THIS DOCUMENT IS A COPY OF REGISTRATION STATEMENT NO. 333-1704 ON FORM S-3,
FILED ON FEBRUARY 28, 1996, AND DECLARED EFFECTIVE ON MARCH 7, 1996.
As filed with the Securities and Exchange Commission on February 28, 1996
Registration No. 333-1704
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
MERRILL LYNCH MORTGAGE INVESTORS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
13-3416059
(I.R.S. Employer Identification Number)
World Financial Center
North Tower - 15th Floor
250 Vesey Street
New York, New York 10281-1315
(212) 449-0336
(Address and telephone number of Registrant's principal executive offices)
Richard M. Fuscone
Merrill Lynch Mortgage Investors, Inc.
World Financial Center - 15th Floor
250 Vesey Street
New York, New York 10281-1315
(212) 449-0336
(Name, address and telephone number of agent for service)
----------------
Copies to:
George J. Petrow, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE REGISTERED PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED (1) PER UNIT (2) PRICE (2) FEE (1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates, $3,424,690,000 100% $3,424,690,000 $1,034,482.76
issued in series
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(1) $424,690,000.00 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
33-97652 referred to below and not previously sold are consolidated in this
Registration Statement pursuant to Rule 429. All registration fees in connection
with such unsold amount of Mortgage Pass-Through Certificates have been
previously paid by the Registrant under the foregoing Registration Statement.
(2) Estimated solely for the purpose of calculating the registration fee.
--------------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus and
Prospectus Supplement contained in this Registration Statement also relates to
the Registrant's Registration Statement on Form S-3 (Registration No. 33-97652).
This Registration Statement, which is a new registration statement, also
constitutes a post-effective amendment to Registration Statement 33-97652. Such
post-effective amendment shall hereafter become effective concurrently with the
effectiveness of this Registration Statement in accordance with Section 8(a) of
the Securities Act of 1933.
<PAGE>
CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(a)
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ITEMS AND CAPTIONS IN FORM S-3 LOCATION IN PROSPECTUSES
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1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.......................................... Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus**
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................................ Inside Front Cover Page of
Prospectus and Outside Back
Cover Page of Prospectus**
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges...................................... Summaries of Prospectus;
Special Considerations
4. Use of Proceeds................................................... Use of Proceeds**
5. Determination of Offering Price................................... *
6. Dilution.......................................................... *
7. Selling Security Holders.......................................... *
8. Plan of Distribution.............................................. Method of Distribution**
9. Description of Securities to Be Registered........................ Outside Front Cover Page;
Summaries of Prospectus;
Description of the Trust
Funds; Description of the
Certificates**
10. Interests of Named Experts and Counsel............................ *
11. Material Changes.................................................. Financial Information
12. Incorporation of Certain Information by Reference................. Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................................... See page II-2
</TABLE>
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* Answer negative or item inapplicable.
** To be completed or provided from time to time by Prospectus Supplement.
<PAGE>
Information contained herein is subject to completion or amendment. Offers to
buy these securities may not be accepted without the delivery of a final
prospectus supplement and prospectus. This prospectus supplement and the
accompanying prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ___________, 199_)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199__-____
$_________________ CLASS A CERTIFICATES
$_________________ CLASS B CERTIFICATES
The Series 199___-____ Mortgage Pass-Through Certificates (the
"Certificates") will consist of four classes (each, a "Class") of Certificates,
designated as the Class A Certificates, the Class B Certificates, the Class C
Certificates and the Class R Certificates. As and to the extent described
herein, the Class B, Class C and Class R Certificates will be subordinate to the
Class A Certificates; and the Class C and Class R Certificates will be
subordinate to the Class B Certificates. Only the Class A and Class B
Certificates (collectively, the "Offered Certificates") are offered hereby. It
is a condition of their issuance that the Class A and Class B Certificates be
rated not lower than "____" and "____", respectively, by
____________________________.
(COVER CONTINUED ON NEXT PAGE)
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PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-16 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 18 OF THE
PROSPECTUS.
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PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE DEPOSITOR OR ANY OF ITS AFFILIATES. NEITHER THE OFFERED
CERTIFICATES NOR THE 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 ACCOMPANYING
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.
-----------
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"),
through one or more of its affiliates, intends to make a secondary market in the
Offered Certificates, but has no obligation to do so. There can be no assurance
that a secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. See "Risk Factors-Limited Liquidity" herein.
The Offered Certificates will be purchased by the Underwriter from the
Depositor and will be offered by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor from the sale of the Offered Certificates,
before deducting expenses payable by the Depositor estimated to be approximately
$_____________, will be ______% of the initial aggregate Certificate Balance of
the Offered Certificates, plus accrued interest.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, to withdrawal, cancellation or modifications of the offer without
notice, to receipt and acceptance by the Underwriter and to certain additional
conditions. It is expected that the Class A Certificates will be delivered in
book-entry form through the Same-Day Funds Settlement System of The Depository
Trust Company and that the Class B Certificates will be delivered at the offices
of the Underwriter, World Financial Center, North Tower, New York, New York
10281, on or about _____________, 199__ (the "Delivery Date"), against payment
therefor in immediately available funds.
-----------
MERRILL LYNCH & CO.
-----------
The date of this Prospectus Supplement is __________, 199__.
<PAGE>
-ii-
(COVER CONTINUED)
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by
Merrill Lynch Mortgage Investors, Inc. (the "Depositor"), that will consist
primarily of a segregated pool (the "Mortgage Pool") of ____ conventional,
multifamily, balloon mortgage loans (the "Mortgage Loans"). As of ____________,
199___ (the "Cut-off Date"), the Mortgage Loans had an aggregate principal
balance (the "Initial Pool Balance") of $___________________, after application
of all payments of principal due on or before such date, whether or not
received. The initial principal balance of the Class A Certificates will be
$__________________, which represents _____% of the Initial Pool Balance; and
the initial principal balance of the Class B Certificates will be
$_____________, which represents ___% of the Initial Pool Balance.
The Mortgage Loans provide for monthly payments of principal and/or
interest ("Monthly Payments"), in all cases based on amortization schedules that
are significantly longer than their remaining terms, thereby leaving substantial
principal amounts due and payable on their respective maturity dates. As more
fully described herein, (i) ___ of the Mortgage Loans (the "ARM Loans"), which
represent ______% of the Initial Pool Balance, provide for periodic adjustments
(which may occur monthly, semi-annually or annually) to the respective
annualized rates at which they accrue interest (their "Mortgage Rates") based on
fluctuations in a base index (an "Index") and subject to the limitations
described herein, and (ii) the remaining Mortgage Loans (the "Fixed Rate Loans")
bear interest at fixed Mortgage Rates. Adjustments to the Mortgage Rates on ____
of the ARM Loans (the "COFI ARM Loans"), which represent ______% of the Initial
Pool Balance, are based upon changes in the monthly weighted average cost of
funds of member savings institutions of the Eleventh Federal Home Loan Bank
District (the "COFI Index"). __________________ of the ARM Loans, which
represent ___% of the Initial Pool Balance, provide for Monthly Payment
adjustments that occur less frequently than Mortgage Rate adjustments and/or
payment caps that limit the amount by which a Monthly Payment can change in
response to a change in the Mortgage Rate, which in either case may result in
Monthly Payments that are greater or less than the amount necessary to amortize
the loan fully over its remaining amortization term and pay interest at the then
applicable Mortgage Rate. Consequently, those ARM Loans (and, accordingly, the
Offered Certificates) may from time to time be subject to periods of
accelerated, slower or negative amortization.
All of the Mortgage Loans are currently held by _____________ (the
"Mortgage Loan Seller"), which either originated the Mortgage Loans or acquired
them from their respective originators. On or before the date of initial
issuance of the Certificates, the Depositor will acquire the Mortgage Loans from
the Mortgage Loan Seller and will transfer them to the Trustee in exchange for
the Certificates.
Distributions of interest on and principal of the Certificates will be
made, to the extent of available funds, on the 25th day of each month or, if any
such 25th day is not a business day, then on the next succeeding business day,
beginning in _____________ 199____ (each, a "Distribution Date"). As more fully
described herein, distributions allocable to interest accrued on each Class of
Offered Certificates will be made on each Distribution Date based on the
variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rates
for the Class A and Class B Certificates applicable to the first Distribution
Date will be _________% and ________% per annum, respectively. Subsequent to the
initial Distribution Date, the Pass-Through Rate for the Class A Certificates
will equal from time to time monthly LIBOR plus ______ basis points, subject to
a maximum of _____% per annum and a minimum of ______% per annum; except when
such rate exceeds a "funds-available cap rate" calculated as described herein,
at which time the Pass-Through Rate for the Class A Certificates will equal the
weighted average of, subject to certain adjustments described herein, the Net
Mortgage Rates on the Mortgage Loans. Subsequent to the initial Distribution
Date, the Pass-Through Rate for the Class B Certificates will equal from time to
time the weighted average of, subject to certain adjustments described herein,
the Net Mortgage Rates on the Mortgage Loans. The Net Mortgage Rate for any
Mortgage Loan is its Mortgage Rate less _____ basis points. Distributions
allocable to principal of each Class of Offered Certificates will be made in the
amounts and in accordance with the priorities described herein. See "Description
of the Certificates-Distributions" herein.
The yield to maturity on each Class of Offered Certificates will depend
on, among other things, fluctuations in its respective Pass-Through Rate and the
rate and timing of principal payments (including by reason of prepayments,
defaults and liquidations) on the Mortgage Loans. See "Yield and Maturity
Considerations" herein and "Yield Considerations" and "Risk Factors-Average Life
of Certificates; Prepayments; Yields" in the Prospectus.
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. The
Offered Certificates and the Class C Certificates (collectively, the "REMIC
Regular Certificates") will constitute "regular interests", and the Class R
Certificates will constitute the sole class of "residual interests", in the
Trust Fund. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
<PAGE>
-iii-
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL TO OBTAIN MATERIAL INFORMATION CONCERNING THE OFFERED
CERTIFICATES. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
-----------
UNTIL [NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT], ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. 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.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT.................................................................................................S-1
RISK FACTORS....................................................................................................................S-16
The Certificates.......................................................................................................S-16
Limited Liquidity.............................................................................................S-16
Certain Yield and Maturity Considerations.....................................................................S-16
The Mortgage Loans.....................................................................................................S-17
Risks of Lending on Income-Producing Properties...............................................................S-17
Limited Recourse..............................................................................................S-18
Environmental Law Considerations..............................................................................S-18
Geographic Concentration......................................................................................S-18
Concentration of Mortgage Loans and Borrowers.................................................................S-19
Adjustable Rate Mortgage Loans; Negative Amortization.........................................................S-19
Balloon Payments..............................................................................................S-19
DESCRIPTION OF THE MORTGAGE POOL................................................................................................S-19
General ..............................................................................................................S-19
Certain Payment Characteristics........................................................................................S-20
The Eleventh District Cost of Funds Index..............................................................................S-21
Additional Mortgage Loan Information...................................................................................S-22
The Mortgage Loan Seller...............................................................................................S-32
General .....................................................................................................S-32
Delinquency and Foreclosure Experience........................................................................S-32
Underwriting Standards.................................................................................................S-33
Assignment of the Mortgage Loans; Repurchase...........................................................................S-34
Representations and Warranties; Repurchases............................................................................S-35
Changes in Mortgage Pool Characteristics...............................................................................S-35
SERVICING OF THE MORTGAGE LOANS.................................................................................................S-36
General ..............................................................................................................S-36
The Master Servicer....................................................................................................S-36
Servicing and Other Compensation and Payment of Expenses...............................................................S-36
Modifications, Waivers and Amendments..................................................................................S-38
Inspections; Collection of Operating Information.......................................................................S-38
Additional Obligations of the Master Servicer with Respect to ARM Loans................................................S-39
DESCRIPTION OF THE CERTIFICATES.................................................................................................S-39
General ..............................................................................................................S-39
Distributions..........................................................................................................S-40
Method, Timing and Amount.....................................................................................S-40
Priority .....................................................................................................S-41
Pass-Through Rates............................................................................................S-43
Determination of LIBOR........................................................................................S-43
Distributable Certificate Interest............................................................................S-44
Scheduled Principal Distribution Amount and Unscheduled Principal Distribution Amount.........................S-45
Certain Calculations with Respect to Individual Mortgage Loans................................................S-45
Subordination..........................................................................................................S-46
P&I Advances...........................................................................................................S-47
Reports to Certificateholders; Available Information...................................................................S-48
Voting Rights..........................................................................................................S-48
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<PAGE>
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Termination............................................................................................................S-49
Trustee ..............................................................................................................S-49
YIELD AND MATURITY CONSIDERATIONS...............................................................................................S-49
Yield Considerations...................................................................................................S-49
General .....................................................................................................S-49
Pass-Through Rate.............................................................................................S-50
Rate and Timing of Principal Payments.........................................................................S-51
Losses and Shortfalls.........................................................................................S-53
Certain Relevant Factors......................................................................................S-53
Delay in Payment of Distributions.............................................................................S-54
Unpaid Distributable Certificate Interest.....................................................................S-54
Weighted Average Life..................................................................................................S-54
USE OF PROCEEDS.................................................................................................................S-58
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.........................................................................................S-58
ERISA CONSIDERATIONS............................................................................................................S-58
LEGAL INVESTMENT................................................................................................................S-60
METHOD OF DISTRIBUTION..........................................................................................................S-60
LEGAL MATTERS...................................................................................................................S-61
RATING .......................................................................................................................S-61
</TABLE>
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN
THE ACCOMPANYING PROSPECTUS. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY MAY
BE DEFINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT OR IN THE PROSPECTUS. AN
"INDEX OF PRINCIPAL DEFINITIONS" IS INCLUDED AT THE END OF BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. TERMS THAT ARE USED BUT NOT DEFINED IN THIS
PROSPECTUS SUPPLEMENT WILL HAVE THE MEANINGS SPECIFIED IN THE PROSPECTUS.
