset Seller)
will maintain custody of the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the right,
title and interest of the Trustee in the Contracts, the Depositor will cause
UCC-1 financing statements to be executed by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment
from the Company to the Trust. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See 'Certain Legal Aspects of the Contracts.'
While the Contract documents will not be reviewed by the Trustee or the
Master Servicer, if the Master Servicer finds that any such document is missing
or defective in any material respect, the Master Servicer shall immediately
notify the Depositor and the relevant Asset Seller. If the Asset Seller cannot
cure the omission or defect within a specified number of days after receipt of
such notice, then unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be obligated, within a specified number of
days of receipt of such notice, to repurchase the related Contract from the
Trustee at the Purchase Price or substitute for such Contract. There can be no
assurance that an Asset Seller will fulfill this repurchase or substitution
obligation, and neither the Master Servicer nor the Depositor will be obligated
to repurchase or substitute for such Contract if the Asset Seller defaults on
its obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for omission of, or a material defect
in, a constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
With respect to each Government Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of the
Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a 'clearing corporation'
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of a financial intermediary in the name of the Trustee
for the benefit of the Certificateholders. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that either
the Depositor or the Trustee promptly cause any MBS and Government Securities in
certificated form not registered in the name of the Trustee to be re-registered,
with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan or Contract, assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the 'Warranting Party') covering, by way of
example, the following types of matters: (i) the accuracy of the information set
forth for such Whole Loan or Contract on the schedule of Assets appearing as an
exhibit to the related Agreement; (ii) in the case of a Whole Loan, the
existence of title insurance insuring the lien priority of the Whole Loan and,
in the case of a Contract, that the Contract creates a valid first security
interest in or lien on the related Manufactured Home; (iii) the authority of the
Warranting Party to sell the Whole Loan or Contract; (iv) the payment status of
the Whole Loan or Contract; (v) in the case of a Whole Loan, the existence of
customary provisions in the related Mortgage Note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the security of the
Mortgage; and (vi) the existence of hazard and extended perils insurance
coverage on the Mortgaged Property or Manufactured Home.
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Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan or Contract
may have been made as of a date prior to the applicable Cut-off Date. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the related series of Certificates evidencing an interest in
such Whole Loan or Contract. Unless otherwise specified in the related
Prospectus Supplement, in the event of a breach of any such representation or
warranty, the Warranting Party will be obligated to reimburse the Trust Fund for
losses caused by any such breach or either cure such breach or repurchase or
replace the affected Whole Loan or Contract as described below. Since the
representations and warranties may not address events that may occur following
the date as of which they were made, the Warranting Party will have a
reimbursement, cure, repurchase or substitution obligation in connection with a
breach of such a representation and warranty only if the relevant event that
causes such breach occurs prior to such date. Such party would have no such
obligations if the relevant event that causes such breach occurs after such
date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan or Contract
that materially and adversely affects the value of such Whole Loan or Contract
or the interests therein of the Certificateholders. If such Warranting Party
cannot cure such breach within a specified period following the date on which
such party was notified of such breach, then such Warranting Party will be
obligated to repurchase such Whole Loan or Contract from the Trustee within a
specified period from the date on which the Warranting Party was notified of
such breach, at the Purchase Price therefor. As to any Whole Loan or Contract,
unless otherwise specified in the related Prospectus Supplement, the 'Purchase
Price' is equal to the sum of the unpaid principal balance thereof, plus unpaid
accrued interest thereon at the Mortgage Rate or Contract Rate from the date as
to which interest was last paid to the due date in the Due Period in which the
relevant purchase is to occur, plus certain servicing expenses that are
reimbursable to the Master Servicer. If so provided in the Prospectus Supplement
for a series, a Warranting Party, rather than repurchase a Whole Loan or
Contract as to which a breach has occurred, will have the option, within a
specified period after initial issuance of such series of Certificates, to cause
the removal of such Whole Loan or Contract from the Trust Fund and substitute in
its place one or more other Whole Loans or Contracts, as applicable, in
accordance with the standards described in the related Prospectus Supplement. If
so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase or substitute a Whole Loan or Contract as to which a
breach has occurred, will have the option to reimburse the Trust Fund or the
Certificateholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates or the Trustee for a breach of representation by a Warranting
Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan or Contract if a Warranting Party defaults on its obligation to do
so, and no assurance can be given that Warranting Parties will carry out such
obligations with respect to Whole Loans or Contracts.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Securities or MBS, covering (i)
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not
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less than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. See 'Events of Default' and 'Rights Upon Event of
Default.'
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the 'Collection Account'), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
('FDIC') (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Certificateholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any class of Securities of such series. The collateral eligible
to secure amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ('Permitted Investments'). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held therein
may be invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Collection
Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
DEPOSITS
A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in the Trust
Fund (to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the normal
servicing procedures of a Master Servicer or the related Sub-Servicer,
subject to the terms and conditions of the related Mortgage and Mortgage
Note) (collectively, 'Insurance Proceeds') and all other amounts received
and retained in connection with the liquidation of defaulted Mortgage Loans
in the Trust Fund, by foreclosure or otherwise ('Liquidation Proceeds'),
together with the net proceeds on a monthly basis with respect to any
Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as
described under 'Description of Credit Support';
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(v) any advances made as described under 'Description of the
Securities -- Advances in Respect of Delinquencies';
(vi) any amounts paid under any Cash Flow Agreement, as described
under 'Description of the Trust Funds -- Cash Flow Agreements';
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under 'Assignment of
Assets; Repurchases' and 'Representations and Warranties; Repurchases,' all
proceeds of any defaulted Mortgage Loan purchased as described under
'Realization Upon Defaulted Whole Loans,' and all proceeds of any Asset
purchased as described under 'Description of the Securities -- Termination'
(also, 'Liquidation Proceeds');
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans or Contracts in the
Trust Fund as described under 'Description of the Agreements -- Retained
Interest; Servicing Compensation and Payment of Expenses';
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under 'Hazard Insurance Policies';
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit
of the Master Servicer or the Trustee, as the case may be, of funds held in
the Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
WITHDRAWALS
A Master Servicer or the Trustee may, from time to time, unless otherwise
specified in the related Prospectus Supplement or the related Agreement, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under 'Description of the Securities -- Advances in Respect of
Delinquencies,' such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Whole Loans or Contracts with respect to which
the advances were made or out of amounts drawn under any form of Credit
Support with respect to such Whole Loans or Contracts;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans or Contracts and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation Proceeds
and Insurance Proceeds collected on the particular Whole Loans or Contracts
and properties, and net income collected on the particular properties, with
respect to which such fees were earned or such expenses were incurred or
out of amounts drawn under any form of Credit Support with respect to such
Whole Loans or Contracts and properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause (iii)
above which, in the Master Servicer's good faith judgment, will not be
recoverable from the amounts described in clauses (ii) and (iii),
respectively, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the related Agreement and
described in the related Prospectus Supplement, just from that portion of
amounts collected on other Assets that is otherwise distributable on one or
more classes of Subordinate Securities, if any, remain outstanding, and
otherwise any outstanding class of Securities, of the related series;
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(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in
clause (iii) above while such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under 'Certain Matters Regarding a Master Servicer and the
Depositor';
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under 'Certain
Matters Regarding the Trustee';
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer
as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and
to the extent described under 'Certain Federal Income Tax Consequences --
REMICS -- Prohibited Transactions Tax and Other Taxes';
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in
connection with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by 'Assignment of Assets; Repurchase' and
'Representations and Warranties; Repurchases' or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
OTHER COLLECTION ACCOUNTS
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under ' -- Deposits' above for one or more series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by a
time specified in the related Prospectus Supplement. To the extent specified in
the related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under ' -- Withdrawals' above, may also be
withdrawn from any such collection
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account. The Prospectus Supplement will set forth any restrictions with respect
to any such collection account, including investment restrictions and any
restrictions with respect to financial institutions with which any such
collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans or
manufactured housing contracts comparable to the Contracts and held for its own
account, provided such procedures are consistent with (i) the terms of the
related Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under 'Description of Credit Support,' (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
'Servicing Standard'). In connection therewith, the Master Servicer will be
permitted in its discretion to waive any late payment charge or penalty interest
in respect of a late payment on a Whole Loan or Contract.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties or Manufactured Homes under certain circumstances; and maintaining
accounting records relating to the Whole Loans or Contracts. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Whole Loans
or Contracts under any applicable instrument of Credit Support. See 'Description
of Credit Support.'
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan or Contract in a manner consistent with the Servicing Standard so
long as the modification, waiver or amendment will not (i) affect the amount or
timing of any scheduled payments of principal or interest on the Whole Loan or
Contract or (ii) in its judgment, materially impair the security for the Whole
Loan or Contract or reduce the likelihood of timely payment of amounts due
thereon. The Master Servicer also may agree to any modification, waiver or
amendment that would so affect or impair the payments on, or the security for, a
Whole Loan or Contract if, unless otherwise provided in the related Prospectus
Supplement, (i) in its judgment, a material default on the Whole Loan or
Contract has occurred or a payment default is imminent and (ii) in its judgment,
such modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Whole Loan or Contract on a present value basis
than would liquidation. The Master Servicer is required to notify the Trustee in
the event of any modification, waiver or amendment of any Whole Loan or
Contract.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the Mortgage Loan debt, or may reflect the diversion of that income from the
servicing of the Mortgage Loan debt. In addition, a Mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan 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 Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Multifamily Property and take such other actions as are consistent
with the related Agreement. A significant period of time may elapse before the
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
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actually foreclose may vary considerably depending on the particular Multifamily
Loan, the Multifamily Property, the Mortgagor, the presence of an acceptable to
party to assume the Multifamily Loan and the laws of the jurisdiction in which
the Multifamily Property is located.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans or Contracts to third-party servicers (each, a 'Sub-Servicer'), but
such Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
'Sub-Servicing Agreement') must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Securities is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans or Contracts. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under an Agreement. See 'Retained Interest; Servicing Compensation
and Payment of Expenses.'
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan or Contract which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if cure
is likely, inspect the Mortgaged Property or Manufactured Home and take such
other actions as are consistent with the Servicing Standard. A significant
period of time may elapse before the Master Servicer is able to assess the
success of such corrective action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans or
Contracts may grant to the Master Servicer and/or the holder or holders of
certain classes of Securities a right of first refusal to purchase from the
Trust Fund at a predetermined purchase price any such Whole Loan or Contract as
to which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Security will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under 'Representations and
Warranties; Repurchases.'
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified period
and that the Master Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Whole Loan
or Contract. In the absence of any bid determined in accordance with the related
Agreement to be fair, the Master Servicer shall proceed with respect to such
defaulted Mortgage Loan or Contract as described below. Any bid in an amount at
least equal to the Purchase Price described under 'Representations and
Warranties; Repurchases' will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise and may at any
time repossess and realize upon any Manufactured Home, if such action is
consistent with the
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Servicing Standard and a default on such Whole Loan or Contract has occurred or,
in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Certificate is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See 'Certain Legal Aspects of Mortgage
Loans -- Foreclosure.'
If recovery on a defaulted Whole Loan or Contract under any related
instrument of Credit Support is not available, the Master Servicer nevertheless
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan or Contract. If the proceeds of any liquidation of the property
securing the defaulted Whole Loan or Contract are less than the outstanding
principal balance of the defaulted Whole Loan or Contract plus interest accrued
thereon at the Mortgage Rate or Contract Rate, as applicable, plus the aggregate
amount of expenses incurred by the Master Servicer in connection with such
proceedings and which are reimbursable under the Agreement, the Trust Fund will
realize a loss in the amount of such difference. The Master Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
the Liquidation Proceeds recovered on any defaulted Whole Loan or Contract,
prior to the distribution of such Liquidation Proceeds to Certificateholders,
amounts representing its normal servicing compensation on the Whole Loan or
Contract, unreimbursed servicing expenses incurred with respect to the Whole
Loan or Contract and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan or Contract.
If any property securing a defaulted Whole Loan or Contract is damaged the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Whole Loan or Contract
after reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
As servicer of the Whole Loans or Contracts, a Master Servicer, on behalf
of itself, the Trustee and the Securityholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Whole Loans or Contracts.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan or Contract, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan or Contract, unreimbursed servicing expenses incurred with
respect to the Whole Loan or Contract and any unreimbursed advances of
delinquent payments made with respect to the Whole Loan or Contract. See 'Hazard
Insurance Policies' and 'Description of Credit Support.'
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HAZARD INSURANCE POLICIES
WHOLE LOANS
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Master Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the mortgagor in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Collection Account. The Agreement will provide that the Master Servicer may
satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Master Servicer's maintaining a blanket policy insuring
against hazard losses on the Whole Loans. If such blanket policy contains a
deductible clause, the Master Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the terms
of the Mortgage Loan so permit; provided, however, that the addition of such
cost will not be taken into account for purposes of calculating the distribution
to be made to Certificateholders. Such costs may be recovered by the Master
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Servicer or Sub-Servicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master Servicer
to present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Master Servicer by
mortgagors.
CONTRACTS
Except as otherwise specified in the related Prospectus Supplement, the
terms of the Agreement for a Trust Fund comprised of Contracts will require the
Master Servicer to cause to be maintained with respect to each Contract one or
more hazard insurance policies which provide, at a minimum, the same coverage as
a standard form fire and extended coverage insurance policy that is customary
for manufactured housing, issued by a company authorized to issue such policies
in the state in which the Manufactured Home is located, and in an amount which
is not less than the maximum insurable value of such Manufactured Home or the
principal balance due from the obligor on the related Contract, whichever is
less; provided, however, that the amount of coverage provided by each such
hazard insurance policy shall be sufficient to avoid the application of any
co-insurance clause contained therein. When a Manufactured Home's location was,
at the time of origination of the related Contract, within a federally
designated special flood hazard area, the Master Servicer shall cause such flood
insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or such lesser amount as may
be available under the federal flood insurance program. Each hazard insurance
policy caused to be maintained by the Master Servicer shall contain a standard
loss payee clause in favor of the Master Servicer and its successors and
assigns. If any obligor is in default in the payment of premiums on its hazard
insurance policy or policies, the Master Servicer shall pay such premiums out of
its own funds, and may add separately such premium to the obligor's obligation
as provided by the Contract, but may not add such premium to the remaining
principal balance of the Contract.
The Master Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home, and
shall maintain, to the extent that the related Contract does not require the
obligor to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on the
obligor's interest in the Contracts resulting from the absence or insufficiency
of individual hazard insurance policies. The Master Servicer shall pay the
premium for such blanket policy on the basis described therein and shall pay any
deductible amount with respect to claims under such policy relating to the
Contracts.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Whole Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally
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enforce any due-on-sale clause to the extent it has knowledge of the conveyance
or proposed conveyance of the underlying Mortgaged Property and it is entitled
to do so under applicable law; provided, however, that the Master Servicer will
not take any action in relation to the enforcement of any due-on-sale provision
which would adversely affect or jeopardize coverage under any applicable
insurance policy. Unless otherwise specified in the related Prospectus
Supplement, any fee collected by or on behalf of the Master Servicer for
entering into an assumption agreement will be retained by or on behalf of the
Master Servicer as additional servicing compensation. See 'Certain Legal Aspects
of Mortgage Loans -- Due-on-Sale Clauses.' The Contracts may also contain such
clauses. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will permit such transfer so long as the transferee satisfies
the Master Servicer's then applicable underwriting standards. The purpose of
such transfers is often to avoid a default by the transferring obligor. See
'Certain Legal Aspects of the Contracts -- Transfers of Manufactured Homes;
Enforceability of 'Due-on-Sale' Clauses.'
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A 'Retained
Interest' in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Certificates will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Certificates
evidencing interests in a Trust Fund that includes Whole Loans or Contracts may
provide that, as additional compensation, the Master Servicer or the
Sub-Servicers may retain all or a portion of assumption fees, modification fees,
late payment charges or Prepayment Premiums collected from mortgagors and any
interest or other income which may be earned on funds held in the Collection
Account or any account established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Certificateholders, and payment of any other expenses described in
the related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans or Contracts
and, to the extent so provided in the related Prospectus Supplement, interest
thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans or
Contracts in the related Trust Fund during such period prior to their respective
due dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans or Contracts
will provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for the Federal
Home Loan Mortgage Corporation ('FHLMC') or such other
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program used by the Master Servicer, the servicing by or on behalf of the Master
Servicer of mortgage loans under agreements substantially similar to each other
(including the related Agreement) was conducted in compliance with the terms of
such agreements or such program except for any significant exceptions or errors
in records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation
Program for Mortgage Bankers, or such other program, requires it to report. In
rendering its statement such firm may rely, as to matters relating to the direct
servicing of mortgage loans by Sub-Servicers, upon comparable statements for
examinations conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC or such other program used by such Sub-Servicer (rendered
within one year of such statement) of firms of independent public accountants
with respect to the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Certificateholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans or Contracts under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Reference herein to the Master
Servicer shall be deemed to be to the servicer of substantially all of the Whole
Loans or Contracts, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided, however, that neither
a Master Servicer, the Depositor nor any such person will be protected against
any breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans or Contract or Contracts (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a
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representation, warranty or covenant made in such Agreement; (iii) incurred by
reason of misfeasance, bad faith or gross negligence in the performance of
obligations or duties thereunder, or by reason of reckless disregard of such
obligations or duties; (iv) incurred in connection with any violation of any
state or federal securities law; or (v) imposed by any taxing authority if such
loss, liability or expense is not specifically reimbursable pursuant to the
terms of the related Agreement. In addition, each Agreement will provide that
neither any Master Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. Any such Master Servicer or the
Depositor may, however, in its discretion undertake any such action which it may
deem necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Securityholders, and the Master Servicer or the Depositor, as the case may be,
will be entitled to be reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer or the Depositor is a party, or any person succeeding to the
business of the Master Servicer or the Depositor, will be the successor of the
Master Servicer or the Depositor, as the case may be, under the related
Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a Trust
Fund that includes Whole Loans or Contracts, Events of Default under the related
Agreement will include (i) any failure by the Master Servicer to distribute or
cause to be distributed to Certificateholders, or to remit to the Trustee or
Indenture Trustee, as applicable, for distribution to Securityholders, any
required payment that continues after a grace period, if any; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for 30 days after written notice of such failure has been given to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities evidencing not less
than 25% of the Voting Rights; (iii) any breach of a representation or warranty
made by the Master Servicer under the Agreement which materially and adversely
affects the interests of Securityholders and which continues unremedied for 30
days after written notice of such breach has been given to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities evidencing not less than 25% of the
Voting Rights; and (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by or on behalf of the Master Servicer indicating its insolvency or inability to
pay its obligations. Material variations to the foregoing Events of Default
(other than to shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Trustee shall, not later than the later
of 60 days after the occurrence of any event which constitutes or, with notice
or lapse of time or both, would constitute an Event of Default and five days
after certain officers of the Trustee become aware of the occurrence of such an
event, transmit by mail to the Depositor and all Securityholders of the
applicable series notice of such occurrence, unless such default shall have been
cured or waived.
The manner of determining the 'Voting Rights' of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under
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the Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans or Contracts, or if
the related Prospectus Supplement so specifies, then the Trustee will not be
obligated to make such advances) and will be entitled to similar compensation
arrangements. Unless otherwise specified in the related Prospectus Supplement,
in the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights allocated
to the respective classes of Securities affected by any Event of Default will be
entitled to waive such Event of Default; provided, however, that an Event of
Default involving a failure to distribute a required payment to Securityholders
described in clause (i) under 'Events of Default under the Agreement' may be
waived only by all of the Securityholders. Upon any such waiver of an Event of
Default, such Event of Default shall cease to exist and shall be deemed to have
been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Securities covered by
such Agreement, unless such Securityholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any of the holders of Securities covered by the Agreement, (i) to cure any
ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with the
related Prospectus Supplement, (iii) to make any other provisions with respect
to matters or questions arising under the Agreement which are not materially
inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not (as evidenced by an opinion of counsel to such effect)
adversely affect in any material respect the interests of any holder of
Securities covered by the Agreement. Unless otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer, if any, and the Trustee, with the consent of the holders of
Securities affected thereby evidencing not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
for any purpose; provided, however, that unless otherwise specified in the
related Prospectus Supplement, no such amendment may (i) reduce in any manner
the amount of, or delay the timing of, payments received or advanced on Mortgage
Loans or Contracts which are required to be distributed on any Security without
the consent of the holder of such Security or (ii) reduce the consent
percentages described in this paragraph without the consent of the holders of
all Securities covered by such Agreement then outstanding. However, with respect
to any series of Certificates as to which a REMIC election is to be made, the
Trustee will not consent to any
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amendment of the Agreement unless it shall first have received an opinion of
counsel to the effect that such amendment will not result in the imposition of a
tax on the related Trust Fund or cause the related Trust Fund to fail to qualify
as a REMIC at any time that the related Certificates are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have a
banking relationship with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement or Trust Agreement, the Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Securities or the Assets, or deposited into or withdrawn from the
Collection 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
or Trust Agreement, as applicable. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement or Trust Agreement, as applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the related Agreement or series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the Voting Rights
for such series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of
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rehabilitation, conservation or liquidation, or if a change in the financial
condition of the Trustee has adversely affected or will adversely affect the
rating on any class of the Securities, then the Depositor may remove the Trustee
and appoint a successor trustee acceptable to the Master Servicer, if any.