<TABLE>
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TITLE OF CERTIFICATES.............................. Merrill Lynch Mortgage Investors, Inc., Mortgage Pass-Through
Certificates, Series 199__-____ (the "Certificates"), to be issued in four
Classes designated as the Class A, Class B, Class C and Class R
Certificates. The Class A, Class B and Class C Certificates are herein
collectively referred to from time to time as the "REMIC Regular
Certificates". Only the Class A and Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C and Class
R Certificates are herein collectively referred to from time to time as the
"Private Certificates".
DEPOSITOR.......................................... Merrill Lynch Mortgage Investors, Inc., a Delaware corporation. The
Depositor is a wholly-owned, limited purpose finance subsidiary of
Merrill Lynch Mortgage Capital Inc., which is a wholly-owned indirect
subsidiary of Merrill Lynch & Co., Inc. Neither the Depositor nor any
of its affiliates has insured or guaranteed the Offered Certificates. See
"The Depositor" in the Prospectus.
MASTER SERVICER.................................... ______________________________, a _____________________. The
primary compensation of the Master Servicer for servicing and
administering the Mortgage Loans will be a monthly fee (the "Servicing
Fee") payable on a loan-by-loan basis out of related interest collections
equal to the portion of such collections accrued at a rate equal to 0.___%
per annum (the "Servicing Fee Rate"). See "Servicing of the Mortgage
Loans-The Master Servicer" and "-Servicing and Other Compensation
and Payment of Expenses" herein.
TRUSTEE .........................................._____________________, a _______________________. The Master
Servicer will be responsible for the fees of the Trustee. See "Description
of the Certificates-Trustee" herein.
MORTGAGE LOAN SELLER............................... ________________________, a __________________________. On or
prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to a Mortgage Loan
Purchase Agreement, dated [the date hereof], between the Depositor and
the Mortgage Loan Seller (the "Mortgage Loan Purchase Agreement").
In the Mortgage Loan Purchase Agreement, the Mortgage Loan Seller
has made certain representations and warranties to the Depositor
regarding the characteristics and quality of the Mortgage Loans and, as
more particularly described herein, has agreed to cure any material
breach thereof or repurchase the affected Mortgage Loan. In connection
with the assignment of its interests in the Mortgage Loans to the Trustee,
the Depositor will also assign its rights under the Mortgage Loan
Purchase Agreement insofar as they relate to or arise out of the
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<PAGE>
S-2
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Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. See "Description of the Mortgage Pool-The Mortgage Loan Seller" and
"-Representations and Warranties; Repurchases" herein.
CUT-OFF DATE....................................... ___________________, 199__.
DELIVERY DATE...................................... ___________________, 199__.
REGISTRATION OF THE
CLASS A CERTIFICATES.......................... The Class A Certificates will be represented by one or more global
Certificates registered in the name of Cede & Co., as nominee of The
Depository Trust Company ("DTC"). No person acquiring an interest
in the Class A Certificates (any such person, a "Class A Certificate
Owner") will be entitled to receive a Class A Certificate in fully
registered, certificated form (a "Definitive Class A Certificate"), except
under the limited circumstances described in the Prospectus under
"Description of the Certificates-Book Entry Registration and Definitive
Certificates". Instead, DTC will effect payments and transfers in respect
of the Class A Certificates by means of its electronic recordkeeping
services, acting through certain participating organizations
("Participants"). This may result in certain delays in receipt of payments
by an investor and may restrict an investor's ability to pledge its
securities. Unless and until Definitive Class A Certificates are issued,
all references herein to the rights of holders of the Class A Certificates
are to the rights of Class A Certificate Owners as they may be exercised
through DTC and its Participants, except as otherwise specified herein.
See "Description of the Certificates-General" herein and "Description
of the Certificates-Book-Entry Registration and Definitive Certificates"
in the Prospectus.
DENOMINATIONS...................................... The Class A Certificates will be issued, maintained and transferred on
the book-entry records of DTC and its Participants in denominations of
$1,000 and in integral multiples thereof. The Class B Certificates will
be issuable in fully registered, certificated form in denominations of
$____________ and in integral multiples of $1,000 in excess thereof,
with one Class B Certificate evidencing an additional amount equal to the
remainder of the initial Certificate Balance of such Class.
THE MORTGAGE POOL.................................. The Mortgage Pool will consist of _____ conventional, balloon Mortgage
Loans with an Initial Pool Balance of $_________________. Each
Mortgage Loan is secured by a first mortgage lien on a fee simple estate
in a multifamily rental property (each, a "Mortgaged Property").
________ of the Mortgage Loans, which represent _____% of the Initial
Pool Balance, are secured by liens on Mortgaged Properties located in
_______________. The remaining Mortgaged Properties are located
throughout ___________ other states. See "Description of the Mortgage
Pool-Additional Mortgage Loan Information" herein.
___________ of the Mortgage Loans, which represent ______% of the
Initial Pool Balance, provide for scheduled payments of principal and/or
interest ("Monthly Payments") to be due on the first day of each month;
the remainder of the Mortgage Loans provide for Monthly Payments to
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S-3
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be due on the ____, _____, _____ or _____ day of each month (the date in any
month on which a Monthly Payment on a Mortgage Loan is first due, the "Due
Date"). The annualized rate at which interest accrues (the "Mortgage Rate") on
____ of the Mortgage Loans (the "ARM Loans"), which represent _____% of the
Initial Pool Balance, is subject to adjustment on specified Due Dates (each
such date of adjustment, an "Interest Rate Adjustment Date") by adding a fixed
number of basis points (a "Gross Margin") to the value of a base index (an
"Index"), subject, in [most] cases, to lifetime maximum and/or minimum Mortgage
Rates, and in _____ cases, to periodic maximum and/or minimum Mortgage Rates,
in each case as described herein; and the remaining Mortgage Loans (the "Fixed
Rate Loans") bear interest at fixed Mortgage Rates. ____ of the ARM Loans,
which represent ___% of the Initial Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly, while the remainder of the ARM Loans
provide for adjustments of the Mortgage Rate to occur semi-annually or
annually. __________ of the ARM Loans (the "COFI ARM Loans"), which represent
______% of the Initial Pool Balance, provide for Mortgage Rate adjustments
based on changes in the monthly weighted average cost of funds of member
savings institutions of the Eleventh Federal Home Loan Bank District (the "COFI
Index"); and the remaining ARM Loans, which represent _____% of the Initial
Pool Balance, provide for Mortgage Rate adjustments based on United States
Treasury yield indices (each, a "Treasury Index"). See "Description of the
Mortgage Pool-Certain Payment Characteristics" herein.
The amount of the Monthly Payment on all of the ARM Loans is subject
to adjustment on specified Due Dates (each such date, a "Payment
Adjustment Date") generally to an amount that would amortize the
outstanding principal balance of the Mortgage Loan over its then
remaining amortization schedule and pay interest at the then applicable
Mortgage Rate, subject, in the case of [most] of the ARM Loans, to
payment caps ("Payment Caps"), which limit the amount by which the
Monthly Payment may adjust on any Payment Adjustment Date as
described herein. _____________ of the ARM Loans, which represent
________% of the Initial Pool Balance, provide for Payment Adjustment
Dates that occur annually, while the remainder of the ARM Loans
provide for adjustments of the Monthly Payment to occur monthly or
semi-annually.
__________ of the ARM Loans, which represent ___% of the Initial
Pool Balance, have Payment Adjustment Dates that occur less frequently
than Interest Rate Adjustment Dates and/or provide for Payment Caps
that limit the amount by which a Monthly Payment can change in
response to a change in the Mortgage Rate. As a result, the amount of
a Monthly Payment in those cases may be greater or less than the amount
necessary to amortize the loan fully over its then remaining amortization
schedule and pay interest at the then applicable Mortgage Rate, and
accordingly, those ARM Loans may be subject to periods of slower
amortization (if the Monthly Payment due on a Due Date is sufficient to
pay interest accrued to such Due Date at the applicable Mortgage Rate
but is not sufficient to reduce principal in accordance with the applicable
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<PAGE>
S-4
<TABLE>
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amortization schedule), to negative amortization (if interest accrued to a Due
Date at the applicable Mortgage Rate is greater than the entire Monthly Payment
due on such Due Date), or to accelerated amortization (if the Monthly Payment
due on a Due Date is greater than the amount necessary to pay interest accrued
to such Due Date at the applicable Mortgage Rate and to reduce principal in
accordance with the applicable amortization schedule). All of the Mortgage
Loans that permit negative amortization limit the amount by which the original
principal balance may be exceeded as a result of negative amortization. In
addition, the ARM Loans with Payment Caps provide by their terms that the
Payment Caps will not be applicable on specified Payment Adjustment Dates. No
ARM Loan that permits negative amortization had a Cut-off Date Balance (that
is, a principal balance as of the Cut-off Date, after the application of all
payments due on or before such date, whether or not received) in excess of its
original principal balance.
All of the Mortgage Loans provide for monthly payments of principal
based on amortization schedules significantly longer than the remaining
terms of such Mortgage Loans, thereby leaving substantial principal
amounts due and payable (each such payment, a "Balloon Payment") on
their respective maturity dates, unless prepaid prior thereto. Loans with
Balloon Payments involve a greater risk to a lender than self-amortizing
loans because the ability of a borrower to make a Balloon Payment
typically will depend upon its ability to fully refinance the loan or to sell
the related Mortgaged Property at a price sufficient to permit the
borrower to make the Balloon Payment. The inability of a borrower to
timely make a Balloon Payment will constitute a default from which
losses could ensue. Moreover, and whether or not losses are ultimately
sustained, any delay in the collection of a Balloon Payment that would
otherwise be distributable in respect of a class of Offered Certificates
will likely extend the weighted average life of such class. See "Risk
Factors-The Mortgage Loans-Balloon Payments" herein and "Risk
Factors-Balloon Payments; Borrower Default" in the Prospectus.
[No Mortgage Loan currently prohibits voluntary principal prepayments;
however, [certain] of the Mortgage Loans impose fees or penalties
("Prepayment Premiums") in connection with full or partial
prepayments.] [____ of the Fixed Rate Loans, which represent ___% of
the Initial Pool Balance, prohibit voluntary prepayments of principal for
a period (a "Lock-out Period") ending on a date (a "Lock-out Expiration
Date") specified in the related Mortgage Note, and impose fees or
penalties ("Prepayment Premiums") in connection with prepayments of
principal made thereafter]. Prepayment Premiums are payable to the
Master Servicer as additional servicing compensation, to the extent not
otherwise applied to offset Prepayment Interest Shortfalls, and may be
waived by the Master Servicer in accordance with the servicing standard
described under "Servicing of the Mortgage Loans-General" herein.
As of the Cut-off Date, the Mortgage Loans had the following additional
characteristics:
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(i) Mortgage Rates ranging from ____% per annum to ____% per
annum, and a weighted average Mortgage Rate of _____% per
annum;
(ii) in the case of the ARM Loans, Gross Margins ranging from
_____ basis points to _____ basis points, and a weighted average
Gross Margin of _____ basis points;
(iii) for those ___ ARM Loans as to which such characteristic
applies, minimum lifetime Mortgage Rates ranging from ___%
per annum to ___% per annum, and a weighted average
minimum lifetime Mortgage Rate of ____% per annum;
(iv) for those ___ ARM Loans as to which such characteristic
applies, maximum lifetime Mortgage Rates ranging from ___%
per annum to ___% per annum, and a weighted average
maximum lifetime Mortgage Rate of ___% per annum;
(v) Cut-off Date Balances ranging from $____________ to
$____________, and an average Cut-off Date Balance of
$------------;
(vi) original terms to scheduled maturity ranging from ___ months to
____ months, and a weighted average original term to scheduled
maturity of ___ months;
(vii) remaining terms to scheduled maturity ranging from ___ months
to ____ months, and a weighted average remaining term to
scheduled maturity of ____ months;
(viii) Cut-off Date LTV Ratios (that is, in each case, a loan-to-value
ratio based upon (a) the Cut-off Date Balance of the Mortgage
Loan, and (b) the appraised value of the related Mortgaged
Property determined at the time of origination of such loan)
ranging from _____% to ____%, and a weighted average Cut-off
Date LTV Ratio of _____%; and
(ix) Debt Service Coverage Ratios (calculated as more particularly
described under "Description of the Mortgage Pool-Additional
Mortgage Loan Information"), for those ____ Mortgage Loans
as to which the ratios could be so calculated, ranging from
_______x to ______x, and a weighted average Debt Service
Coverage Ratio of _______x.
The Mortgage Loans were originated between 19__ and 19__.
DESCRIPTION OF THE
CERTIFICATES.................................. The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Depositor, the
Master Servicer and the Trustee (the "Pooling and Servicing
Agreement"), and will represent in the aggregate the entire beneficial
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ownership interest in a trust fund (the "Trust Fund") consisting of the
Mortgage Pool and certain related assets.
A. CERTIFICATE BALANCE....................... The aggregate Certificate Balance of the Certificates as of the Delivery
Date will equal the Initial Pool Balance. The Class A Certificates will
have an initial Certificate Balance of $_______________, which
represents _____% of the Initial Pool Balance; the Class B Certificates
will have an initial Certificate Balance of $___________, which
represents ___% of the Initial Pool Balance; the Class C Certificates will
have an initial Certificate Balance of $____________, which represents
___% of the Initial Pool Balance; and the Class R Certificates will have
an initial Certificate Balance of [zero]. The Certificate Balance of each
Class of Certificates outstanding at any time represents the maximum
amount that the holders thereof are entitled to receive as distributions
allocable to principal from the cash flow on the Mortgage Loans and
other assets in the Trust Fund. As more specifically described herein,
the Certificate Balance of each Class of REMIC Regular Certificates will
be adjusted from time to time on each Distribution Date to reflect any
additions thereto resulting from the allocation of Mortgage Loan negative
amortization to such Class and any reductions therein resulting from the
distribution of principal of such Class. The aggregate amount of
monthly Mortgage Loan negative amortization allocable to the
Certificates on any Distribution Date is herein referred to as the
"Aggregate Mortgage Loan Negative Amortization" for such date, and
the portion thereof allocable to any particular Class constitutes the
"Certificate Negative Amortization" in respect of such Class for such
date. The Certificate Balance of the Class R Certificates will at all times
equal the excess, if any, of the aggregate Stated Principal Balance of the
Mortgage Pool, over the aggregate Certificate Balance of the REMIC
Regular Certificates (such excess, if any, the "Excess Pool Balance").
See "Description of the Certificates-General" herein.
Losses experienced with respect to the Mortgage Loans or otherwise with
respect to the Trust Fund will not be applied to reduce either the
Certificate Balance or the absolute entitlement to interest of any Class of
REMIC Regular Certificates, even though such losses may cause one or
more of such Classes to receive less than the full amount of principal and
interest to which it is entitled. As a result, the aggregate Stated Principal
Balance of the Mortgage Pool at any time subsequent to the initial
Distribution Date may be less than the aggregate Certificate Balance of
the REMIC Regular Certificates. Such deficit will be allocated to the
respective Classes of REMIC Regular Certificates (in each case to the
extent of its Certificate Balance) in reverse alphabetical order of their
Class designations (that is, C, B, A). Such allocation will not reduce the
Certificate Balance of any such Class and is intended solely to identify
the portion (the "Uncovered Portion") of the Certificate Balance of each
such Class for which there is at such time no corresponding principal
amount of Mortgage Loans. See "Description of the
Certificates-Subordination" herein.
The "Stated Principal Balance" of each Mortgage Loan outstanding at
any time represents the principal balance of such Mortgage Loan
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ultimately due and payable to the Certificateholders and, as more particularly
described herein, will equal the Cut-off Date Balance thereof, increased on
each Distribution Date by any negative amortization experienced by the Mortgage
Loan that is allocated to the Certificates on such date, and reduced on each
Distribution Date generally by any payments or other collections (or advances
in lieu thereof) of principal of such Mortgage Loan that are distributed on the
Certificates on such date. See "Description of the
Certificates-Distributions-Certain Calculations with Respect to Individual
Mortgage Loans" herein.
B. PASS-THROUGH RATES......................... The Pass-Through Rates applicable to the Class A and Class B
Certificates for the initial Distribution Date will equal _____% and
_____% per annum, respectively. With respect to any Distribution Date
subsequent to the initial Distribution Date, the Pass-Through Rate for the
Class A Certificates will equal LIBOR for such Distribution Date plus
_____ basis points, subject to a maximum of ____% per annum and a
minimum of ____% per annum; unless, however, the rate so calculated
exceeds the Funds-Available Cap Rate in respect of the Class A
Certificates for such Distribution Date, in which case the Pass-Through
Rate for the Class A Certificates will equal the Weighted Average
Effective Net Mortgage Rate for such Distribution Date. With respect
to any Distribution Date subsequent to the initial Distribution Date, the
Pass-Through Rate for the Class B Certificates will equal the Weighted
Average Effective Net Mortgage Rate for such Distribution Date.
[The Pass-Through Rate applicable to the Class C Certificates will equal
the Weighted Average Effective Net Mortgage Rate for such Distribution
Date. The Class R Certificates will have no specified Pass-Through
Rate.]
"LIBOR" for each Distribution Date will be the average of the interbank
offered rates for one month United States dollar deposits in the London
market as determined during the preceding month in accordance with the
method described herein. The "Weighted Average Effective Net
Mortgage Rate" for each Distribution Date is the weighted average of the
applicable Effective Net Mortgage Rates for the Mortgage Loans,
weighted on the basis of their respective Stated Principal Balances
immediately prior to such Distribution Date. For purposes of calculating
the Weighted Average Effective Net Mortgage Rate for any Distribution
Date, the "applicable Effective Net Mortgage Rate" for each Mortgage
Loan is an annualized rate equal to the Mortgage Rate in effect for such
Mortgage Loan as of the commencement of the related Due Period, (a)
reduced by the Servicing Fee Rate (the Mortgage Rate, as so reduced,
the "Net Mortgage Rate"), and (b) if the accrual of interest on such
Mortgage Loan is computed other than on the basis of a 360-day year
consisting of twelve 30-day months (which is the basis of accrual for
interest on the REMIC Regular Certificates), then adjusted to reflect that
difference in computation.
The "Funds-Available Cap Rate" applicable to the determination of the
Pass-Through Rate on the Class A Certificates for each Distribution Date
will be an annualized rate equal to the product of (a) the Weighted
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Average Effective Net Mortgage Rate for such Distribution Date, multiplied by
(b) a fraction, expressed in decimal form, the numerator of which is the sum of
(i) the Certificate Balance of the Class A Certificates immediately prior to
such Distribution Date, plus (ii) any Excess Pool Balance, existing immediately
prior to such Distribution Date, and the denominator of which is the
Certificate Balance of the Class A Certificates immediately prior to such
Distribution Date. Accordingly, in the absence of Excess Pool Balance, the
Funds-Available Cap Rate applicable to the determination of the Pass-Through
Rate for the Class A Certificates for any Distribution Date will be the
Weighted Average Effective Net Mortgage Rate for such Distribution Date.
The "Due Period" for each Distribution Date will be the period that
begins on the ____ day of the month preceding the month in which such
Distribution Date occurs and ends on the ____ day of the month in which
such Distribution Date occurs. See "Description of the Certificates-
Distributions-Pass-Through Rates" and "-Distributions-Determination
of LIBOR" herein.
C. DISTRIBUTIONS............................. Distributions on the Certificates will be made by the Master Servicer, to
the extent of available funds, on the 25th day of each month or, if any
such 25th day is not a business day, then on the next succeeding business
day, beginning in __________ 199__ (each, a "Distribution Date"), to
the holders of record as of the close of business on the last business day
of the month preceding the month of each such distribution (each, a
"Record Date"). Notwithstanding the above, the final distribution on
any Certificate will be made after due notice by the Master Servicer of
the pendency of such distribution and only upon presentation and
surrender of such Certificates at the location to be specified in such
notice. The total of all payments or other collections (or advances in lieu
thereof) on or in respect of the Mortgage Loans that are available for
distribution to Certificateholders on any Distribution Date is herein
referred to as the "Available Distribution Amount" for such date. See
"Description of the Certificates-Distributions-Method, Timing and
Amount" herein.
On each Distribution Date, for so long as the Class A and/or Class B
Certificates remain outstanding, the Master Servicer will (except as
otherwise described under "Description of the Certificates-Termination"
herein) apply the Available Distribution Amount for such date for the
following purposes and in the following order of priority, in each case
to the extent of remaining available funds:
(1) to distributions of interest to the holders of the Class A
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class A Certificates for such
Distribution Date and, to the extent not previously paid, for all
prior Distribution Dates;
(2) to distributions of principal to the holders of the Class A
Certificates in an amount equal to the sum of (a) the product of
(i) the Class A Certificates' Ownership Percentage (as calculated
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immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) the entire Unscheduled Principal Distribution Amount for such
Distribution Date (but not more than would be necessary to reduce the
Certificate Balance of the Class A Certificates to zero);
(3) to distributions of principal to the holders of the Class A
Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class A Certificates immediately prior
to such Distribution Date;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such
Distribution Date and, to the extent not previously paid, for all
prior Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of
(i) the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii)
the Scheduled Principal Distribution Amount for such
Distribution Date, plus (b) if the Class A Certificates have been
retired, then to the extent not distributed in retirement thereof on
such Distribution Date, the entire Unscheduled Principal
Distribution Amount for such Distribution Date (but not more
than would be necessary to reduce the Certificate Balance of the
Class B Certificates to zero);
(6) to distributions of principal to the holders of the Class A
Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class B Certificates immediately prior
to such Distribution Date (but not more than would be necessary
to reduce the Certificate Balance of the Class A Certificates to
zero);
(7) to distributions of principal to the holders of the Class B
Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class B Certificates immediately prior
to such Distribution Date, net of any distributions of principal
made on such Distribution Date in respect of the Class A
Certificates as described in the immediately preceding clause (6);
(8) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such
Distribution Date and, to the extent not previously distributed,
for all prior Distribution Dates;
(9) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
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Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(10) to distributions of principal to the holders of the respective
Classes of REMIC Regular Certificates, in reverse alphabetical
order of their Class designations (that is, C, B, A), in an
aggregate amount equal to the product of (a) the Class R
Certificates' Ownership Percentage (as calculated immediately
prior to such Distribution Date), multiplied by (b) the Scheduled
Principal Distribution Amount for such Distribution Date (but,
in each case, not more than would be necessary to reduce the
related Certificate Balance to zero);
(11) to distributions of principal to the holders of the respective
Classes of REMIC Regular Certificates, in alphabetical order of
their Class designations (that is, A, B, C), in an aggregate
amount equal to any Uncovered Portion of the Certificate
Balance of the Class C Certificates immediately prior to such
Distribution Date (but, in each case, not more than would be
necessary to reduce the related Certificate Balance to zero);
(12) to distributions of principal to the holders of the respective
Classes of REMIC Regular Certificates, in reverse alphabetical
order of their Class designations (that is, C, B, A,), in an
aggregate amount equal to ______% of the remaining balance,
if any, of the Available Distribution Amount (such remaining
balance, if any, herein referred to as "Excess Funds") (but, in
each case, not more than would be necessary to reduce the
related Certificate Balance to zero); and
(13) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance of any Excess Funds.
See "Description of the Certificates-Distributions-Priority"
herein.
The "Distributable Certificate Interest" in respect of any Class of REMIC
Regular Certificates for any Distribution Date will equal 30 days' interest
at the applicable Pass-Through Rate accrued on the Certificate Balance
of such Class of REMIC Regular Certificates immediately prior to such
Distribution Date, reduced (to not less than zero) by such Class of
REMIC Regular Certificates' allocable share (in each case, calculated as
described herein) of any Aggregate Mortgage Loan Negative
Amortization and any Net Aggregate Prepayment Interest Shortfall (as
described below) for such Distribution Date. See "Servicing of the
Mortgage Loans-Servicing and Other Compensation and Payment of
Expenses" and "Description of the Certificates-Distributions-
Distributable Certificate Interest" herein.
The "Scheduled Principal Distribution Amount" for any Distribution
Date will equal the aggregate of all scheduled payments of principal
(including the principal portion of any Balloon Payments) due on the
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Mortgage Loans during or, if and to the extent not previously received or
advanced and distributed on prior Distribution Dates, prior to the related Due
Period that were either received from the borrowers as of the ___ day of the
month in which such Distribution Date occurs or advanced by the Master Servicer
in respect of such Distribution Date. The "Unscheduled Principal Distribution
Amount" for any Distribution Date will, in general, equal the aggregate of (i)
all prepayments of principal of the Mortgage Loans received from the borrowers
during the related Due Period, and (ii) any other unscheduled collections on or
in respect of the Mortgage Loans and any Mortgaged Properties acquired in
respect of defaulted Mortgage Loans through foreclosure, deed in lieu of
foreclosure or otherwise (each, an "REO Property"), which other unscheduled
collections were received during the related Due Period and were identified and
applied by the Master Servicer as recoveries of previously unadvanced principal
of the related Mortgage Loans. The respective amounts which constitute the
Scheduled Principal Distribution Amount and Unscheduled Principal Distribution
Amount for any Distribution Date are herein collectively referred to from time
to time as the "Distributable Principal Collections and Advances". The
"Ownership Percentage" evidenced by any Class of Certificates as of any date of
determination will equal a fraction, expressed as a percentage, the numerator
of which is the then Certificate Balance of such Class of Certificates, net (in
the case of a Class of REMIC Regular Certificates) of any Uncovered Portion of
such Certificate Balance, and the denominator of which is the then aggregate
Stated Principal Balance of the Mortgage Pool. See "Description of the
Certificates-Distributions-Scheduled Principal Distribution Amount and
Unscheduled Principal Distribution Amount" herein.
P&I ADVANCES....................................... Subject to a recoverability determination as described herein, the Master
Servicer is required to make advances (each, a "P&I Advance") with
respect to each Distribution Date in an amount that is generally equal to
the aggregate of: (i) all delinquent payments of principal and interest
(net of related Servicing Fees) on the Mortgage Loans, other than
delinquent Balloon Payments, scheduled to be due during the related Due
Period; (ii) in the case of each Mortgage Loan delinquent in respect of
its Balloon Payment, an amount equal to 30 days' interest thereon (net
of related Servicing Fees), but only to the extent that the related
borrower has not made a payment sufficient to cover such amount under
any forbearance arrangement or otherwise, which payment has been
included in the Available Distribution Amount for such Distribution
Date; and (iii) in the case of each REO Property, an amount equal to 30
days' imputed interest with respect thereto (net of related Servicing
Fees), but only to the extent that such amount is not covered by any net
income from such REO Property included in the Available Distribution
Amount for such Distribution Date.
As more fully described herein, the Master Servicer will be entitled to
interest on any P&I Advances made, and certain servicing expenses
incurred, by it or on its behalf. Such interest will accrue from the date
any such P&I Advance is made or such servicing expense is incurred at
an annualized rate equal to ____% (the "Master Servicer Reimbursement
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Rate") and will be paid, contemporaneously with the reimbursement of such P&I
Advance or such servicing expense, out of general collections on the Mortgage
Pool then on deposit in the Certificate Account. See "Description of the
Certificates-P&I Advances" herein and "Description of the Certificates-Advances
in Respect of Delinquencies" and "Description of the Pooling
Agreements-Certificate Account" in the Prospectus.