Holders of the Securities of any series entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series may at any time remove the Trustee without cause and appoint a
successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any principal
of or interest on any Note of such series; (ii) failure to perform any other
covenant of the Depositor or the Trust Fund in the Indenture which continues for
a period of sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other Event of Default provided with respect to Notes of
that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related Prospectus Supplement)
of all the Notes of such series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
holders of a majority in aggregate outstanding amount of the Notes of such
series.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an Event of Default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless (a) the holders of 100% (or such
other percentage specified in the related Prospectus Supplement) of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the holders of 66 2/3% (or such other percentage specified in the related
Prospectus Supplement) of the then aggregate outstanding amount of the Notes of
such series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default,
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the amount available for distribution to the Noteholders would be less than
would otherwise be the case. However, the Indenture Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge Indenture. The Indenture will be discharged with respect to a
series of Notes (except with respect to certain continuing rights specified in
the Indenture) upon the delivery to the Indenture Trustee for cancellation of
all the Notes of such series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each series of
Notes will be required to mail each year to all related Noteholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects such Notes and that has
not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Depositor will be obligated to
appoint a successor trustee for such series. The Depositor may also remove any
such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture or if such Indenture Trustee
becomes insolvent. In such circumstances the Depositor will be obligated to
appoint a successor trustee for the applicable series of Notes. Any resignation
or removal of the Indenture Trustee and appointment of a successor trustee for
any series of
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Notes does not become effective until acceptance of the appointment by the
successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates or the Master Servicer
or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Securities Credit Support will not provide protection against all risks of
loss and will not guarantee repayment of the entire Security Balance of the
Securities and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
'Covered Trust'), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (iii) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See 'Special Considerations -- Credit Support
Limitations.'
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, Credit Support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Mortgage Assets
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prior to distributions on Subordinate Securities evidencing interests in a
different group of Mortgage Assets within the Trust Fund. The Prospectus
Supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS
If so provided in the Prospectus Supplement for a series of Securities, the
Whole Loans or Contracts in the related Trust Fund will be covered for various
default risks by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the 'L/C Bank').
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Assets on the related
Cut-off Date or of the initial aggregate Security Balance of one or more classes
of Securities. If so specified in the related Prospectus Supplement, the letter
of credit may permit draws in the event of only certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. The
obligations of the L/C Bank under the letter of credit for each series of
Securities will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited
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to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Securityholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Securities, the
MBS in the related Trust Fund and/or the Mortgage Loans underlying such MBS may
be covered by one or more of the types of Credit Support described herein. The
related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See 'Description
of the Trust Funds -- Assets.'
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as 'mortgages.' Any of the foregoing types of
mortgages 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 separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, 'mortgagor' includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a 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,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage 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 mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns to the
lender the Mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the Mortgagor 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.
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INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
('Cooperative Loans') secured by security interests in shares issued by a
cooperative housing corporation (a 'Cooperative') and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee 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 property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a 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 maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder of
a 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 Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its
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blanket mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights are financed through a cooperative share loan evidenced by a
promissory note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
cooperative shares. The lender generally takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See 'Foreclosure -- Cooperative Loans' below.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state
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constitutional provisions reflecting due process concerns for adequate notice
require that a mortgagor receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the mortgagor.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a 'due-on-sale' clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior
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mortgage loans, if the lender purchases the property the lender's title will be
subject to all senior mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their 'equity of redemption.' The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor 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 exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. 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.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than two years. Unless otherwise
provided in the related Prospectus Supplement, with respect to a series of
Securities for which an election is made to qualify the Trust Fund or a part
thereof as a REMIC, the Agreement will permit foreclosed property to be held for
more than two years if the Internal Revenue Service grants an extension of time
within which to sell such property or independent counsel renders an opinion to
the effect that holding such property for such additional period is permissible
under the REMIC Provisions.
COOPERATIVE LOANS
The cooperative shares 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
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative
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enter into a recognition agreement which establishes the rights and obligations
of both parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with 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 the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such 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.
In some 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 Cooperatives 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See ' -- Foreclosure' herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or
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deed of trust will generally govern. 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 first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor 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 lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state 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, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of 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
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt 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. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
11 or Chapter 13 except with respect to mortgage payment arrearages, which may
be cured within a reasonable time period.
In the case of income-producing Multifamily Properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
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Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases this liability may affect
assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an 'owner' or 'operator' of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Certificates might
realize a loss if such costs were required to be paid by the Trust Fund.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St Germain Depository Institutions Act of
1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, 'due-on-sale' clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the 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 that bears an interest rate below the current market rate being
assumed by a new home buyer
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rather than being paid off, which may affect the average life of the Mortgage
Loans and the number of Mortgage Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are owner-occupied,
it is anticipated that prepayment charges may not be imposed with respect to
many of the Mortgage Loans. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Mortgage Loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirement of
such loans.
SUBORDINATE FINANCING
Where a 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 any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
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Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage 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 was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ('Title VIII'). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; 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 all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII 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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'Relief Act'), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors 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 mortgagors
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 any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
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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 ('RICO') statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the 'Crime
Control Act'), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties 'known to have an alleged interest in the property,' including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, 'reasonably without cause to believe' that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the Contracts
are described more fully below.
The Contracts generally are 'chattel paper' as defined in the Uniform
Commercial Code (the 'UCC') in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Agreement, the Master Servicer will transfer physical
possession of the Contracts to the Trustee or its custodian or may retain
possession of the Contracts as custodian for the Trustee. In addition, the
Master Servicer will make an appropriate filing of a UCC-1 financing statement
in the appropriate states to give notice of the Trustee's ownership of the
Contracts. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or marked otherwise to reflect their assignment
from the Company to the Trustee. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the Trustee's interest in Contracts
could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Asset Seller fails, due to clerical error, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have
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held that manufactured homes, under certain circumstances, 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.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect to a
Series of Certificates and if so described in the related Prospectus Supplement,
the Master Servicer may be required to perfect a security interest in the
Manufactured Home under applicable real estate laws. The Warranting Party will
represent that as of the date of the sale to the Depositor it has obtained a
perfected first priority security interest by proper notation or delivery of the
required documents and fees with respect to substantially all of the
Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor
nor the Trustee will amend the certificates of title (or file UCC-3 statements)
to identify the Trustee as the new secured party, and neither the Depositor nor
the Master Servicer will deliver the certificates of title to the Trustee or
note thereon the interest of the Trustee. Accordingly, the Asset Seller (or
other originator of the Contracts) will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In some
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to Master Servicer's rights as the secured party.
However, in some states, in the absence of an amendment to the certificate of
title (or the filing of a UCC-3 statement), such assignment of the security
interest in the Manufactured Home may not be held effective or such security
interests may not be perfected and in the absence of such notation or delivery
to the Trustee, the assignment of the security interest in the Manufactured Home
may not be effective against creditors of the Asset Seller (or such other
originator of the Contracts) or a trustee in bankruptcy of the Asset Seller (or
such other originator).
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 Asset Seller
(or other originator of the Contracts) on the certificate of title or delivery
of the required documents and fees will be sufficient to protect the
Certificateholders 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 security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Master Servicer must surrender possession if
it holds the certificate of title to such Manufactured Home or, in
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the case of Manufactured Homes registered in states which provide for notation
of lien, the Asset Seller (or other originator) would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to re-
perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection. In
the ordinary course of servicing the manufactured housing contracts, the Master
Servicer takes steps to effect such re-perfection upon receipt of notice of
re-registration or information from the obligor as to relocation. Similarly,
when an obligor under a manufactured housing contract sells a manufactured home,
the Master Servicer must surrender possession of the certificate of title or, if
it is noted as lienholder on the certificate of title, 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 the Agreement, the Master Servicer is
obligated to take such steps, at the Master Servicer's expense, as are necessary
to maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
Agreement that it has no knowledge of any such liens with respect to any
Manufactured Home securing payment on any Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to the
Trustee or Certificateholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Master Servicer on behalf of the Trustee, to the extent required by the
related Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such Defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
'self-help' repossession that is 'peaceful' (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Under the terms of the federal Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the 'Relief Act'), an Obligor who enters military service
after the origination of such Obligor's Contract (including an Obligor who is a
member of the National Guard or is in reserve status at the time of the
origination of the Contract and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such Obligor's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Contracts. Any shortfall in interest
collections resulting from the application of the Relief Act, to the
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extent not covered by the subordination of a Class of Subordinated Certificates,
could result in losses to the holders of a Series of Certificates. In addition,
the Relief Act imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Contract during the Obligor's period of
active duty status. Thus, in the event that such a Contract goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Manufactured Home in a timely fashion.
CONSUMER PROTECTION LAWS
The so-called 'Holder-in-Due-Course' rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF 'DUE-ON-SALE' CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer expects that it will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the 'due-on-sale' clause. The Garn-St Germain Depositary Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of 'due-on-sale' clauses applicable to the Manufactured
Homes. Consequently, in some states the Master Servicer may be prohibited from
enforcing a 'due-on-sale' clause in respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ('Title V'), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of Brown & Wood LLP, counsel to the Depositor. This
summary is based on laws, regulations, including the REMIC regulations
promulgated by the Treasury Department (the 'REMIC Regulations'), rulings and
decisions now in effect or (with respect to regulations) proposed, all of which
are subject to change either prospectively or retroactively. This summary does
not address the federal income tax consequences of an investment in Securities
applicable to all categories of investors, some of which (for example, banks and
insurance companies) may be subject to special rules. Prospective investors
should consult their tax advisors regarding the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
Securities.
Unless otherwise stated or unless the context otherwise requires, in the
following discussion a reference to the term 'Mortgage Loan' or 'Mortgage Asset'
will also be deemed to include a reference to a 'Contract'.
GENERAL
The federal income tax consequences to Securityholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Securities as a REMIC under the Code. The Prospectus Supplement for
each Series of Securities will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If neither a REMIC election nor a partnership election is made, Brown &
Wood LLP will deliver its opinion that the Trust Fund will not be classified as
an association taxable as a corporation and that each such Trust Fund will be
classified as a grantor trust under subpart E, Part I of subchapter J of the
Code. In this case, owners of Certificates will be treated for federal income
tax purposes as owners of a portion of the Trust Fund's assets as described
below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of Grantor
Trust Certificates. In this case, each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ('OID'), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation) will be reduced by the lesser of (i) 3%
of the excess of adjusted gross income over the applicable amount and (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable year.
A Grantor Trust Certificateholder using the cash method of accounting
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must take into account its pro rata share of income and deductions as and when
collected by or paid to the Master Servicer. A Grantor Trust Certificateholder
using an accrual method of accounting must take into account its pro rata share
of income and deductions as they become due or are paid to the Master Servicer,
whichever is earlier. If the servicing fees paid to the Master Servicer are
deemed to exceed reasonable servicing compensation, the amount of such excess
could be considered as an ownership interest retained by the Master Servicer (or
any person to whom the Master Servicer assigned for value all or a portion of
the servicing fees) in a portion of the interest payments on the Mortgage
Assets. The Mortgage Assets would then be subject to the 'coupon stripping'
rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans (not including Contracts, Unsecured Home Improvement Loans, SBA
Loans or SBA 504 Loans), Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a 'domestic building and loan
association' within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent 'loans . . . secured by an interest in real property which is
. . . residential property' within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the Mortgage Assets represented by
that Grantor Trust Certificate are of a type described in such Code
section;
(ii) a Grantor Trust Certificate owned by a financial institution
described in Code Section 593(a) representing principal and interest
payments on Mortgage Assets will be considered to represent 'qualifying
real property loans' within the meaning of Code Section 593(d) and the
Treasury regulations under Code Section 593, to the extent that the
Mortgage Assets represented by that Grantor Trust Certificate are of a type
described in such Code section;
(iii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent 'real estate assets' within the meaning of Code Section
856(c)(5)(A), and interest income on the Mortgage Assets will be considered
'interest on obligations secured by mortgages on real property' within the
meaning of Code Section 856(c)(3)(B), to the extent that the Mortgage
Assets represented by that Grantor Trust Certificate are of a type
described in such Code section; and
(iv) a Grantor Trust Certificate owned by a REMIC will represent
'obligation[s] . . . which [are] principally secured by an interest in real
property' within the meaning of Code Section 860G(a)(3).
Under Code Section 7701(a)(19)(C)(v), 'loans secured by an interest in real
property' include loans secured by mobile homes not used on a transient basis.
The Treasury regulations under Code Section 593 define 'qualifying real property
loan' to include a loan secured by a mobile home unit 'permanently fixed to real
property' except during a brief period in which the unit is transported to its
site. The Treasury regulations under Code Section 856 state that the local law
definitions are not controlling in determining the meaning of the term 'real
property' for purposes of Code Section 856, and the Internal Revenue Service
('IRS') has ruled that obligations secured by permanently installed mobile home
units qualify as 'real estate assets' under this provision. Entities affected by
the foregoing Code provisions that are considering the purchase of Certificates
evidencing interests in Trust Fund comprised of Contracts should consult their
tax advisors regarding such provisions.
Stripped Bonds and Coupons. Certain Trust Funds may consist of Government
Securities which constitute 'stripped bonds' or 'stripped coupons' as those
terms are defined in Section 1286 of the Code, and, as a result, such assets
would be subject to the stripped bond provisions of the Code. Under these rules,
such Government Securities are treated as having original issue discount based
on the purchase price and the stated redemption price at maturity of each
Security. As such, Grantor Trust Certificateholders would be required to include
in income their pro rata share of the original issue discount on each Government
Security recognized in any given year on an economic accrual basis even if the
Grantor Trust Certificateholder is a cash method taxpayer. Accordingly, the sum
of the income includible to the Grantor Trust Certificateholder in any taxable
year may exceed amounts actually received during such year.
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Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Mortgage Loan (or
underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to original issue discount ('OID') (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994,
under such Sections (the 'OID Regulations'), will be applicable to a Grantor
Trust Certificateholder's interest in those Mortgage Assets meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of OID income are applicable to mortgages of corporations originated
after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such OID could arise by the financing of points
or other charges by the originator of the mortgages in an amount greater than a
statutory de minimis exception to the extent that the points are not currently
deductible under applicable Code provisions or are not for services provided by
the lender. OID generally must be reported as ordinary gross income as it
accrues under a constant interest method. See ' -- Multiple Classes of Grantor
Trust Certificates -- Accrual of Original Issue Discount' below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a 'market discount.'
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such
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holder's tax basis in such interest. Market discount with respect to a Grantor
Trust Certificate will be considered to be zero if the amount allocable to the
Grantor Trust Certificate is less than 0.25% of the Grantor Trust Certificate's
stated redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
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
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See ' -- Taxation of Owners of REMIC Regular
Certificates -- Premium' herein. The election to accrue interest, discount and
premium on a constant yield method with respect to a Certificate is irrevocable.
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B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of 'stripped bonds' with respect to principal payments and 'stripped
coupons' with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Mortgage Assets (the 'Stripped
Bond Certificates'), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
'Stripped Coupon Certificates').
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by Mortgage Asset basis, which could result in
some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off. See ' -- Non-REMIC Certificates' and 'Multiple Classes of
Grantor Trust Certificates -- Stripped Bonds and Stripped Coupons' herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an interest in Mortgage Assets issued on the day such Certificate
is purchased for purposes of calculating any OID. Generally, if the discount on
a Mortgage Asset is larger than a de minimis amount (as calculated for purposes
of the OID rules) a purchaser of such a Certificate will be required to accrue
the discount under the OID rules of the Code. See ' -- Non-REMIC Certificates'
and ' -- Single Class of Grantor Trust Certificates -- Original Issue Discount'
herein. However, a purchaser of a Stripped Bond Certificate will be required to
account for any discount on the Mortgage Assets as market discount rather than
OID if either (i) the amount of OID with respect to the Mortgage Assets is
treated as zero under the OID de minimis rule when the Certificate was stripped
or (ii) no more than 100 basis points (including any amount of servicing fees in
excess of reasonable servicing fees) is stripped off of the Trust Fund's
Mortgage Assets. Pursuant to Revenue Procedure 91-49, issued on August 8, 1991,
purchasers of Stripped Bond Certificates using an inconsistent method of
accounting must change their method of accounting and request the consent of the
IRS to the change in their accounting method on a statement attached to their
first timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
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Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent 'qualifying real property loans' within the meaning of Code Section
593(d), 'real estate assets' within the meaning of Code Section 856(c)(5)(A) and
'loans . . . secured by, an interest in real property which is . . . residential
real property' within the meaning of Code Section 7701(a)(19)(C)(v), and
interest income attributable to Grantor Trust Certificates should be considered
to represent 'interest on obligations secured by mortgages on real property'
within the meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be 'obligation[s] . . . which [are]
principally secured, directly or indirectly, by an interest in real property'
within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans
The original issue discount rules of Code Sections 1271 through 1275 will
be applicable to a Certificateholder's interest in those Mortgage Assets as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgage in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions, or under certain circumstances,
by the presence of 'teaser' rates on the Mortgage Assets. OID on each Grantor
Trust Certificate must be included in the owner's ordinary income for federal
income tax purposes as it accrues, in accordance with a constant interest method
that takes into account the compounding of interest, in advance of receipt of
the cash attributable to such income. The amount of OID required to be included
in an owner's income in any taxable year with respect to a Grantor Trust
Certificate representing an interest in Mortgage Assets other than Mortgage
Assets with interest rates that adjust periodically ('ARM Loans') likely will be
computed as described below under ' -- Accrual of Original Issue Discount.' The
following discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the '1986 Act'). The OID Regulations
generally are effective for debt instruments issued on or after April 4, 1994,
but may be relied upon as authority with respect to debt instruments, such as
the Grantor Trust Certificates, issued after December 21, 1992. Alternatively,
proposed Treasury regulations issued December 21, 1992 may be treated as
authority for debt instruments issued after December 21, 1992 and prior to April
4, 1994, and proposed Treasury regulations issued in 1986 and 1991 may be
treated as authority for instruments issued before December 21, 1992. In
applying these dates, the issued date of the Mortgage Assets should be used, or,
in the case of Stripped Bond Certificates or Stripped Coupon Certificates, the
date such Certificates are acquired. The holder of a Certificate should be
aware, however, that neither the proposed OID Regulations nor the OID
Regulations adequately address certain issues relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such
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Mortgage Asset's stated redemption price at maturity over its issue price. The
issue price of a Mortgage Asset is generally the amount lent to the mortgagee,
which may be adjusted to take into account certain loan origination fees. The
stated redemption price at maturity of a Mortgage Asset is the sum of all
payments to be made on such Mortgage Asset other than payments that are treated
as qualified stated interest payments. The accrual of this OID, as described
below under ' -- Accrual of Original Issue Discount,' will, unless otherwise
specified in the related Prospectus Supplement, utilize the original yield to
maturity of the Grantor Trust Certificate calculated based on a reasonable
assumed prepayment rate for the mortgage loans underlying the Grantor Trust
Certificates (the 'Prepayment Assumption'), and will take into account events
that occur during the calculation period. The Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the 1986 Act (the 'Legislative History')
provides, however, that the regulations will require that the Prepayment
Assumption be the prepayment assumption that is used in determining the offering
price of such Certificate. No representation is made that any Certificate will
prepay at the Prepayment Assumption or at any other rate. The prepayment
assumption contained in the Code literally only applies to debt instruments
collateralized by other debt instruments that are subject to prepayment rather
than direct ownership interests in such debt instruments, such as the
Certificates represent. However, no other legal authority provides guidance with
regard to the proper method for accruing OID on obligations that are subject to
prepayment, and, until further guidance is issued, the Master Servicer intends
to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor Trust
Certificate must include in gross income the sum of the 'daily portions,' as
defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
state redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the 'adjusted issue price' of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other than
a payment of qualified stated interest made at the end of or during that accrual
period. The OID accruing during such accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of OID must be determined according
to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Assets acquired by a Certificateholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Asset, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Asset (i.e. points) will be
includible by such holder. Other original issue discount on the Mortgage Assets
(e.g., that arising from a 'teaser' rate) would still need to be accrued.