COMPENSATING INTEREST PAYMENTS..................... To the extent of its servicing compensation for the related Due Period,
the Master Servicer is required to make a non-reimbursable payment (a
"Compensating Interest Payment") with respect to each Distribution Date
to cover the amount, if any, by which Prepayment Interest Shortfalls
incurred during the related Due Period exceed Prepayment Interest
Excesses and prepayment premiums collected during such Due Period.
A "Prepayment Interest Shortfall" is a shortfall in the collection of a full
month's interest (net of related Servicing Fees) on any Mortgage Loan
by reason of a full or partial principal prepayment made prior to its Due
Date in any Due Period. A "Prepayment Interest Excess" is a payment
of interest (net of related Servicing Fees) made in connection with any
full or partial prepayment of a Mortgage Loan subsequent to its Due
Date in any Due Period, which payment of interest is intended to cover
the period on and after such Due Date. The "Net Aggregate Prepayment
Interest Shortfall" for any Distribution Date will be the amount, if any,
by which (a) the aggregate of any Prepayment Interest Shortfalls incurred
during the related Due Period exceeds (b) the sum of (i) the aggregate of
any Prepayment Interest Excesses and prepayment premiums collected
during the related Due Period and (ii) any Compensating Interest
Payment made by the Master Servicer with respect to such Distribution
Date. See "Servicing of the Mortgage Loans-Servicing and Other
Compensation and Payment of Expenses" and "Description of the
Certificates-Distributions-Distributable Certificate Interest" herein.
SUBORDINATION...................................... The rights of holders of the Class B Certificates and each Class of the
Private Certificates (collectively, the "Subordinate Certificates") to
receive distributions of amounts collected or advanced on the Mortgage
Loans will, in each case, be subordinated, to the extent described herein,
to the rights of holders of the Class A Certificates and each other Class
of Subordinate Certificates, if any, with an earlier alphabetical Class
designation. This subordination is intended to enhance the likelihood of
timely receipt by the holders of the Class A Certificates of the full
amount of Distributable Certificate Interest payable in respect of such
Certificates on each Distribution Date, and the ultimate receipt by such
holders of principal equal to the entire Certificate Balance of the Class
A Certificates. Similarly, but to a lesser degree, this subordination is
also intended to enhance the likelihood of timely receipt by the holders
of the Class B Certificates of the full amount of Distributable Certificate
Interest payable in respect of such Certificates on each Distribution Date,
and the ultimate receipt by such holders of principal equal to the entire
Certificate Balance of the related Class of Certificates. The protection
afforded to the holders of each Class of Offered Certificates by means of
the subordination of each other Class of Certificates with a later
alphabetical Class designation will be accomplished by the application of
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the Available Distribution Amount on each Distribution Date in the order
described above in this Summary under "-Description of the
Certificates-Distributions". No other form of Credit Support will be available
for the benefit of the holders of the Offered Certificates.
OPTIONAL TERMINATION............................... At its option, the Master Servicer may purchase all of the Mortgage
Loans and REO Properties, and thereby effect termination of the Trust
Fund and early retirement of the then outstanding Certificates, on any
Distribution Date on which the remaining aggregate Stated Principal
Balance of the Mortgage Pool is less than ___% of the Initial Pool
Balance. See "Description of the Certificates-Termination" herein and
in the Prospectus.
CERTAIN INVESTMENT
CONSIDERATIONS................................ The yield to maturity of an Offered Certificate purchased at a discount
or premium will be affected by the rate of prepayments and other
unscheduled collections of principal on or in respect of the Mortgage
Loans and the allocation thereof to reduce the principal balance of such
Certificate. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of prepayments could result in a lower than anticipated yield and, in
the case of any Offered Certificate purchased at a premium, the risk that
a faster than anticipated rate of prepayments could result in a lower than
anticipated yield. See "Risk Factors", "Description of the Mortgage
Pool", "Description of the Certificates" and "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" in the
Prospectus.
In addition, insofar as an investor's initial investment in any Offered
Certificate is returned in the form of payments of principal thereon, there
can be no assurance that such amounts can be reinvested in comparable
alternative investments with comparable yields. Investors in the Offered
Certificates (particularly the Class A Certificates, to which the entire
Unscheduled Principal Distribution Amount will be allocated for so long
as they are outstanding) should consider that the Mortgage Loans may be
prepaid at any time, [generally without the payment of a premium,
penalty or fee] [subject, in certain cases, to the payment of a penalty or
premium]. See "Description of the Mortgage Pool" herein.
Accordingly, the rate of prepayments on the Mortgage Loans is likely to
be inversely related to the level of prevailing market interest rates (and,
presumably, to the yields on comparable alternative investments).
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES.............................. An election will be made to treat the Trust Fund as a real estate
mortgage investment conduit (a "REMIC") for Federal income tax
purposes. Upon the issuance of the Offered Certificates,
___________________________, counsel to the Depositor, will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the Pooling and Servicing Agreement, for Federal income
tax purposes, the Trust Fund will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986 (the "Code").
For Federal income tax purposes, the Class A, Class B and Class C
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Certificates will be the "regular interests" in the Trust Fund, and the Class R
Certificates will be the sole class of "residual interests" in the Trust Fund.
The Offered Certificates generally will be treated as debt obligations of
the Trust Fund for Federal income tax purposes. Holders of Offered
Certificates must report income with respect thereto on the accrual
method, regardless of their method of tax accounting generally. In
addition, the Offered Certificates will be treated as qualifying assets and
income under Sections 593(d), 856(c)(5)(A), 856(c)(3)(B) and
7701(a)(19)(C) of the Code.
The ____________ Certificates [will] [will not] [may] be treated as
having been issued with original issue discount for Federal income tax
purposes. The prepayment assumption that will be used for purposes of
computing the accrual of [original issue discount,] market discount and
premium, if any, for Federal income tax purposes will be equal to [a
CPR of ___%]. However, no representation is made that the Mortgage
Loans will prepay at that rate or at any other rate.
For further information regarding the Federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA CONSIDERATIONS............................... A fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code (a "Plan") should
review carefully with its legal advisors whether the purchase or holding
of Offered 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 to the Underwriter an
individual exemption, Prohibited Transaction Exemption 90-29, 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 and the servicing and operation of related asset pools,
provided that certain conditions are satisfied.]
[The Depositor expects that Prohibited Transaction Exemption 90-29 will
generally apply to the Class A Certificates, but it will not apply to the
Class B Certificates. As a result,] no transfer of a [Class B] Certificate
or any interest therein may be made to a Plan or to any person who is
directly or indirectly purchasing such [Class B] Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets
of a Plan, unless the prospective transferee (at its own expense) provides
the Certificate Registrar (as identified herein) with a certification and an
opinion of counsel which establish to the Certificate Registrar's
</TABLE>
<PAGE>
S-15
<TABLE>
<S> <C>
satisfaction that such transfer will not result in a violation of Section 406
of ERISA or Section 4975 of the Code or cause the Master Servicer or the
Trustee to be deemed a fiduciary of such Plan or result in the imposition of an
excise tax under Section 4975 of the Code. See "ERISA Considerations" herein
and in the Prospectus.
RATING .......................................... It is a condition of their issuance that the Class A and Class B
Certificates be rated not lower than "___" and "___", respectively, by
_______________________ (together, the "Rating Agencies"). 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 of Mortgage Loans, or the corresponding
effect on yield to investors. See "Rating" herein and "Risk
Factors-Limited Nature of Ratings" in the Prospectus.
LEGAL INVESTMENT................................... [The Class A Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") for so long as they are rated in one of the two highest
ratings categories by one or more nationally recognized statistical rating
organizations and, as such, are legal investments for certain entities to
the extent provided in SMMEA. Such investments, however, will be
subject to general regulatory considerations governing investment
practices under state and federal law. In addition, institutions whose
investment activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the investment
by such institutions in certain forms of mortgage related securities.
Furthermore, certain states have recently enacted legislation overriding
the legal investment provisions of SMMEA.]
The [Class B] Certificates will NOT be "mortgage related securities"
within the meaning of the Secondary Mortgage Market Enhancement Act
of 1984. As a result, the appropriate characterization of the [Class B]
Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the [Class B]
Certificates, may be subject to significant interpretative uncertainties.
Investors should consult their own legal advisors to determine whether
and to what extent the Offered Certificates constitute legal investments
for them. See "Legal Investment" herein and in the Prospectus.
</TABLE>
<PAGE>
S-16
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among
other things, the following factors (as well as the factors set forth under
"Risk Factors" in the Prospectus) in connection with an investment therein.
THE CERTIFICATES
LIMITED LIQUIDITY. There is currently no secondary market for the
Offered Certificates. While the Underwriter currently intends to make a
secondary market in the Offered Certificates, it is under no obligation to do
so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will provide holders
of Offered Certificates with liquidity of investment or that it will continue
for the life of the Offered Certificates. The Offered Certificates will not be
listed on any securities exchange.
CERTAIN YIELD AND MATURITY CONSIDERATIONS. The yield on any Offered
Certificate will depend on, among other things, the Pass-Through Rate in effect
from time to time for such Certificate. The Pass-Through Rate applicable to the
Class A Certificates for any Distribution Date will equal LIBOR for such
Distribution Date, plus ____ basis points, subject to a maximum of ___% per
annum and a minimum of _____% per annum; unless, however, the rate so calculated
exceeds the Funds-Available Cap Rate applicable to the Class A Certificates for
such Distribution Date, in which case the Pass-Through Rate for the Class A
Certificates for such Distribution Date will equal the Weighted Average
Effective Net Mortgage Rate for such date. Accordingly, the yield on the Class A
Certificates will, in general, be highly sensitive to monthly changes in LIBOR.
The Pass-Through Rate applicable to the Class B Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
for such date. Accordingly, the yield on the Class B Certificates will be
sensitive to adjustments to the Mortgage Rates on the ARM Loans and to changes
in the relative composition of the Mortgage Pool as a result of scheduled
amortization, voluntary prepayments and involuntary liquidations of Mortgage
Loans. See "Description of the Certificates-Distributions-Pass-Through Rate"
herein.
The yield on any Offered Certificate that is purchased at a discount or
premium will also be affected by the rate and timing of principal payments on
such Certificate, which in turn will be affected by (i) the rate and timing of
principal payments (including principal prepayments) and other principal
collections on the Mortgage Loans, (ii) the availability from time to time of
amounts other than Distributable Principal Collections and Advances to amortize
the Certificate Balances of the respective Classes of Certificates, and (iii)
the extent to which the items described in subclauses (i) and (ii) are applied
on any Distribution Date in reduction of the Certificate Balance of the Class to
which such Certificate belongs. As and to the extent described herein, the
holders of each Class of Offered Certificates will be entitled to receive on
each Distribution Date their allocable share (calculated on the basis of the
Ownership Percentage evidenced by such Class of Certificates immediately prior
to such date) of the Scheduled Principal Distribution Amount for such
Distribution Date; however, the Unscheduled Principal Distribution Amount for
each Distribution Date will be distributable entirely in respect of the Class A
Certificates, until the Certificate Balance thereof is reduced to zero, and will
thereafter be distributable entirely in respect of the Class B Certificates. In
addition, as and to the extent described herein, distributions of the Class R
Certificates' allocable share of the Scheduled Principal Distribution Amount for
each Distribution Date, together with ________% of all Excess Funds, if any, for
such Distribution Date, will be applied in reduction of the Certificate Balances
of the respective Classes of REMIC Regular Certificates, in reverse alphabetical
order of their Class designations; while any distributions in respect of an
Uncovered Portion of the Certificate Balance of any Class of REMIC Regular
Certificates will be applied, to the extent of such Uncovered Portion, in
reduction of the Certificate Balance(s) of such Class of REMIC Regular
Certificates and each other Class of REMIC Regular Certificates, if any, with an
earlier alphabetical Class designation, in alphabetical order of such Class
designations. See "Description of the Certificates-Distributions-Priority" and
"-Distributions-Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. Because it is impossible to predict
accurately the timing and amount of principal prepayments and other unscheduled
recoveries of principal, if any, that will be received, or the availability from
time to time of any amounts other than Distributable Principal Collections and
Advances to amortize the Certificate Balances of the respective Classes of
Certificates, investors may find it difficult to analyze the effect that such
items might have on the yield and weighted average lives of the Offered
Certificates.
<PAGE>
S-17
Furthermore, the yield on any Offered Certificate also will be affected
by the rate and timing of delinquencies and defaults on the Mortgage Loans and
the severity of ensuing losses. As and to the extent described herein, the
Private Certificates are subordinate in right and time of payment to the Offered
Certificates and will bear shortfalls in collections and losses incurred in
respect of the Mortgage Loans prior to the Offered Certificates; and the Class B
Certificates are subordinate in right and time of payment to the Class A
Certificates and will bear shortfalls in collections and losses incurred in
respect of the Mortgage Loans prior to the Class A Certificates. See
"Description of the Mortgage Pool", "Description of the
Certificates-Distributions" and "-Subordination" and "Yield and Maturity
Considerations" herein and "Yield Considerations" in the Prospectus.
PREPAYMENT CONSIDERATIONS. As discussed above in "-Certain Yield and
Maturity Considerations", the yield on any Offered Certificate purchased at a
discount or premium will be affected by the rate and timing of principal
payments on such Certificate, which in turn will be affected by, among other
things, the rate and timing of principal prepayments on the Mortgage Loans. The
rate at which principal prepayments occur on the Mortgage Loans will be affected
by a variety of factors, including, without limitation, 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, the Mortgage Loans are likely to prepay at a higher rate than if
prevailing rates remain at or above those Mortgage Rates [, especially since the
Mortgage Loans may be prepaid at any time without penalty]. [Nonetheless, the
rate of principal payments on the Mortgage Loans is likely to be affected by the
provisions of the Mortgage Loans imposing Lock-out Periods and Prepayment
Premiums which, in general, would be expected to lower the rate of principal
prepayments from the rate that would occur absent such provisions.]