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3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ('Stripped ARM Obligations') to holders in a manner it believes is
consistent with the rules described above under the heading ' -- Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans' and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ('Deferred Interest') to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a 'capital asset' within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
Grantor Trust Certificates will be 'evidences of indebtedness' within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below) or (ii) a Grantor Trust Certificateholder holding on behalf of an owner
that is not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Grantor Trust Certificate also will be subject to federal
income tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Grantor Trust Certificate evidences ownership
in Mortgage Assets issued after July 18, 1984, by natural persons if such
Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor Trust
Certificateholder is not a U.S. Person and providing the name and address of
such Grantor Trust Certificateholder). Additional restrictions apply to Mortgage
Assets of where the mortgagor is not a natural person in order to qualify for
the exemption from withholding.
As used herein, a 'U.S. Person' means a citizen or resident of the United
States, a corporation or a partnership organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust, the
income of which from sources outside the United States is includible in gross
income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States.
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E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
REMICS
THE DISCUSSION UNDER THIS HEADING 'REMICS' DOES NOT APPLY TO ANY TRUST FUND
CONTAINING UNSECURED HOME IMPROVEMENT LOANS, SBA LOANS OR SBA 504 LOANS.
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however ' -- Taxation of Owners of REMIC Residual Certificates' and
' -- Prohibited Transactions' below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under 'Taxation of Owners of REMIC
Residual Certificates,' the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the 'REMIC
Certificates') may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ('REMIC Regular Certificates') or a sole class of residual
interests ('REMIC Residual Certificates') in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates evidencing an interest in a Trust Fund
comprised of Mortgage Loans (not including Contracts or Unsecured Home
Improvement Loans) held by a thrift institution taxed as a 'mutual savings bank'
or 'domestic building and loan association' will represent interests in
'qualifying real property loans' within the meaning of Code Section 593(d)(1);
(ii) such Certificates held by a thrift institution taxed as a 'domestic
building and loan association' will constitute assets described in Code Section
7701(a)(19)(C); (iii) such Certificates held by a real estate investment trust
will constitute 'real estate assets' within the meaning of Code Section
856(c)(5)(A); and (iv) interest on such Certificates held by a real estate
investment trust will be considered 'interest on obligations secured by
mortgages on real property' within the meaning of Code Section 856(c)(3)(B).
Under Code Section 7701(a)(19)(C)(v), 'loans secured by an interest in real
property' include loans secured by mobile homes not used on a transient basis.
The Treasury regulations under Code Section 593 define 'qualifying real property
loan' to include a loan secured by a mobile home unit 'permanently fixed to real
property' except during a brief period in which the unit is transported to its
site. The Treasury regulations under Code Section 856 state that the local law
definitions are not controlling in determining
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the meaning of the term 'real property' for purposes of Section 856, and the IRS
has ruled that obligations secured by permanently installed mobile home units
qualify as 'real estate assets' under this provision. Entities affected by the
foregoing Code provisions that are considering the purchase of Certificates
evidencing interests in a Trust Fund comprised of Contracts should consult their
tax advisors regarding such provisions. If less than 95% of the REMIC's assets
are assets qualifying under any of the foregoing Code sections, the Certificates
will be qualifying assets only to the extent that the REMIC's assets are
qualifying assets. In addition, payments on Mortgage Assets held pending
distribution on the REMIC Certificates will be considered to be qualifying real
property loans for purposes of Code Section 593(d)(1) and real estate assets for
purposes of Code Section 856(c).
In some instances the Mortgage Assets may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Loans contained in ' -- Non-REMIC Certificates -- Single Class of
Grantor Trust Certificates' above. REMIC Certificates held by a real estate
investment trust will not constitute 'Government Securities' within the meaning
of Code Section 856(c)(5)(A), and REMIC Certificates held by a regulated
investment company will not constitute 'Government Securities' within the
meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held by certain
financial institutions will constitute 'evidences of indebtedness' within the
meaning of Code Section 582(c)(1).
A 'qualified mortgage' for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
'single family residences' under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the 'Subsidiary REMIC' and the 'Master REMIC') for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood LLP, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) 'qualifying real property
loans' under Section 593(d) of the Code; (ii) 'real estate assets' within the
meaning of Section 856(c)(5)(A) of the Code; (iii) 'loans secured by an interest
in real property' under Section 7701(a)(19)(C) of the Code; and (iv) whether the
income on such Certificates is interest described in Section 856(c)(3)(B) of the
Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the 'stated redemption price at maturity' of a REMIC Regular Certificate and its
'issue price.' Holders of any class of Certificates issued with
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OID will be required to include such OID in gross income for federal income tax
purposes as it accrues, in accordance with a constant interest method based on
the compounding of interest as it accrues rather than in accordance with receipt
of the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
'1986 Act'). Holders of REMIC Regular Certificates (the 'REMIC Regular
Certificateholders') should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
'stated redemption price at maturity' over its 'issue price.' The issue price of
a REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the 'Closing Date'), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
'qualified stated interest.' Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. Distributions of
interest on REMIC Regular Certificates with respect to which Deferred Interest
will accrue will not constitute qualified stated interest payments, and the
stated redemption price at maturity of such REMIC Regular Certificates includes
all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date
on a REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the Certificates stated redemption
price at maturity. REMIC Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this
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purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of full
years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the REMIC Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the REMIC Regular Certificate. Although currently unclear, it
appears that the schedule of such distributions should be determined in
accordance with the Prepayment Assumption. The Prepayment Assumption with
respect to a Series of REMIC Regular Certificates will be set forth in the
related Prospectus Supplement. Holders generally must report de minimis OID pro
rata as principal payments are received, and such income will be capital gain if
the REMIC Regular Certificate is held as a capital asset. However, accrual
method holders may elect to accrue all de minimis OID as well as market discount
under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
'Super-Premium Certificates'). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to original issue discount, should apply to such
Certificates. Although such rules are not applicable to instruments governed by
Code Section 1276(a)(6), they represent the only guidance regarding the current
views of the IRS with respect to contingent payment instruments. In the
alternative, the IRS could assert that the stated redemption price at maturity
of such REMIC Regular Certificates should be limited to their principal amount
(subject to the discussion below under ' -- Accrued Interest Certificates'), so
that such REMIC Regular Certificates would be considered for federal income tax
purposes to be issued at a premium. If such a position were to prevail, the
rules described below under ' -- Taxation of Owners of REMIC Regular
Certificates -- Premium' would apply. It is unclear when a loss may be claimed
for any unrecovered basis for a Super-Premium Certificate. It is possible that a
holder of a Super-Premium Certificate may only claim a loss when its remaining
basis exceeds the maximum amount of future payments, assuming no further
prepayments or when the final payment is received with respect to such
Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under ' -- REMIC Regular Certificates -- Premium' should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income
the 'daily portions,' as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds 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, a calculation
will be made of the portion of the OID that accrues during each successive
period ('an accrual period') that ends on the day in the calendar year
corresponding to a Distribution Date (or if Distribution Dates are on the first
day or first business day of the immediately preceding month, interest may be
treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by (i) adding (a) the present value at
the end of the
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accrual period (determined by using as a discount factor the original yield to
maturity of the REMIC Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and (b) any payments included in
the stated redemption price at maturity received during such accrual period, and
(ii) subtracting from that total the adjusted issue price of the REMIC Regular
Certificates at the beginning of such accrual period. The adjusted issue price
of a REMIC Regular Certificate at the beginning of the first accrual period is
its issue price; the adjusted issue price of a REMIC Regular Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period and reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accrued during an accrual period will then be divided by
the number of days in the period to determine the daily portion of OID for each
day in the accrual period. The calculation of OID under the method described
above will cause the accrual of OID to either increase or decrease (but never
below zero) in a given accrual period to reflect the fact that prepayments are
occurring faster or slower than under the Prepayment Assumption. With respect to
an initial accrual period shorter than a full accrual period, the daily portions
of OID may be determined according to an appropriate allocation under any
reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for that REMIC Regular
Certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a 'qualified floating rate,'
an 'objective rate,' a combination of a single fixed rate and one or more
'qualified floating rates,' one 'qualified inverse floating rate,' or a
combination of 'qualified floating rates' that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
' -- Original Issue Discount and Premium' by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
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Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
' -- REMIC Regular Certificates -- Premium' herein. The election to accrue
interest, discount and premium on a constant yield method with respect to a
Certificate is irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, 'market discount' equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal amount
or, in the case of a REMIC Regular Certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had purchased such REMIC
Regular Certificate from an original holder) over (ii) the price for such REMIC
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount will recognize income upon
receipt of each distribution representing amounts included in such certificate's
stated redemption price at maturity. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such distribution
first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at the
beginning of the period. For REMIC Regular Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (a) the total remaining market discount and (b) a fraction, the numerator of
which is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest
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remaining to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the REMIC Regular Certificates) that provide for payments that may be
accelerated by reason of prepayments of other obligations securing such
instruments, the same Prepayment Assumption applicable to calculating the
accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount also
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
such Certificate purchased with market discount. For these purposes, the de
minimis rule referred to above applies. Any such deferred interest expense would
not exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such Certificates and, therefore, applying the latter analysis may result only
in a slight difference in the timing of the inclusion in income of interest on
such REMIC Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more classes of Subordinated Certificates, and in the event there
are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Assets. Timing and characterization of such
losses is discussed in ' -- REMIC Regular Certificates -- Treatment of Realized
Losses' below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the
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sale, exchange, redemption, or retirement and the seller's adjusted basis in the
REMIC Regular Certificate. Such adjusted basis generally will equal the cost of
the REMIC Regular Certificate to the seller, increased by any OID and market
discount included in the seller's gross income with respect to the REMIC Regular
Certificate, and reduced (but not below zero) by payments included in the stated
redemption price at maturity previously received by the seller and by any
amortized premium. Similarly, a holder who receives a payment that is part of
the stated redemption price at maturity of a REMIC Regular Certificate will
recognize gain equal to the excess, if any, of the amount of the payment over
the holder's adjusted basis in the REMIC Regular Certificate. A REMIC Regular
Certificateholder who receives a final payment that is less than the holder's
adjusted basis in the REMIC Regular Certificate will generally recognize a loss.