THE MORTGAGE LOANS
RISKS OF LENDING ON INCOME-PRODUCING PROPERTIES. The Mortgaged
Properties consist entirely of income-producing real estate. Lending on the
security of income-producing real estate is generally viewed as exposing the
lender to a greater risk of loss than lending on the security of single-family
residences. Furthermore, the repayment of loans secured by income producing
properties is typically dependent upon the successful operation of the related
real estate project (i) to generate rental income sufficient to pay operating
expenses, to make necessary repairs, tenant improvements and capital
improvements and to pay debt service and (ii) in the case of loans that do not
fully amortize over their terms, to retain sufficient value to permit the
borrower to pay off the loan at maturity by sale or refinancing. A number of
factors, many beyond the control of the property owner, can affect the ability
of an income-producing real estate project to generate sufficient net operating
income to pay debt service and/or to maintain its value. Among these factors are
economic conditions generally and in the area of the project, the age, quality
and design of the project and the degree to which it competes with other
projects in the area, changes or continued weakness in specific industry
segments, increases in operating costs, the willingness and ability of the owner
to provide capable property management and maintenance and the degree to which
the project's revenue is dependent upon a single tenant or user, a small group
of tenants, or tenants concentrated in a particular business or industry. If
leases are not renewed or replaced, if tenants default and/or if rental rates
fall and/or if operating expenses increase, the borrower's ability to repay the
loan may be impaired and the resale value of the property, which is
substantially dependent upon the property's ability to generate income, may
decline. In addition, there are other factors, including changes in zoning or
tax laws, the availability of credit for refinancing, and changes in interest
rate levels that may adversely affect the value of a project (and thus the
borrower's ability to sell or refinance) without necessarily affecting the
ability to generate current income.
In addition, particular types of income properties are exposed to
particular risks. For instance, office properties generally require their owners
to expend significant amounts of cash to pay for general capital improvements,
tenant improvements and costs of re-leasing space. Also, office properties that
are not equipped to accommodate the needs of modern business may become
functionally obsolete and thus non-competitive. Multifamily projects are part of
a market that, in general, is characterized by low barriers to entry. Thus, a
particular apartment market with historically low vacancies could experience
substantial new construction, and a resultant oversupply of units, in a
relatively short period of time. Since multifamily apartment units are typically
leased on a short-term basis, the tenants who reside in a particular project
within such a market may easily move to newer projects with better amenities.
Shopping centers in
<PAGE>
S-18
general are affected by the health of the retail industry, which is currently
undergoing a consolidation and is experiencing changes due to the growing market
share of "off-price" retailing, and a particular shopping center may be
adversely affected by the bankruptcy or decline in drawing power of an anchor
tenant, a shift in consumer demand due to demographic changes (for example,
population decreases or changes in average age or income) and/or changes in
consumer preference (for example, to discount retailers). Industrial properties
may be adversely affected by reduced demand for industrial space occasioned by a
decline in a particular industry segment (for example, a decline in defense
spending), and a particular industrial property that suited the needs of its
original tenant may be difficult to relet to another tenant or may become
functionally obsolete relative to newer properties. The successful operation of
a hotel property with a franchise affiliation may depend in part upon the
strength of the franchisor, the public perception of the franchise service mark
and the continued existence of the franchise license agreement. The
transferability of a franchise license agreement may be restricted, and a lender
or other person that acquires title to a hotel property as a result of
foreclosure may be unable to succeed to the borrower's rights under the
franchise license agreement. Moreover, the transferability of a hotel's
operating, liquor and other licenses upon a transfer of the hotel, whether
through purchase of foreclosure, is subject to local law requirements. See "Risk
Factors-Risks Associated with Certain Mortgage Loans and Mortgaged Properties"
in the Prospectus.
LIMITED RECOURSE. The Mortgage Loans are not insured or guaranteed by
any governmental entity or private mortgage insurer. The Depositor has not
undertaken any evaluation of the significance of the recourse provisions of any
of a number of the Mortgage Loans that provide for recourse against the related
borrower or another person in the event of a default. Accordingly, investors
should consider all of the Mortgage Loans to be non-recourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan.
ENVIRONMENTAL LAW CONSIDERATIONS. [The Mortgage Loan Seller has
represented and warranted in the Mortgage Loan Purchase Agreement that as of
[the Delivery Date] [specify any representation and warranty as to environmental
matters]. Furthermore, the Mortgage Loan Seller has agreed that, in the event of
a material breach of such representation and warranty, it will either cure the
breach or repurchase the affected Mortgage Loan. The Mortgage Loan Seller's
representations and warranties regarding the Mortgage Loans set forth in the
Mortgage Loan Purchase Agreement will be assigned, together with the related
cure and repurchase obligations, by the Depositor to the Trustee in connection
with the Depositor's assignment of its interests in the Mortgage Loans.
Notwithstanding the foregoing, however, no environmental site assessments have
been conducted with respect to any of the Mortgaged Properties, and thus, the
Mortgage Loan Seller's representation and warranty as to environmental matters
should be regarded as an absence of knowledge on the part of the Mortgage Loan
Seller of the inaccuracy of such representation and warranty and as an
allocation of risk in the event any breach thereof is subsequently discovered.
See "Description of the Mortgage Pool-Representations and Warranties;
Repurchases" herein.]
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto or assuming its operation. Such prohibition effectively
precludes enforcement of the security for the related Mortgage Note until a
satisfactory environmental site assessment is obtained (or until any required
remedial action is thereafter taken), but will decrease the likelihood that the
Trust Fund will become liable for a material adverse environmental condition at
the Mortgaged Property. However, there can be no assurance that the requirements
of the Pooling and Servicing Agreement will effectively insulate the Trust Fund
from potential liability for a materially adverse environmental condition at any
Mortgaged Property. See "Description of the Pooling Agreements-Realization Upon
Defaulted Mortgage Loans", "Risk Factors-Environmental Risks" and "Certain Legal
Aspects of Mortgage Loans-Environmental Legislation" in the Prospectus.
GEOGRAPHIC CONCENTRATION. ______ Mortgage Loans, which represent ____%
of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in _____________. In general, that concentration increases the exposure
of the Mortgage Pool to any adverse economic or other developments that may
occur in _________. In recent periods, _____________ (along with other regions
of the United States) has experienced a significant downturn in the market value
of real estate.
<PAGE>
S-19
CONCENTRATION OF MORTGAGE LOANS AND BORROWERS. Several of the Mortgage
Loans have Cut-off Date Balances that are substantially higher than the average
Cut-off Date Balance. The [two] largest Mortgage Loans have Cut-off Date
Balances that represent approximately ____% and ___%, respectively, of the
Initial Pool Balance, and the _________ largest Mortgage Loans have Cut-off Date
Balances that represent in the aggregate approximately _____% of the Initial
Pool Balance. There are also several pairs of Mortgage Loans that have the same
borrower. The [three] largest of those pairs, by aggregate Cut-off Date Balance
of the Mortgage Loans, represent ____%, ____% and ____%, respectively, of the
Initial Pool Balance.
In general, concentrations in a mortgage pool of loans with
larger-than-average balances can result in losses that are more severe, relative
to the size of the pool, than would be the case if the aggregate balance of the
pool were more evenly distributed. Concentration of borrower representation in a
mortgage pool also poses increased risks. For instance, if a borrower that owns
several Mortgaged Properties experiences financial difficulty at one Mortgaged
Property, or at another income-producing property that it owns, it could attempt
to avert foreclosure by filing a bankruptcy petition that might have the effect
of interrupting Monthly Payments for an indefinite period on all of the related
Mortgage Loans.
ADJUSTABLE RATE MORTGAGE LOANS; NEGATIVE AMORTIZATION. ________ of the
Mortgage Loans, which represent ____% of the Initial Pool Balance, are ARM
Loans. In addition, ___ of the ARM Loans, which represent ____% of the Initial
Pool Balance, allow negative amortization to occur. Increases in the required
Monthly Payments on ARM Loans in excess of those assumed in the original
underwriting of such loans may result in a default rate higher than that on
mortgage loans with fixed mortgage rates. Moreover, increases in the principal
balances of ARM Loans due to the deferral and capitalization of interest
payments may result in a default rate that is higher than that of adjustable
rate mortgage loans that do not provide for negative amortization.
BALLOON PAYMENTS. None of the Mortgage Loans is fully amortizing over
its term to maturity. Thus, each Mortgage Loan will have a substantial payment
(that is, a Balloon Payment) due at its stated maturity unless prepaid prior
thereto. In addition, ARM Loans that permit negative amortization could require,
under certain interest rate scenarios, Balloon Payments substantially larger
than expected. Loans with Balloon Payments involve a greater risk to a lender
than self-amortizing loans because the ability of a borrower to make a Balloon
Payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the borrower to make the Balloon Payment. See "Risk Factors-Balloon Payments;
Borrower Default" in the Prospectus.
In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement permits the Master Servicer to extend and modify
Mortgage Loans that are in material default or as to which a payment default
(including the failure to make a Balloon Payment) is imminent; subject, however,
to the limitations described under "Servicing of the Mortgage
Loans-Modifications, Waivers and Amendments" herein. There can be no assurance,
however, that any such extension or modification will increase the present value
of recoveries in a given case. Any delay in collection of a Balloon Payment that
would otherwise be distributable in respect of a Class of Offered Certificates,
whether such delay is due to borrower default or to modification of the related
Mortgage Loan by the Master Servicer, will likely extend the weighted average
life of such Class of Offered Certificates. See "Yield and Maturity
Considerations" herein and "Yield Considerations" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of ___ conventional, balloon
Mortgage Loans with an Initial Pool Balance of $_______________. Each Mortgage
Loan is evidenced by a promissory note (a "Mortgage Note") and secured by a
mortgage, deed of trust or other similar security instrument (a "Mortgage") that
creates a first mortgage lien on a fee simple estate in a multifamily rental
property (a "Mortgaged Property"). ALL PERCENTAGES OF THE MORTGAGE LOANS, OR OF
ANY SPECIFIED GROUP OF MORTGAGE LOANS, REFERRED TO HEREIN WITHOUT FURTHER
DESCRIPTION ARE APPROXIMATE PERCENTAGES BY AGGREGATE CUT-OFF DATE BALANCE.
<PAGE>
S-20
The Mortgage Loans will be acquired by the Depositor on or before the
Delivery Date from __________________ (the "Mortgage Loan Seller"), which either
originated the Mortgage Loans or acquired them from their respective
originators. See "-The Mortgage Loan Seller" herein.
The Mortgage Loans were originated between 19__ and 19__. [While the
Depositor has caused to be undertaken a limited review of the records and files
related to the Mortgage Loans in connection with the issuance of the
Certificates, none of the Mortgage Loans was "re-underwritten" or subjected to
the type of review that would typically be made in respect of a newly originated
mortgage loan. All of the Mortgaged Properties were inspected by or on behalf of
the Depositor within the ____ month period preceding the Cut-off Date to assess
their general condition[, which in virtually all cases was determined to be
average or better]. However, no Mortgaged Property was re-appraised by or on
behalf of the Depositor to assess its current value [and no evaluation was made
of the existence or extent of deferred maintenance at any Mortgaged Property].
CERTAIN PAYMENT CHARACTERISTICS
___ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the ______ (____% of the Mortgage
Loans), _____ (____% of the Mortgage Loans), _____ (____% of the Mortgage
Loans), and _______ (____% of the Mortgage Loans) day of each month.
____________ of the Mortgage Loans (the "ARM Loans"), which represent
____% of the Initial Pool Balance, bear interest at Mortgage Rates that are
subject to adjustment on periodically occurring Interest Rate Adjustment Dates
by adding the related Gross Margin to the value of a base index (an "Index"),
subject in [most] cases to rounding conventions and lifetime minimum and/or
maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the Initial Pool Balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans (the "Fixed Rate Loans") bear
interest at fixed Mortgage Rates. None of the ARM Loans is convertible into a
Fixed Rate Loan.
Adjustments to the Mortgage Rates on ___ of the ARM Loans (the "COFI
ARM Loans"), which represent ___% of the Initial Pool Balance, are based upon
the COFI Index (See "-The Eleventh District Cost of Funds Index" herein).
Adjustments to the Mortgage Rates on the remaining ARM Loans are based upon
Treasury Indices. The adjustments to the Mortgage Rates on the ARM Loans may in
each case be based on the value of the related Index as available a specified
number of days prior to an Interest Rate Adjustment Date, or may be based on the
value of the related Index as most recently published as of an Interest Rate
Adjustment Date or as of a designated date preceding an Interest Rate Adjustment
Date. ____ of the ARM Loans, which represent ___% of the Initial Pool Balance,
provide for Interest Rate Adjustment Dates that occur monthly; ____ of the ARM
Loans, which represent ___% of the Initial Pool Balance, provide for Interest
Rate Adjustment Date that occur semi-annually; and the remaining ARM Loans
provide for Interest Rate Adjustment Dates that occur annually.
Subject, in the case of [most] of the ARM Loans, to the Payment Caps
described below, the Monthly Payments on each ARM Loan are subject to adjustment
on each Payment Adjustment Date to an amount that would amortize fully the
principal balance of the Mortgage Loan over its then remaining amortization
schedule and pay interest at the Mortgage Rate in effect during the one month
period preceding such Payment Adjustment Date. __________ of the ARM Loans,
which represent ___% of the Initial Pool Balance, provide for Payment Adjustment
Dates that occur annually; ___ of the ARM Loans, which represent ___% of the
Initial Pool Balance, provide for Payment Adjustment Dates that occur
semi-annually; and the remaining ARM Loans provide for Payment Adjustment Dates
that occur monthly. _________ of the ARM Loans, which represent ____% of the
Initial Pool Balance, provide that an adjustment of the amount of the Monthly
Payment on a Payment Adjustment Date may not result in a Monthly Payment that is
more than _______% greater or, in the case of [some] of those Mortgage Loans,
less than the amount of the Monthly Payment in effect immediately prior to such
Payment Adjustment Date (each such provision, a "Payment Cap"); however, those
Mortgage Loans also provide that the Payment Cap will not apply on certain
Payment Adjustment Dates.