Except as provided in the following paragraph and as provided under ' -- Market
Discount' above, any such gain or loss will be capital gain or loss, provided
that the REMIC Regular Certificate is held as a 'capital asset' (generally,
property held for investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
The Certificates will be 'evidences of indebtedness' within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a REMIC
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
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 necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC Regular Certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular Certificates
('Payment Lag Certificates') may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a REMIC Regular
Certificate is allocable to interest that has accrued prior to the issue date
('pre-issuance accrued interest') and the REMIC Regular Certificate provides for
a payment of stated interest on the first payment date (and the first payment
date is within one year of the issue date) that equals or exceeds the amount of
the pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of
pre-issuance accrued interest, rather than as an amount payable on the REMIC
Regular Certificate. However, it is unclear under this method how the OID
Regulations treat interest on Payment Lag Certificates. Therefore, in the case
of a Payment Lag Certificate, the Trust Fund intends to include accrued interest
in the issue price and report interest payments made on the first Distribution
Date as interest to the extent such payments represent interest for the number
of days that the Certificateholder has held such Payment Lag Certificate during
the first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a 'single-class REMIC,' a portion of the
REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those REMIC Regular Certificateholders
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that are 'pass-through interest holders.' Certificateholders that are
pass-through interest holders should consult their own tax advisors about the
impact of these rules on an investment in the REMIC Regular Certificates. See
'Pass-Through of Non-Interest Expenses of the REMIC' under 'Taxation of Owners
of REMIC Residual Certificates' below.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of Certificates
may be allowed a bad debt deduction at such time that the principal balance of
any such Certificate is reduced to reflect realized losses resulting from any
liquidated Mortgage Assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all Mortgage Assets remaining in the related
Trust Fund have been liquidated or the Certificates of the related Series have
been otherwise retired. Potential investors and holders of the Certificates are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the REMIC Regular Certificates to a REMIC
Regular Certificateholder who is not a U.S. Person and is not engaged in a trade
or business within the United States will not be subject to federal withholding
tax if (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions of
interest to such holder, including distributions in respect of accrued OID, may
be subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate of
a non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the 'REMIC Residual Certificateholder')
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any
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amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual Certificates.
The REMIC will not be subject to federal income tax except with respect to
income from prohibited transactions and certain other transactions. See
' -- Prohibited Transactions and Other Taxes' below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined by
allocating the taxable income of the REMIC for each calendar quarter ratably to
each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
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 the limitations on the deductibility of 'passive losses.'
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, 'phantom income'). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See ' -- Sale or Exchange of REMIC
Residual Certificates' below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The taxable
income of the REMIC will reflect a netting of (i) the income from the Mortgage
Assets and the REMIC's other assets and (ii) the deductions allowed to the REMIC
for interest and OID on the REMIC Regular Certificates and, except as described
above under ' -- Taxation of Owners of REMIC Regular
Certificates -- Non-Interest Expenses of the REMIC,' other expenses. REMIC
taxable income is generally determined in the same manner as the taxable income
of an individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC's gross income
includes interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, reduced by amortization of any premium on the
Mortgage Loans, plus income on
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reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the REMIC Regular
Certificates. Note that the timing of cancellation of indebtedness income
recognized by REMIC Residual Certificateholders resulting from defaults and
delinquencies on Mortgage Assets may differ from the time of the actual loss on
the Mortgage Asset. The REMIC's deductions include interest and original issue
discount expense on the REMIC Regular Certificates, servicing fees on the
Mortgage Loans, other administrative expenses of the REMIC and realized losses
on the Mortgage Loans. The requirement that REMIC Residual Certificateholders
report their pro rata share of taxable income or net loss of the REMIC will
continue until there are no Certificates of any class of the related Series
outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon and
would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See ' -- Sale or Exchange of REMIC Residual
Certificates' below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of such REMIC Residual Certificate to such holder and
the adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder, see ' -- Allocation of the Income of
the REMIC to the REMIC Residual Certificates' above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS recently released proposed regulations
(the 'Proposed Mark-to-Market Regulations') which provide that a REMIC Residual
Certificate acquired after January 3, 1995 cannot be marked to market. The
Proposed Mark-to-Market Regulations change the temporary regulations which
allowed a
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Residual Certificate to be marked to market provided that it was not a 'negative
value' residual interest and did not have the same economic effect as a
'negative value' residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
REMIC Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g., a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other 'miscellaneous
itemized deductions' of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the 'Applicable Amount') will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term 'pass-through interest
holder' generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an 'excess inclusion') for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as 'unrelated business taxable income' within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated business
taxable income (see ' -- Tax-Exempt Investors' below); and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See ' -- Non-U.S. Persons' below.
The exception for thrift institutions is available only to the institution
holding the REMIC Residual Certificate and not to any affiliate of the
institution, unless the affiliate is a subsidiary all the stock of which, and
substantially all the indebtedness of which, is held by the institution, and
which is organized and operated exclusively in connection with the organization
and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any REMIC
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (ii) the sum
of the 'daily accruals' (as defined below) for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds such REMIC Residual
Certificate. For this purpose,
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the daily accruals with respect to a REMIC Residual Certificate are determined
by allocating to each day in the calendar quarter its ratable portion of the
product of the 'adjusted issue price' (as defined below) of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
'Federal long-term rate' in effect at the time the REMIC Residual Certificate is
issued. For this purpose, the 'adjusted issue price' of a REMIC Residual
Certificate at the beginning of any calendar quarter equals the issue price of
the REMIC Residual Certificate, increased by the amount of daily accruals for
all prior quarters, and decreased (but not below zero) by the aggregate amount
of payments made on the REMIC Residual Certificate before the beginning of such
quarter. The 'federal long-term 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.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ('thrift institutions') to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC Residual Certificates that have 'significant value' within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to Residual Certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the 'wash sale' rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be 'evidences of indebtedness' within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
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Except as provided in Treasury regulations yet to be issued, if the seller
of a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a 'taxable mortgage pool' (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the 'wash
sale' rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from 'prohibited transactions' (the 'Prohibited Transactions Tax'). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the 'Contributions Tax'). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be 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 income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Trustee's or Asset
Seller's obligations, as the case may be, under the related Agreement for such
Series, such tax will be borne by such Master Servicer, Trustee or Asset Seller,
as the case may be, out of its own funds or (ii) the Asset Seller's obligation
to repurchase a Mortgage Loan, such tax will be borne by the Asset Seller. In
the event that such Master Servicer, Trustee or Asset Seller, as the case may
be, fails to pay or is not required to pay any such tax as provided above, such
tax will be payable out of the Trust Fund for such Series and will result in a
reduction in amounts available to be distributed to the Certificateholders of
such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to
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the amount of such excess. It is unclear whether such a loss, if allowed, will
be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its 'unrelated business
taxable income' within the meaning of Code Section 512 will be subject to such
tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See ' -- Taxation of Owners
of REMIC Residual Certificates -- Excess Inclusions' above.
G. RESIDUAL CERTIFICATE PAYMENTS -- NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons
(see ' -- Taxation of Owners of REMIC Regular Certificates -- Non-U.S. Persons'
above) are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as 'portfolio interest,' subject to the conditions
described in ' -- Taxation of Owners of REMIC Regular Certificates' above, but
only to the extent that the underlying mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a REMIC Residual
Certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See ' -- Taxation of Owners of REMIC Residual
Certificates -- Excess Inclusions' above. If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the REMIC Residual Certificate is
disposed of) under rules similar to those for withholding upon disposition of
debt instruments that have OID. The Code, however, grants the Treasury
Department authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See ' -- Taxation of Owners of REMIC Residual
Certificates -- Excess Inclusions' above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see ' -- Tax-Related Restrictions on Transfers of REMIC Residual
Certificates' below.
REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
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TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by 'disqualified organizations' (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
'disqualified organization.' The amount of the tax equals the product of (i) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated 'excess inclusions' with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A 'disqualified
organization' means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on 'unrelated business taxable income' and
(C) a rural electric or telephone cooperative.
A tax is imposed on a 'pass-through entity' (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a 'pass-through entity' means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity. The tax on pass-through entities
is generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable years
of such entities beginning after December 31, 1988. Under proposed legislation,
large partnerships (generally with 250 or more partners) will be taxable on
excess inclusion income as if all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a 'U.S. Person,' as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the
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product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes. A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or should
have known that the transferee would be unwilling or unable to pay taxes due on
its share of the taxable income of the REMIC. A transferor is presumed not to
have such knowledge if (i) the transferor conducted a reasonable investigation
of the transferee and (ii) the transferee acknowledges to the transferor that
the residual interest may generate tax liabilities in excess of the cash flow
and the transferee represents that it intends to pay such taxes associated with
the residual interest as they become due. If a transfer of a Noneconomic REMIC
Residual Certificate is disregarded, the transferor would continue to be treated
as the owner of the REMIC Residual Certificate and would continue to be subject
to tax on its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a 'tax avoidance potential' to a 'foreign
person' will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United States trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expects that the REMIC will distribute to
the transferee amounts that will equal at least 30 percent of each excess
inclusion, and that such amounts will be distributed at or after the time the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the REMIC
Residual Certificate to a U.S. Person, the transfer will be disregarded, and the
foreign transferor will continue to be treated as the owner, if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess inclusions.