<PAGE>
S-21
____________ of the ARM Loans, which represent ____% of the Initial
Pool Balance, provide for Payment Adjustment Dates that occur less frequently
than Interest Rate Adjustment Dates and/or provide for Payment Caps that limit
the amount by which a Monthly Payment can increase (or, in [some] cases,
decrease) in response to a change in the Mortgage Rate. As a result, the amount
of a Monthly Payment in those cases may be greater or less than the amount
necessary to amortize the loan fully over its then remaining amortization
schedule and pay interest at the applicable Mortgage Rate, and accordingly,
those ARM Loans may be subject to slower amortization (if the Monthly Payment
due on a Due Date is sufficient to pay interest accrued to such Due Date at the
applicable Mortgage Rate but is not sufficient to reduce principal in accordance
with the applicable amortization schedule), to negative amortization (if
interest accrued to a Due Date at the applicable Mortgage Rate is greater than
the entire Monthly Payment due on such Due Date) or to accelerated amortization
(if the Monthly Payment due on a Due Date is greater than the amount necessary
to pay interest accrued to such Due Date at the applicable Mortgage Rate and to
reduce principal in accordance with the applicable amortization schedule). All
of the Mortgage Loans that permit negative amortization provide that if, as a
result of negative amortization, the respective principal balance of the
Mortgage Loan reaches an amount specified therein (which in no case is greater
than [125%] of the original principal balance thereof), the amount of the
Monthly Payments due thereunder will be increased (irrespective of any Payment
Cap and whether or not such increase will occur on a Payment Adjustment Date) as
necessary to prevent negative amortization in excess of such amount.
All of the Mortgage Loans provide for monthly payments of principal
based on amortization schedules significantly longer than the remaining terms of
such Mortgage Loans, thereby leaving substantial principal amounts due and
payable (each such payment, a "Balloon Payment") on their respective maturity
dates, unless prepaid prior thereto.
[No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments.] [____ of the Fixed Rate Loans,
which represent ___% of the Initial Pool Balance, prohibit voluntary prepayments
of principal for a period (a "Lock-out Period") ending on a date (a "Lock-out
Expiration Date") specified in the related Mortgage Note, and impose fees or
penalties ("Prepayment Premiums") in connection with prepayments of principal
made thereafter.] Prepayment Premiums are payable to the Master Servicer as
additional servicing compensation, to the extent not otherwise applied to offset
Prepayment Interest Shortfalls, and may be waived by the Master Servicer in
accordance with the servicing standard described under "Servicing of the
Mortgage Loans-General" herein.
THE ELEVENTH DISTRICT COST OF FUNDS INDEX
The COFI Index reflects the monthly weighted average cost of funds of
savings and loan associations and savings banks, the home offices of which are
located in Arizona, California and Nevada, that are member institutions of the
Eleventh District of the Federal Home Loan Bank System. The COFI Index is
computed from statistics tabulated and published by the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco"), which normally announces the
COFI Index on the last working day of the month following the month as to which
the weighted average cost of funds was computed. The FHLB of San Francisco
publishes the COFI Index in its monthly Information Bulletin, copies of which
may be obtained from the FHLB of San Francisco's Office of Public Information.
The COFI Index reflects the interest costs paid on all types of funds
held by Eleventh District member institutions. The COFI Index is weighted to
reflect the relative amount of each type of funds held at the end of the
relevant month. There are three major components of funds of Eleventh District
member institutions: (1) savings deposits, (2) FHLB of San Francisco advances
and (3) all other borrowings, such as reverse repurchase agreements and
mortgage-backed bonds. Unlike most other interest rate measures, the COFI Index
does not necessarily reflect current market rates, since the component funds
represent a variety of maturities the costs of which may react in different ways
to changing conditions.
A number of factors affect the performance of the COFI Index and may
cause the COFI Index to move in a manner different from indices based upon
specific interest rates, such as the United States Treasury rates and LIBOR.
Because the COFI Index is based on, among other things, the various maturities
of the liabilities of member institutions of the Eleventh District of the
Federal Home Loan Bank System for the month prior to the month in which the COFI
Index is published, the COFI Index may not reflect the average prevailing market
interest rates on new liabilities of
<PAGE>
S-22
similar maturities and, in general, the COFI Index tends to respond more slowly
to interest rate movements than do other interest rate indices. Moreover, there
can be no assurance that the COFI Index will necessarily move in the same
direction as prevailing interest rates since, as longer term deposits or
borrowings mature and are renewed at market interest rates, the COFI Index will
rise or fall depending upon the differential between the prior and the new rates
on such deposits and borrowings. Furthermore, any movement in the COFI Index, as
compared to other indices based upon specific interest rates, may be affected by
changes instituted by the FHLB of San Francisco in the method used to calculate
the COFI Index. Because _____% of the Mortgage Loans are COFI ARM Loans, the
performance of the COFI Index, to the extent that it moves within a range that
affects the Mortgage Rates on the COFI ARM Loans, will have a substantial effect
on the Weighted Average Effective Net Mortgage Rate in effect from time to time.
The Pass-Through Rate from time to time of the Class B Certificates is the
Weighted Average Effective Net Mortgage Rate, and thus, the yield on the Class B
Certificates will be extremely sensitive to movements in the COFI Index that
result in adjustments to the Mortgage Rates of the COFI ARM Loans. The
Pass-Through Rate from time to time of the Class A Certificates, under certain
circumstances described herein, will equal the Weighted Average Effective Net
Mortgage Rate, and thus, the yield on the Class A Certificates may in those
circumstances also be affected by movements in the COFI Index. See "Yield and
Maturity Considerations" herein.
Listed below are some historical values of the COFI Index since January
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of past or future values of the COFI Index.
<TABLE>
<CAPTION>
MONTH 1988 1989 1990 1991 1992 1993 1994 1995
- ----- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January ................. 7.615% 8.125% 8.369% 7.858% 6.002% 4.360% 3.710% 4.747%
February ................ 7.647 8.346 8.403 7.848 5.800 4.333 3.687 4.925
March ................... 7.509 8.423 8.258 7.654 5.611 4.245 3.629 5.007
April ................... 7.519 8.648 8.211 7.501 5.427 4.171 3.672 5.064
May ..................... 7.497 8.797 8.171 7.329 5.290 4.103 3.726 5.141
June .................... 7.618 8.923 8.086 7.155 5.258 4.050 3.804 5.179
July .................... 7.593 8.844 8.109 6.998 5.069 3.998 3.860 5.144
August .................. 7.659 8.763 8.075 6.845 4.874 3.958 3.945 5.133
September ............... 7.847 8.807 8.091 6.714 4.805 3.881 4.039 5.111
October ................. 7.828 8.643 8.050 6.566 4.597 3.823 4.187 5.116
November ................ 7.914 8.595 8.044 6.414 4.508 3.822 4.367 5.119
December ................ 8.022 8.476 7.963 6.245 4.432 3.879 4.589 5.059
</TABLE>
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in
each case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE ARM LOANS AS OF THE CUT-OFF DATE
Percent by
Number of Aggregate Cut-off Percent by Aggregate Cut-off
RANGE OF MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------------------- --------------- -------------------- ------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
S-23
The following tables set forth the range of Mortgage Rates on the ARM
Loans, the Fixed Rate Loans and all the Mortgage Loans, respectively, as of the
Cut-off Date:
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE ARM LOANS AS OF THE CUT-OFF DATE
Percent by
Number of Aggregate Cut-off Percent by Aggregate Cut-off
RANGE OF MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------------------- --------------- -------------------- ------------- -----------------
<S> <C> <C> <C> <C>
Total.........................................
-------------- ------------------- ----------- --------------------
-------------- ------------------- ----------- --------------------
Weighted Average
Mortgage Rate (ARM Loans): ____% per annum
</TABLE>
<TABLE>
MORTGAGE RATES ON THE FIXED RATE LOANS AS OF THE CUT-OFF DATE
Number of Percent by
Fixed Rate Aggregate Cut-off Percent by Aggregate Cut-off
RANGE OF MORTGAGE RATES(%) LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------------------- --------------- -------------------- ------------- ----------------
<S> <C> <C> <C> <C>
-------------- ------------------- ----------- --------------------
Total.........................................
-------------- ------------------- ----------- --------------------
-------------- ------------------- ----------- --------------------
Weighted Average
Mortgage Rate (Fixed Rate Loans): _____% per annum
</TABLE>
<PAGE>
S-24
<TABLE>
MORTGAGE RATES ON ALL MORTGAGE LOANS AS OF THE CUT-OFF DATE
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
RANGE OF MORTGAGE RATES(%) LOANS DATE BALANCE NUMBER DATE BALANCE
- -------------------------------------------------- --------------- --------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Total..........................................
-------------- ------------------- ----------- --------------------
-------------- ------------------- ----------- --------------------
Weighted Average
Mortgage Rate (All Loans): ______% per annum
</TABLE>
The following table sets forth the range of Gross Margins for the ARM
Loans:
<TABLE>
GROSS MARGINS FOR THE ARM LOANS
Percent by
Number of Aggregate Cut-off Percent by Aggregate Cut-off
RANGE OF GROSS MARGINS(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------------------- --------------- ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
-------------- ------------------ ---------------- -------------------
Total............................................
-------------- ------------------ ---------------- -------------------
-------------- ------------------ ---------------- -------------------
Weighted Average
Gross Margin: ____%
</TABLE>
<PAGE>
S-25
The following table sets forth for the ARM Loans the Indices upon which
Mortgage Rate adjustments are based, and the frequency of adjustments to the
Mortgage Rates and Monthly Payments of the ARM Loans.
<TABLE>
<CAPTION>
INDICES AND FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES AND MONTHLY PAYMENTS FOR THE ARM LOANS
Monthly
Mortgage Rate Payment Number of Percent by
Adjustment Adjustment Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
INDEX FREQUENCY FREQUENCY LOANS DATE BALANCE NUMBER DATE BALANCE
- ---------------------- ---------------- --------------- --------------- ------------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
-------------- ------------------ --------------- -------------------
Total..................
-------------- ------------------ --------------- -------------------
-------------- ------------------ --------------- -------------------
</TABLE>
The following table sets forth the range of maximum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
<TABLE>
<CAPTION>
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
Percent by
RANGE OF MAXIMUM Number of Aggregate Cut-off Percent by Aggregate Cut-off
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
- -------------------------------------------------- --------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
None...........................................
Total..........................................
-------------- ------------------ --------------- -------------------
-------------- ------------------ --------------- -------------------
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- -----------------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
<PAGE>
S-26
The following table sets forth the range of minimum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
<TABLE>
<CAPTION>
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
Percent by
RANGE OF MINIMUM Number of Aggregate Cut-off Percent by Aggregate Cut-off
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------------------- --------------- ---------------------- --------------- -----------------
<S> <C> <C> <C> <C>
None.............................................
-------------- -------------------- -------------- ----------------------
Total............................................
-------------- -------------------- -------------- ----------------------
-------------- -------------------- -------------- ----------------------
Weighted Average Minimum
Lifetime Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- ----------------
(A) This calculation does not include the _____ ARM Loans without minimum
lifetime Mortgage Rates.
<PAGE>
S-27
The following table sets forth the range of Cut-off Date Balances of
the Mortgage Loans:
<TABLE>
<CAPTION>
CUT-OFF DATE BALANCES
Number of Percent by
CUT-OFF DATE Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
BALANCE RANGE ($) LOANS DATE BALANCE NUMBER DATE BALANCE
- ---------------------------------------------------- --------------- ------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Total...............................................
Average Cut-off Date
Balance (ARM Loans): $____________
Average Cut-off Date
Balance (Fixed Rate Loans): $____________
Average Cut-off Date
Balance (All Loans): $____________
</TABLE>
The following tables set forth the original and remaining terms to
stated maturity (in months) of the Mortgage Loans:
<TABLE>
<CAPTION>
ORIGINAL TERMS TO STATED MATURITY (IN MONTHS)
Percent by
RANGE OF ORIGINAL Number of Aggregate Cut-off Percent by Aggregate Cut-off
TERMS (IN MONTHS) MORTGAGE LOANS DATE BALANCE NUMBER DATE BALANCE
- ---------------------------------------- -------------------- -------------------------- ------------- -----------------
<S> <C> <C> <C> <C>
------------------- ------------------------- ------------ ---------------------
Total...................................
Weighted Average Original
Term to Stated Maturity
(ARM Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(All Loans): ____ months
</TABLE>
<PAGE>
S-28
<TABLE>
<CAPTION>
REMAINING TERMS TO STATED MATURITY (IN MONTHS) AS OF THE CUT-OFF DATE
Percent by
RANGE OF REMAINING Number of Aggregate Cut-off Percent by Aggregate Cut-off
TERMS (IN MONTHS) MORTGAGE LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------- ---------------------- -------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
-------------------- ------------------------- ------------ -------------------
Total................................
-------------------- ------------------------- ------------ -------------------
-------------------- ------------------------- ------------ -------------------
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(All Loans): ___ months
</TABLE>
The following table sets forth the respective years in which the
Mortgage Loans were originated:
<TABLE>
<CAPTION>
YEARS OF ORIGINATION
Percent by
Number of Aggregate Cut-off Percent by Aggregate Cut-off
YEAR MORTGAGE LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------- ---------------------- -------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
-------------------- ------------------------- ------------ -------------------
Total..................................
-------------------- ------------------------- ------------ -------------------
-------------------- ------------------------- ------------ -------------------
</TABLE>
<PAGE>
S-29
The following table sets forth the respective years in which the
Mortgage Loans are scheduled to mature. The tables provide an indication (which
does not account for any scheduled amortization, prepayments or negative
amortization) of the concentration of Balloon Payments that will be due in those
years with respect to such groups of Mortgage Loans. See "Risk Factors-Balloon
Payments" herein.