The provisions in the REMIC Regulations regarding transfers of REMIC Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the Trustee with a duly completed I.R.S. Form 4224 and the Trustee
consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
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 Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
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, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
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A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, etc. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for 'qualified stated interest'
under the OID regulations, and that any OID on the Notes (i.e., any excess of
the principal amount of the Notes over their issue price) does not exceed a de
minimis amount (i.e., 1/4% of their principal amount multiplied by the number of
full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
'foreign person') generally will be considered 'portfolio interest,' and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust Fund or the Asset
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Seller is a 'related person' within the meaning of the Code and (ii) provides
the Owner Trustee or other person who is otherwise required to withhold U.S. tax
with respect to the Notes with an appropriate statement (on Form W-8 or a
similar form), signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. If a Note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to withhold
31 percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be 'unrelated business taxable income,' income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Depositor will agree, and
the Certificateholders will agree by their purchase of Certificates, to treat
the 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 Trust Fund, the partners
of the partnership being the Certificateholders, and the Notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the Trust Fund, the Certificates, the Notes, the Trust Fund and the Master
Servicer is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
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Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Company.
Based on the economic arrangement of the parties, this approach for allocating
Trust Fund income should be permissible under applicable treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Certificateholders. Moreover, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
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. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Mortgage Loans may be greater or less than
the remaining principal balance of the Loans at the time of
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purchase. If so, the Loan will have been acquired at a premium or discount, as
the case may be. (As indicated above, the Trust Fund will make this calculation
on an aggregate basis, but might be required to recompute it on a Mortgage Loan
by Mortgage Loan basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Trust Fund will be considered
to distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a 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 Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the 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,
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as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust 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
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the 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 Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the 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 Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the 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 Trust Fund's income.
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Each foreign holder must obtain a taxpayer identification number from the IRS
and submit that number to the 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 Trust Fund taking the position that no taxes were due because the 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 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 will be subject
to United States federal income tax and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable treaty. In such case, a
foreign holder would only be entitled to claim a refund for that portion of the
taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
RECENT LEGISLATION
During 1996, President Clinton signed into law the 'Small Business Job
Protection Act of 1996' (the 'Act'). The Act creates a new type of entity for
federal income tax purposes called a 'financial asset securitization investment
trust' or 'FASIT.' Beginning in September of 1997, the Act generally enables
certain arrangements similar to a Trust Fund that is treated as a partnership to
elect to be treated as a FASIT. Under the Act, a FASIT generally would avoid
federal income taxation and could issue securities substantially similar to the
Certificates and Notes, and those securities would be treated as debt for
federal income tax purposes. If so provided in the related Prospectus
Supplement, the Agreement, the Trust Agreement and/or the Indenture will set
forth certain conditions which, if satisfied, will permit the Depositor to amend
such Agreement, Trust Agreement and/or Indenture in order to enable all or a
portion of the Trust Fund to qualify as a FASIT and to permit a FASIT election
to be made with respect thereto, and to make such modifications to such
Agreement, Trust Agreement and/or Indenture as may be permitted by reason of the
making of such an election. However, the Depositor may, but is not obligated to,
cause a FASIT election and there can be no assurance that the Depositor will or
will not cause any permissible FASIT election to be made with respect to a Trust
Fund or amend the related Agreement, Trust Agreement and/or the Indenture in
connection with any election. Furthermore, any such election will be made only
if an opinion of federal tax counsel or special federal tax counsel is rendered
that such election will not have material adverse federal income consequences to
any holder of a Note or Certificate.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Offered Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans subject to ERISA
('Plans') and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section
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410(d) of the Code), are not subject to the restrictions of ERISA, and assets of
such plans may be invested in the Securities without regard to the ERISA
considerations described below, subject to other applicable federal and state
law. However, any such governmental or church plan which is qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of the
Code is subject to the prohibited transaction rules set forth in Section 503 of
the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code imposes certain excise taxes (or, in some cases, a civil penalty may
be assessed pursuant to Section 502(i) of ERISA) on parties in interest which
engage in non-exempt prohibited transactions.
The United States Department of Labor ('Labor') has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an 'equity investment' will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans or Contracts and any
other assets held by the Trust Fund. In such an event, the Asset Seller, the
Master Servicer, the Trustee, any insurer of the Assets and other persons, in
providing services with respect to the assets of the Trust Fund, may be parties
in interest, subject to the fiduciary responsibility provisions of Title I of
ERISA, including the prohibited transaction provisions of Section 406 of ERISA
(and of Section 4975 of the Code), with respect to transactions involving such
assets unless such transactions are subject to a statutory or administrative
exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, 'benefit plan investors' in the aggregate, own at
least 25% of the value of any class of equity interest. 'Benefit plan investors'
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25% limitation must be met with respect to each
class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interest' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
AVAILABILITY OF UNDERWRITER'S EXEMPTION FOR CERTIFICATES
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21,450 (1990) (the 'Exemption') which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith
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Incorporated or any of its affiliates is the sole underwriter or the manager or
co-manager of the underwriting syndicate; and (2) the servicing, operation and
management of such asset-backed pass-through trusts, provided that the general
conditions and certain other conditions set forth in the Exemption are
satisfied. The Exemption does not apply to Certificates evidencing an interest
in a Trust Fund containing Unsecured Home Improvement Loans, SBA Loans or SBA
504 Loans. With respect to a series of Notes, the related Prospectus Supplement
will discuss whether the Exemption may be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets forth
the following general conditions which must be satisfied before a transaction
involving the acquisition, sale and holding of the Certificates or a transaction
in connection with the servicing, operation and management of the Trust may be
eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Inc., Fitch Investors Service
L.P., Moody's Investors Service, Inc. and Standard & Poor's Ratings Group;
(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Mortgage Assets, any
borrower whose obligations under one or more Assets constitute more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (the 'Restricted Group');
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Asset Seller pursuant to the sale
of the Assets to the Trust Fund represents not more than the fair market
value of such Assets; the sum of all payments made to and retained by the
Master Servicer represent not more than reasonable compensation for the
Master Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is 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.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute 'certificates' for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Securities, a
fiduciary of a Plan subject to the fiduciary responsibility provisions of ERISA
or an employee benefit plan subject to the prohibited transaction provisions of
the Code should make its own determination as to the availability of the
exemptive relief provided in the Exemption, and also consider the availability
of any other prohibited transaction exemptions. In particular, in connection
with a contemplated purchase of Securities representing a beneficial ownership
interest in a pool of single family residential first mortgage loans, such Plan
fiduciary should consider the availability of the Exemption or Prohibited
Transaction Class Exemption 83-1 ('PTCE 83-1') for certain transactions
involving mortgage pool investment trusts. The Prospectus Supplement with
respect to a series of Securities may contain additional information regarding
the application of the Exemption, PTCE 83-1, or any other exemption, with
respect to the Securities offered thereby. PTCE 83-1 is not
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applicable to manufactured housing contract pool investment trusts or
multifamily mortgage pool investment trusts.
Purchasers that are insurance companies should consult with their counsel
with respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust & Savings Bank (decided December 13, 1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be 'plan assets' for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Securities. In particular, such
an insurance company should consider the exemptive relief granted by Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute 'mortgage related securities' ('SMMEA Securities') for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA').
SMMEA Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia enacted legislation before
the October 4, 1991 cutoff established by SMMEA for such enactments, limiting to
varying extents the ability of certain entities (in particular, insurance
companies) to invest in mortgage related securities, in most cases by requiring
the affected investors to rely solely upon existing state law, and not SMMEA.
Investors affected by such legislation will be authorized to invest in SMMEA
Certificates only to the extent provided in such legislation. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in 'mortgage
related securities,' or require the sale or other disposition of such
securities, so long as such contractual commitment was made or such securities
acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with 'mortgage
related securities' without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ('NCUA') Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation 'Investment
and Deposit Activities' (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
Institutions where investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ('FDIC'), the Office of Thrift Supervision
('OTS'), the NCUA or other federal or state
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agencies with similar authority should review any applicable rules, guidelines
and regulations prior to purchasing any Offered Security. The Federal Financial
Institutions Examination Council, for example, has issued a Supervisory Policy
Statement on Securities Activities effective February 10, 1992 (the 'Policy
Statement') setting forth guidelines for and significant restrictions on
investments in 'high-risk mortgage securities.' The Policy Statement has been
adopted by the Comptroller of the Currency, the Federal Reserve Board, the FDIC,
the OTS and the NCUA (with certain modifications), with respect to the
depository institutions that they regulate. The Policy Statement generally
indicates that a mortgage derivative product will be deemed to be high risk if
it exhibits greater price volatility than a standard fixed rate thirty-year
mortgage security. According to the Policy Statement, prior to purchase, a
depository institution will be required 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. Reliance on analysis and documentation obtained from a securities dealer
or other outside party without internal analysis by the institution would be
unacceptable. There can be no assurance that any classes of Offered Securities
will not be treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, 'Mortgage
Derivative Products and Mortgage Swaps,' which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain 'high-risk' mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise 'troubled' institutions. According to the
bulletin, such 'high-risk' mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the 'Model Law') which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute 'mortgage
related securities' under SMMEA. The appropriate characterization of this
Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
Except as to the status of SMMEA Securities identified in the Prospectus
Supplement for a series as 'mortgage related securities' under SMMEA, the
Depositor will make no representations as to the proper characterization of the
Offered Certificates for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase any Offered
Certificates under applicable legal investment restrictions. The uncertainties
described above (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the Offered
Securities) may adversely affect the liquidity of the Offered Securities.
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 certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other
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restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch') acting as underwriter with other
underwriters, if any, named therein. In such event, the Prospectus Supplement
may also specify that the underwriters will not be obligated to pay for any
Offered Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Depositor. In connection with the sale of Offered
Certificates, underwriters may receive compensation from the Depositor or from
purchasers of Offered 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 Offered
Securities will be distributed by Merrill Lynch acting as agent or in some cases
as principal with respect to Offered Securities that it has previously purchased
or agreed to purchase. If Merrill Lynch acts as agent in the sale of Offered
Securities, Merrill Lynch will receive a selling commission with respect to such
Offered Securities, depending on market conditions, expressed as a percentage of
the aggregate Certificate Balance or notional amount of such Offered Securities
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 Merrill
Lynch elects to purchase Offered Securities as principal, Merrill Lynch may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
Offered Securities will often be sold primarily to institutional investors.