<TABLE>
<CAPTION>
YEAR OF SCHEDULED MATURITY
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
YEAR LOANS DATE BALANCE NUMBER DATE BALANCE
- -------------------------------- ---------------------- ---------------------- -------------- ----------------
<S> <C> <C> <C> <C>
--------------------- ------------------ --------------- -------------------
Total.........................
--------------------- ------------------ --------------- -------------------
--------------------- ------------------ --------------- -------------------
</TABLE>
___% of the Mortgage Loans prohibit voluntary prepayments of
principal until a Lock-out Expiration Date specified in the related Mortgage
Note. The following table sets forth the calendar quarters in which Lock-out
Expiration Dates for such Mortgage Loans occur.
<TABLE>
<CAPTION>
MORTGAGE LOAN LOCK-OUT EXPIRATION DATES
CALENDAR QUARTER IN WHICH Number of Percent by
LOCK-OUT EXPIRATION Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
DATE OCCURS LOANS DATE BALANCE NUMBER DATE BALANCE
- -------------------------------- ---------------------- ---------------------- -------------- ----------------
<S> <C> <C> <C> <C>
--------------------- ------------------ --------------- -------------------
Total.........................
--------------------- ------------------ --------------- -------------------
--------------------- ------------------ --------------- -------------------
</TABLE>
<PAGE>
S-30
The following table sets forth the range of Cut-off Date LTV Ratios of
the Mortgage Loans. A "Cut-off Date LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the Cut-off Date Balance of a Mortgage
Loan, and the denominator of which is the appraised value of the related
Mortgaged Property as determined by an appraisal thereof obtained in connection
with the origination of such Mortgage Loan. A Cut-off Date LTV Ratio, because it
is based on the value of a Mortgaged Property determined as of loan origination,
is not necessarily a reliable measure of the borrower's current equity in that
Mortgaged Property. In a declining real estate market, the fair market value of
the Mortgaged Property could have decreased from the value determined at
origination, and the actual loan-to-value ratio of a Mortgage Loan may be higher
than its Cut-off Date LTV Ratio.
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS
Percent by
RANGE OF CUT-OFF Number of Aggregate Cut-off Percent by Aggregate Cut-off
DATE LTV RATIOS(%) MORTGAGE LOANS DATE BALANCE NUMBER DATE BALANCE
- ----------------------------------- ---------------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
--------------------- ------------------ --------------- ------------------
Total...........................
--------------------- ------------------ --------------- ------------------
--------------------- ------------------ --------------- ------------------
Weighted Average Cut-off
Date LTV Ratio (ARM
Loans): _____%
Weighted Average Cut-off
Date LTV Ratio (Fixed
Rate Loans): _____%
Weighted Average Cut-off
Date LTV Ratio (All
Loans): _____%
</TABLE>
The following table sets forth the range of Debt Service Coverage Ratios for
the Mortgage Loans. The "Debt Service Coverage Ratio" for any Mortgage Loan is
the ratio of Net Operating Income produced by the related Mortgaged Property for
the period (annualized if the period was less than one year) covered by an
operating statement to the amount of the Monthly Payment in effect as of the
Cut-off Date multiplied by 12. "Net Operating Income" is the revenue derived
from the use and operation of a Mortgaged Property (consisting primarily of
rental income and deposit forfeitures) less operating expenses (such as
utilities, general administrative expenses, management fees, advertising,
repairs and maintenance) and less fixed expenses (such as insurance and real
estate taxes). Net Operating Income generally does not reflect capital
expenditures. The following table was prepared using operating statements
obtained from the respective borrowers. In each case, the information contained
in such operating statements was unaudited, and the Depositor has made no
attempt to verify its accuracy. In the case of ___ Mortgage Loans (___ ARM Loans
and ___ Fixed Rate Loans), the related Mortgaged Property has an operating
history of less than ________. Performance over such a relatively short period
may be less predictive of future performance than would be a stable operating
history over an extended period of time. In the case of _____ Mortgage Loans
(____ ARM Loans and ____ Fixed Rate Loans), operating statements for years
following 19__ could not be obtained. Accordingly, Debt Service Coverage Ratios
for those Mortgage Loans were not calculated and no conclusion should be drawn
as to the Debt Service Ratios of such Mortgage Loans based on the information
set forth below. The last day of the period (which may not correspond to the end
of the calendar year most
<PAGE>
S-31
recent to the Cut-off Date) covered by each operating statement from which a
Debt Service Coverage Ratio was calculated is set forth in Annex A with respect
to the related Mortgage Loan.
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE RATIOS
AS OF THE CUT-OFF DATE
RANGE OF Percent by
DEBT SERVICE Number of Aggregate Cut-off Percent by Aggregate Cut-off
COVERAGE RATIOS MORTGAGE LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------ ---------------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Not calculated (A)............. ------------------ ------------------------- ------------ -------------------
Total..........................
------------------ ------------------------- ------------ -------------------
------------------ ------------------------- ------------ -------------------
Weighted Average
Debt Service Coverage
Ratio (ARM Loans):
_____x(B)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans):
_____x(C)
Weighted Average
Debt Service Coverage
Ratio (All Loans): _____x(D)
</TABLE>
- ---------------------
(A) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements for years following
19__.
(B) This calculation does not include the ________ ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(C) This calculation does not include the ________ Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
<PAGE>
S-32
The Mortgage Loans are secured by liens on Mortgaged Properties located
in _____ different states. The following table sets forth the states in which
the Mortgaged Properties are located:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
STATE LOANS DATE BALANCE NUMBER DATE BALANCE
------------------------------ ---------------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
--------------------- ------------------ ----------- -------------------
Total....................................
--------------------- ------------------ ----------- -------------------
--------------------- ------------------ ----------- -------------------
</TABLE>
Specified in Annex A to this Prospectus Supplement are the foregoing
and certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under ["-Underwriting Standards",] "-Assignment of the
Mortgage Loans; Repurchases" and "-Representations and Warranties; Repurchases"
and in the Prospectus under "Description of the Trust Funds" and "Certain Legal
Aspects of Mortgage Loans".
THE MORTGAGE LOAN SELLER
GENERAL. On or prior to the Delivery Date, the Depositor will acquire
the Mortgage Loans from ____________ (the "Mortgage Loan Seller") pursuant to a
Mortgage Loan Purchase Agreement, dated [the date hereof], between the Depositor
and the Mortgage Loan Seller (the "Mortgage Loan Purchase Agreement"). The
Mortgage Loan Seller originated ___ of the Mortgage Loans, which represent ___%
of the Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof.
[The Mortgage Loans Seller [, a wholly-owned subsidiary of __________,]
is a _________________ organized in ____ under the laws of __________________.
As of December 31, 199_, the Mortgage Loan Seller had a net worth of
approximately $_________________, and currently holds and services for its own
account a total multifamily and commercial mortgage loan portfolio of
approximately $__________________, of which approximately $__________________
constitutes multifamily mortgage loans].
The information set forth herein concerning the Mortgage Loan Seller,
the delinquency, foreclosure and loss experience of its mortgage loan portfolio
and its underwriting standards has been provided by the Mortgage Loan Seller,
and neither the Depositor nor the Underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
[DELINQUENCY AND FORECLOSURE EXPERIENCE. The following table sets forth
certain information concerning the delinquency experience (including pending
foreclosures) on the Mortgage Loan Seller's portfolio of multifamily mortgage
loans held and serviced for its own account. 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 30 days past due
on a contractual basis.
<PAGE>
S-33
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 199 AS OF DECEMBER 31, 199 AS OF , 199
------------------------------------ ------------------------------------ -----------------------
By Dollar By Dollar By Dollar
By Number of Amount of By Number of Amount of By Number of Amount of
LOANS LOANS LOANS LOANS LOANS LOANS
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total Multifamily
Mortgage Loans.......... $ $ $
------------------- ------------- ------------------- -------------- ---------------- ------------
Period of Delinquency
30 to 59 days........
60 to 89 days........
90 days or more......
Total Delinquent Loans..
Foreclosures
pending(1)..............
Real Estate Owned.......
</TABLE>
- ------------------------------
(1) Includes bankruptcies which stay foreclosure.
The following table presents, for the Mortgage Loan Seller's portfolio
of multifamily mortgage loans held and serviced for its own account, the net
gains (losses) resulting from foreclosures and the disposition of properties
acquired in foreclosure or by deed in lieu of foreclosure during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MONTHS ENDED
199 199 199 199
-------------------------- -------------------------- --------------------------- --------------
<S> <C> <C> <C> <C>
Net gains (losses)(1)......
</TABLE>
- ----------------------------
(1) Gains (losses) are defined as proceeds from sale less outstanding
principal balance less certain capitalized costs related to the
foreclosure and/or disposition of the related property (exclusive of
accrued interest).
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond to
the delinquency, foreclosure and loss experience of the Mortgage Loan Seller's
total multifamily mortgage loan portfolio set forth in the foregoing tables. The
aggregate delinquency, foreclosure and loss experience on the Mortgage Loans
comprising the Mortgage Pool will depend on the results obtained over the life
of the Mortgage Pool.]
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.
Description of underwriting standards.]
[The Mortgage Loans were not originated by the Mortgage Loan Seller to
conform to any particular underwriting standards or criteria; however, the
Mortgage Loans were originated in the manner described herein and generally with
a view to obtaining the rating assigned to the Offered Certificates.]
<PAGE>
S-34
The Depositor believes that the Mortgage Loans selected for inclusion
in the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis that would have a material adverse effect on the
Certificateholders.
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASE
On or prior to the Delivery Date, the Depositor will assign its
interests in the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. In connection with such assignment, the
Depositor will require the Mortgage Loan Seller to deliver to the Trustee or to
a document custodian appointed by the Trustee (a "Custodian"), among other
things, the following documents with respect to each Mortgage Loan
(collectively, as to such Mortgage Loan, the "Mortgage File"): (i) the original
Mortgage Note, endorsed (without recourse) to the order of Trustee; (ii) the
original Mortgage or a certified copy thereof, together with originals or
certified copies of any intervening assignments of such document, in each case
with evidence of recording thereon; (iii) the original or a certified copy of
any related assignment of leases, rents and profits (if such item is a document
separate from the Mortgage), together with originals or certified copies of any
intervening assignments of such document, in each case with evidence of
recording thereon; (iv) the original or a certified copy of any related security
agreement (if such item is a document separate from the Mortgage), together with
originals or certified copies of any intervening assignments of such document;
(v) an assignment of the Mortgage in favor of the Trustee, in recordable form;
(vi) an assignment of any related assignment of leases, rents and profits (if
such item is a document separate from the Mortgage) in favor of the Trustee, in
recordable form; (vii) an assignment of any related security agreement (if such
item is a document separate from the Mortgage) in favor of the Trustee; (viii)
originals or certified copies of all assumption, modification and substitution
agreements in those instances where the terms or provisions of the Mortgage or
Mortgage Note have been modified or the Mortgage or Mortgage Note has been
assumed; (ix) the original lender's title insurance policy issued on the date of
the origination of such Mortgage Loan or, with respect to each Mortgage Loan as
to which a lender's title insurance policy has not yet been issued, a
preliminary title report or a title insurance commitment or binder or, with
respect to each Mortgage Loan not covered by a lender's title insurance policy,
an attorney's opinion of title given by an attorney licensed to practice law in
the jurisdiction where the Mortgaged Property is located; and (x) the original
of any guaranty of the borrower's obligations under the related Mortgage Note.
The Trustee or a Custodian on its behalf will be required to review
each Mortgage File within a period of ___ days of the receipt thereof, and the
Trustee or a Custodian on its behalf will hold such documents in trust for the
benefit of the Certificateholders. If any of the above-described documents is
found during the course of such review to be missing from any Mortgage File or
defective, and in either case such omission or defect materially and adversely
affects the value of any Mortgage Loan or the interests of Certificateholders
therein, the Trustee will be required to notify the Master Servicer, the
Depositor and the Mortgage Loans Seller. In any such case, and if the Mortgage
Loan Seller cannot deliver the document or cure the defect within a period of
___ days following its receipt of such notice, then the Mortgage Loan Seller
will be obligated pursuant to the Mortgage Loan Purchase Agreement (the relevant
rights under which will be assigned, together with its interests in the Mortgage
Loans, by the Depositor to the Trustee) to repurchase the affected Mortgage Loan
within such ___-day period at a price (the "Purchase Price") equal to the sum of
(i) the unpaid principal balance of such Mortgage Loan, (ii) unpaid accrued
interest on such Mortgage Loan at the Mortgage Rate from the date to which
interest was last paid to the Due Date in the Due Period in which the purchase
is to occur (exclusive of any portion of such interest representing negative
amortization previously added to the principal balance of such Mortgage Loan),
(iii) certain servicing expenses that are reimbursable to the Master Servicer,
and (iv) any unpaid accrued interest at the Master Servicer Reimbursement Rate
that may be payable to the Master Servicer in respect of related unreimbursed
P&I Advances and servicing expenses as described under "Description of the
Certificates-P&I Advances" herein. This repurchase obligation will constitute
the sole remedy available to the Certificateholders and the Trustee for any
defect in or omission from a Mortgage File, and neither the Depositor nor any of
its affiliates will be obligated to repurchase the affected Mortgage Loan if the
Mortgage Loan Seller defaults on its obligation to do so.
The Pooling and Servicing Agreement will require the Master Servicer
promptly (and in any event within ___ days of the Delivery Date) to cause each
assignment of a Mortgage described in clause (v) of the second preceding
paragraph and each assignment of an assignment of leases, rents and profits
described in clause (vi) of the second
<PAGE>
S-35
preceding paragraph to be submitted for recording in the real property records
of the jurisdiction in which the related Mortgaged Property is located. See
"Description of the Pooling Agreements-Assignment of Mortgage Loans;
Repurchases" in the Prospectus.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Mortgage Loan Purchase Agreement, the Mortgage Loan Seller has
represented and warranted with respect to each Mortgage Loan, as of [the
Delivery Date], or as of such other date specifically provided in the
representation and warranty, among other things, that:
[Specify significant representations and warranties.]