Purchasers of Offered 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 Offered 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 an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment-grade class may be initially retained by the Depositor or Asset
Seller, and may be sold by the Depositor or Asset Seller at any time in private
transactions.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
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LEGAL MATTERS
Certain legal matters in connection with the Securities, including certain
federal income tax consequences, will be passed upon for the Depositor by Brown
& Wood LLP, New York, New York or such other counsel as is specified in the
related Prospectus Supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities 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 stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
1986 Act........................................................................................ 80, 85
accrual period.................................................................................. 86
Accrual Securities.............................................................................. 9, 31
Agreement....................................................................................... 38
Applicable Amount............................................................................... 94
ARM Contracts................................................................................... 23
ARM Loans....................................................................................... 20, 80
Asset Seller.................................................................................... 19
Assets.......................................................................................... 1, 5, 19
Available Distribution Amount................................................................... 32
Balloon Mortgage Loans.......................................................................... 15
Benefit plan investors.......................................................................... 106
Book-Entry Securities........................................................................... 31
Buydown Mortgage Loans.......................................................................... 29
Buydown Period.................................................................................. 29
Cash Flow Agreement(s).......................................................................... 1, 8, 25
CDC............................................................................................. 24
Cede............................................................................................ 3, 38
Certificates.................................................................................... 1, 5
Certified Lender................................................................................ 24
Certified Lender Program........................................................................ 24
Closing Date.................................................................................... 85
Code............................................................................................ 11
Collection Account.............................................................................. 43
Commission...................................................................................... 3
Contract Group.................................................................................. 9, 31
Contract Rate................................................................................... 7, 23
Contracts....................................................................................... 1, 6
Contributions Tax............................................................................... 96
Cooperative Loans............................................................................... 62
Cooperative(s).................................................................................. 19, 62
Covered Trust................................................................................... 17, 58, 65
CPR............................................................................................. 28
Credit Support.................................................................................. 1, 8, 25
Crime Control Act............................................................................... 71
Cut-off Date.................................................................................... 10
Deferred Interest............................................................................... 82
Definitive Securities........................................................................... 31, 38
Depositor....................................................................................... 5, 19
Determination Date.............................................................................. 31
disqualified organization....................................................................... 98
Distribution Date............................................................................... 10
DTC............................................................................................. 3, 37
Due Period...................................................................................... 32
ERISA........................................................................................... 12, 106
excess inclusion................................................................................ 94
Exchange Act.................................................................................... 1
excess servicing................................................................................ 79
Exemption....................................................................................... 107
FASIT........................................................................................... 105
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
financial asset securitization investment trust................................................. 105
FDIC............................................................................................ 43, 109
FHLMC........................................................................................... 51
foreign person.................................................................................. 99, 101
Government Securities........................................................................... 1, 7, 19
Grantor Trust Certificates...................................................................... 11
Home Equity Loans............................................................................... 5, 20
Home Improvement Contracts...................................................................... 6, 20
Indenture....................................................................................... 31, 39
Indenture Trustee............................................................................... 39
Indirect Participants........................................................................... 37
Insurance Proceeds.............................................................................. 43
L/C Bank........................................................................................ 59
Labor........................................................................................... 106
Legislative History............................................................................. 81
Liquidation Proceeds............................................................................ 43
Loan-to-Value Ratio............................................................................. 20
Lock-out Date................................................................................... 21
Lock-out Period................................................................................. 21
Manufactured Home............................................................................... 6
manufactured housing contracts.................................................................. 16
Master REMIC.................................................................................... 84
Master Servicer................................................................................. 5
MBS............................................................................................. 1, 5, 19
MBS Agreement................................................................................... 21
MBS Issuer...................................................................................... 21
MBS Servicer.................................................................................... 21
MBS Trustee..................................................................................... 22
Merrill Lynch................................................................................... 110
Model Law....................................................................................... 109
Mortgage Assets................................................................................. 19
Mortgage Loan Group............................................................................. 9, 31
Mortgage Loans.................................................................................. 1, 5, 19
Mortgage Notes.................................................................................. 20
Mortgage Participations......................................................................... 1, 5, 19
Mortgages....................................................................................... 20
Mortgage Rate................................................................................... 6, 21
Multifamily Mortgage Loan....................................................................... 19
Multifamily Property............................................................................ 5, 19
NCUA............................................................................................ 109
Nonrecoverable Advance.......................................................................... 35
Notes........................................................................................... 1, 5
Offered Securities.............................................................................. 1
OID............................................................................................. 75
OID Regulations................................................................................. 77
Originator...................................................................................... 20
OTS............................................................................................. 109
Participants.................................................................................... 37
parties in interest............................................................................. 106
pass-through entity............................................................................. 98
pass-through interest holder.................................................................... 94
</TABLE>
113
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<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
Pass-Through Rate............................................................................... 9, 32
Payment Lay Certificates........................................................................ 90
Permitted Investments........................................................................... 43
Plans........................................................................................... 106
phantom income.................................................................................. 92
Policy Statement................................................................................ 109
Pooling and Servicing Agreement................................................................. 38
Preferred Lender................................................................................ 24
Preferred Lender Program........................................................................ 24
Pre-Funded Amount............................................................................... 8, 25
Pre-Funding Account............................................................................. 8
pre-issuance accrued interest................................................................... 90
prepayment...................................................................................... 28
Prepayment Assumption........................................................................... 81
Prepayment Premium.............................................................................. 21
Prohibited Transactions Tax..................................................................... 96
Proposed Mark to-Market Regulations............................................................. 93
PTCE 83-1....................................................................................... 108
Rating Agency................................................................................... 12
Record Date..................................................................................... 31
Refinance Loans................................................................................. 20
Related Proceeds................................................................................ 34
Relief Act...................................................................................... 70, 73
REMIC........................................................................................... 11
REMIC Certificates.............................................................................. 83
REMIC Regular Certificateholders................................................................ 85
REMIC Regular Certificates...................................................................... 11, 83
REMIC Regulations............................................................................... 75
REMIC Residual Certificateholder................................................................ 91
REMIC Residual Certificates..................................................................... 11, 83
Restricted Group................................................................................ 107
RICO............................................................................................ 71
SBA............................................................................................. 7, 23
SBA Act......................................................................................... 7, 23
SPA Loans....................................................................................... 7, 19
SBA 504 Loans................................................................................... 7, 19
SBA 504 Loan Program............................................................................ 7, 24
Section 7(a) Program............................................................................ 7, 23
Securities...................................................................................... 1, 5
Security Balance................................................................................ 9, 33
Security Owners................................................................................. 37
Securityholders................................................................................. 1, 18
senior lien..................................................................................... 15
Senior Securities............................................................................... 9, 31
Servicing Agreement............................................................................. 39
Servicing Standard.............................................................................. 46
Short-Term Note................................................................................. 100
Single Family Mortgage Loan..................................................................... 19
Single Family Property.......................................................................... 5, 19
SMMEA........................................................................................... 12, 108
SMMEA Securities................................................................................ 108
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
SPA............................................................................................. 28
Stripped ARM Obligations........................................................................ 82
Stripped Coupon Certificates.................................................................... 79
Stripped Interest Securities.................................................................... 9, 31
Stripped Principal Securities................................................................... 9, 31
Sub-Servicer.................................................................................... 47
Sub-Servicing Agreement......................................................................... 47
Subsidiary REMIC................................................................................ 84
Subordinate Securities.......................................................................... 9, 31
Subsequent Assets............................................................................... 8, 24
Super-Premium Certificates...................................................................... 86
tax avoidance potential......................................................................... 99
Title V......................................................................................... 69, 74, 76
Title VIII...................................................................................... 70
Trust Agreement................................................................................. 38
Trust Assets.................................................................................... 3
Trust Fund...................................................................................... 1
Trustee......................................................................................... 5
UCC............................................................................................. 37, 71
Underlying MBS.................................................................................. 19
Underlying Mortgage Loans....................................................................... 19
Unguaranteed Interest........................................................................... 24
unrelated business taxable income............................................................... 98
Unsecured Home Improvement Loans................................................................ 1, 6, 19
U.S. Person..................................................................................... 99
Value........................................................................................... 20
Warranting Party................................................................................ 41
Whole Loans..................................................................................... 19
</TABLE>
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
_____________________________________ _____________________________________
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement............................................................................................. S-4
Risk Factors................................................................................................................. S-15
The Master Servicer and the Mortgage Loan Seller............................................................................. S-17
The Mortgage Pool............................................................................................................ S-18
Yield on the Certificates.................................................................................................... S-36
Description of the Certificates.............................................................................................. S-42
Pooling and Servicing Agreement.............................................................................................. S-55
The Insurer.................................................................................................................. S-59
Certain Federal Income Tax Consequences...................................................................................... S-61
Use of Proceeds.............................................................................................................. S-63
Underwriting................................................................................................................. S-63
Legal Matters................................................................................................................ S-64
Experts...................................................................................................................... S-64
Ratings...................................................................................................................... S-64
Legal Investment............................................................................................................. S-64
ERISA Considerations......................................................................................................... S-65
PROSPECTUS
Prospectus Supplement........................................................................................................ 2
Available Information........................................................................................................ 3
Incorporation of Certain Information by Reference............................................................................ 3
Summary of Prospectus........................................................................................................ 5
Special Considerations....................................................................................................... 13
Description of the Trust Funds............................................................................................... 19
Use of Proceeds.............................................................................................................. 25
Yield Considerations......................................................................................................... 26
The Depositor................................................................................................................ 30
Description of the Securities................................................................................................ 31
Description of the Agreements................................................................................................ 38
Description of Credit Support................................................................................................ 58
Certain Legal Aspects of Mortgage Loans...................................................................................... 61
Certain Legal Aspects of the Contracts....................................................................................... 71
Certain Federal Income Tax Consequences...................................................................................... 75
State Tax Considerations..................................................................................................... 105
ERISA Considerations......................................................................................................... 105
Legal Investment............................................................................................................. 108
Plan of Distribution......................................................................................................... 110
Legal Matters................................................................................................................ 111
Financial Information........................................................................................................ 111
Rating....................................................................................................................... 111
Index of Principal Definitions............................................................................................... 112
</TABLE>
------------------------
UNTIL DECEMBER 19, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
$81,129,770 (APPROXIMATE)
MORTGAGE LOAN ASSET BACKED
CERTIFICATES, SERIES 1996-1
MERRILL LYNCH MORTGAGE
INVESTORS, INC.
DEPOSITOR
BERKELEY FEDERAL BANK
& TRUST FSB
MORTGAGE LOAN SELLER
AND MASTER SERVICER
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
MERRILL LYNCH & CO.
DATED SEPTEMBER 20, 1996
_____________________________________ _____________________________________