If the Master Servicer, the Trustee or the Depositor discovers a breach
of any of the foregoing representations and warranties, and such breach
materially and adversely affects the value of any Mortgage Loan or the interests
of Certificateholders therein, the party making such discovery will be required
to so notify each of the other parties and the Mortgage Loan Seller. In any such
case, and if the Mortgage Loan Seller cannot cure such breach within a period of
____ days following its receipt of such notice, then the Mortgage Loan Seller
will be obligated pursuant to the Mortgage Loan Purchase Agreement (the relevant
rights under which will be assigned, together with its interests in the Mortgage
Loans, by the Depositor to the Trustee) to repurchase the affected Mortgage Loan
within such ___-day period at the applicable Purchase Price.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. [Thus, for example, if the Mortgage Loan Seller were found to have
breached its representation set forth in clause __ above regarding environmental
matters, it would have no obligation to indemnify the Trust Fund for any
resulting liability that the Trust Fund might have incurred for clean-up costs
at the affected Mortgaged Property. However, because of the restrictions imposed
by the Pooling and Servicing Agreement upon the ability of the Master Servicer
to acquire title to a Mortgaged Property or to assume control of its operations,
the Depositor believes that it is unlikely that the Trust Fund will incur any
such liability. See "Risk Factors-Environmental Law Considerations" herein and
"Description of the Pooling Agreements-Realization Upon Defaulted Mortgage
Loans", "Risk Factors-Environmental Risks" and "Certain Legal Aspects of
Mortgage Loans-Environmental Legislation" in the Prospectus.]
The Mortgage Loan Seller will be the sole Warranting Party in respect
of the Mortgage Loans, and neither the Depositor nor any of its affiliates will
be obligated to repurchase any affected Mortgage Loan in connection with a
breach of the Mortgage Loan Seller's representations and warranties if the
Mortgage Loan Seller defaults on its obligation to do so. However, the Depositor
will not include any Mortgage Loan in the Mortgage Pool if anything has come to
the Depositor's attention that would cause it to believe that the
representations and warranties made by the Mortgage Loan Seller regarding such
Mortgage Loan will not be correct in all material respects. See "Description of
the Pooling Agreements-Representations and Warranties; Repurchases" in the
Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Offered Certificates, a Mortgage Loan may be removed from the
Mortgage Pool if the Depositor deems such removal necessary or appropriate or if
it is prepaid. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Offered 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 Offered Certificates are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
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A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer will be required to service and administer the
Mortgage Loans, either directly or through sub-servicers, on behalf of the
Trustee and in the best interests of and for the benefit of the
Certificateholders (as determined by the Master Servicer in its good faith and
reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans and,
to the extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are located, and with a view to the maximization of timely recovery
of principal and interest, but without regard to: (i) any relationship that the
Master Servicer or any affiliate of the Master Servicer may have with the
related borrower; (ii) the ownership of any Certificate by the Master Servicer
or any affiliate of the Master Servicer; (iii) the Master Servicer's obligation
to make P&I Advances and advances to cover certain servicing expenses; and (iv)
the Master Servicer's right to receive compensation for its services under the
Pooling and Servicing Agreement or with respect to any particular transaction.
Set forth below, following the subsection captioned "-The Master
Servicer", is a description of certain pertinent provisions of the Pooling and
Servicing Agreement relating to the servicing of the Mortgage Loans. Reference
is also made to the Prospectus, in particular to the section captioned
"Description of the Pooling Agreements", for important information in addition
to that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement as they relate to the rights and obligations of the Master
Servicer thereunder.
THE MASTER SERVICER
[__________________________________, a ___________________, will act as
Master Servicer with respect to the Mortgage Pool. Founded in ____ as a
____________, the Master Servicer today furnishes a variety of wholesale banking
services. As of December 31, 19__, the Master Servicer had a net worth of
approximately $__________, and currently has a multifamily mortgage loan
servicing portfolio of approximately $___________.
The offices of the Master Servicer that will be primarily responsible
for servicing and administering the Mortgage Pool are located at
____________________________.
For so long as the long-term unsecured debt obligations of the Master
Servicer are rated ___ or better by _____________________, the Master Servicer
will not be required to maintain the errors and omissions policy described in
the Prospectus under ["Description of the Pooling Agreements-Hazard Insurance
Policies"].]
The information set forth herein concerning the Master Servicer has
been provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities will be the Servicing Fee. The "Servicing
Fee" will be payable monthly on a loan-by-loan basis from amounts received in
respect of interest on each Mortgage Loan, will accrue in accordance with the
terms of the related Mortgage Note at a rate equal to ________% per annum (the
"Servicing Fee Rate") and will be computed on the basis of the same principal
amount
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and for the same period respecting which any related interest payment on the
related Mortgage Loan is computed. As additional servicing compensation, the
Master Servicer will be entitled to retain all assumption and modification fees
and, as and to the extent described below, Prepayment Premiums, Prepayment
Interest Excesses and Penalty Charges collected from borrowers. In addition, the
Master Servicer is authorized but not required to invest or direct the
investment of funds held in the Certificate Account in certain short-term United
States government securities and other investment grade obligations ("Permitted
Investments"), and the Master Servicer will be entitled to retain any interest
or other income earned on such funds. Although the Master Servicer is required
to service and administer the Mortgage Pool in accordance with the general
servicing standard described under "-General" above and, accordingly, without
regard to its right to receive compensation under the Pooling and Servicing
Agreement, additional servicing compensation in the nature of assumption and
modification fees, Prepayment Premiums, Prepayment Interest Excesses and Penalty
Charges may under certain circumstances provide the Master Servicer with an
economic disincentive to comply with such standard.
If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period on a date that is prior to its Due Date in such Due
Period, the amount of interest (net of related Servicing Fees) that accrues on
the amount of such principal prepayment will be less (such shortfall, a
"Prepayment Interest Shortfall") than the corresponding amount of interest
accruing on the Certificates. If such a principal prepayment occurs during any
Due Period after the Due Date for such Mortgage Loan in such Due Period, the
amount of interest (net of related Servicing Fees) that accrues on the amount of
such principal prepayment will exceed (such excess, a "Prepayment Interest
Excess") the corresponding amount of interest accruing on the Certificates. As
to any Due Period, to the extent Prepayment Interest Excesses and Prepayment
Premiums collected for all Mortgage Loans are greater than Prepayment Interest
Shortfalls incurred, such excess will be paid to the Master Servicer as
additional servicing compensation. To the extent Prepayment Interest Shortfalls
incurred during any Due Period are greater than Prepayment Interest Excesses and
Prepayment Premiums collected in such Due Period, the Master Servicer will be
required to deposit into the Certificate Account (such deposit, a "Compensating
Interest Payment"), without any right of reimbursement therefor, an amount equal
to the lesser of (i) its servicing compensation for such Due Period, and (ii) an
amount sufficient to eliminate such net shortfall. Compensating Interest
Payments will not cover shortfalls in Mortgage Loan interest accruals that
result from any liquidation of a defaulted Mortgage Loan, or of any REO Property
acquired in respect thereof, that occurs during a Due Period prior to the
related Due Date therein.
As and to the extent described herein under "Description of the
Certificates-P&I Advances", the Master Servicer will be entitled to receive
interest on P&I Advances and reimbursable servicing expenses, such interest to
be paid, contemporaneously with the reimbursement of the related P&I Advance or
servicing expense, in the first instance out of late charges and penalty
interest ("Penalty Charges") received on the Mortgage Pool as a whole during the
Due Period of reimbursement, and thereafter out of any other collections on the
Mortgage Loans. As to any Due Period, to the extent that Penalty Charges
collected for all Mortgage Loans are greater than the amount of interest paid to
the Master Servicer in respect of P&I Advances and reimbursable servicing
expenses, such excess will be paid to the Master Servicer as additional
servicing compensation.
The Master Servicer generally will be required to pay all expenses
incurred by it in connection with its servicing activities under the Pooling and
Servicing Agreement, and will not be entitled to reimbursement therefor except
as expressly provided in the Pooling and Servicing Agreement. However, the
Master Servicer will be permitted to pay certain such expenses directly out of
the Certificate Account and at times without regard to the relationship between
the expense and the funds from which it is being paid. In connection therewith,
the Master Servicer will be responsible for all fees of any sub-servicers, other
than management fees earned in connection with the operation of an REO Property,
which management fees the Master Servicer will be authorized to pay out of
revenues received from such property (thereby reducing the portion of such
revenues that would otherwise be available for distribution to
Certificateholders). See "Description of the Certificates-Distributions-Method,
Timing and Amount" herein and "Description of the Pooling Agreements-Certificate
Account" and "-Servicing Compensation and Payment of Expenses" in the
Prospectus.
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MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer may agree to modify, waive or amend any term of any
Mortgage Loan in a manner consistent with the servicing standard described
herein, provided that such modification, waiver or amendment will not (i) affect
the amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan or (ii) in its judgment, materially impair the security for the
Mortgage Loan or reduce the likelihood of timely payment of amounts due thereon.
The Master Servicer also may agree to any other modification, waiver or
amendment of the terms of a Mortgage Loan, but only if, in its judgment, a
material default on the Mortgage Loan has occurred or a payment default is
imminent, and such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Mortgage Loan on a present value
basis than would liquidation.
To the extent consistent with the foregoing, the Master Servicer will
be permitted: (1) to reduce scheduled monthly payments of principal and interest
on any Mortgage Loan, provided that [(a) no such payment may be reduced to an
amount less than [1/12 of 5]% of the unpaid principal balance of such Mortgage
Loan and (b) no single modification or amendment may provide for a reduction of
more than 12 consecutive monthly payments]; and (2) to extend the date on which
any Balloon Payment is scheduled to be due for a period of not more than [36]
months, but only if:
[(x) the related borrower is required to continue to make
monthly payments of principal and/or interest thereon in an amount at
least equal to the greater of (i) the amount of the Monthly Payment due
on the Due Date immediately preceding the scheduled maturity date and
(ii) an amount equal to thirty days' interest at the related Mortgage
Rate;
(y) no Monthly Payment due during the preceding 12 months has
been more than 30 days delinquent (without regard to any grace period
provided for in the related Mortgage Note); and
(z) the Master Servicer has previously determined in its
good faith judgment that:
(i) such extension is reasonably likely to
produce a greater recovery than liquidation
of the related Mortgage Loan;
(ii) on the basis of an inspection report, no
deferred maintenance, material damage or
waste exists at the related Mortgaged
Property; and
(iii) on the basis of a review of the most recent
annual operating statement for the related
Mortgaged Property, and calculated with
respect to the amount described in clause
(x) above, the debt service coverage ratio
for the Mortgage Loan is not less than
_____x.]
The Master Servicer is required to notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement whereby
any such modification, waiver or amendment of any term of any Mortgage Loan is
effected are required to be available for review during normal business hours at
the offices of the Master Servicer. See "Description of the Certificates-Reports
to Certificateholders; Available Information" herein.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Master Servicer is required to perform a physical inspection of
each Mortgaged Property at such times and in such manner as are consistent with
the servicing standard set forth herein, but in any event (i) at least once per
calendar year and (ii), if any scheduled payment becomes more than 60 days
delinquent on the related Mortgage Loan, as soon as practicable thereafter. The
Master Servicer will be required to prepare a written report of each such
inspection describing the condition of the Mortgaged Property and specifying the
existence of any material vacancies in the
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Mortgaged Property, of any sale, transfer or abandonment of the Mortgaged
Property, of any material change in the condition or value of the Mortgaged
Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to
deliver such statements, the Master Servicer is also required to collect and
review the annual operating statements of the related Mortgaged Property. Most
of the Mortgages obligate the related borrower to deliver annual property
operating statements. However, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the Master
Servicer likely to have any practical means of compelling such delivery in the
case of an otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to
above are required to be available for review by Certificateholders during
normal business hours at the offices of the Master Servicer. See "Description of
the Certificates-Reports to Certificateholders; Available Information" herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or Monthly
Payment had been properly adjusted, over (ii) the amount of such improperly
adjusted Monthly Payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Depositor, the Master
Servicer and the Trustee (the "Pooling and Servicing Agreement"), and will
represent in the aggregate the entire beneficial ownership interest in a Trust
Fund consisting of: (i) the Mortgage Loans and all payments under and proceeds
of the Mortgage Loans received after the Cut-off Date (exclusive of payments of
principal and interest due on or before the Cut-off Date); (ii) any Mortgaged
Property acquired on behalf of the Trust Fund through foreclosure, deed in lieu
of foreclosure or otherwise (upon acquisition, an "REO Property"); (iii) such
funds or assets as from time to time are deposited in the Certificate Account;
(iv) the rights of the mortgagee under all insurance policies with respect to
the Mortgage Loans; and (v) certain rights of the Depositor under the Mortgage
Loan Purchase Agreement relating to Mortgage Loan document delivery requirements
and the representations and warranties of the Mortgage Loan Seller regarding the
Mortgage Loans.
The Certificates will consist of four classes to be designated as the
Class A Certificates, the Class B Certificates, the Class C Certificates and the
Class R Certificates. The Class A Certificates will have an initial Certificate
Balance of $____________, which represents ____% of the Initial Pool Balance;
the Class B Certificates will have an initial Certificate Balance of
$____________, which represents ____% of the Initial Pool Balance; the Class C
Certificates will have an initial Certificate Balance of $____________, which
represents ___% of the Initial Pool Balance; and the Class R Certificates will
have an initial Certificate Balance of [zero]. The Certificate Balance of any
Class of Certificates outstanding at any time represents the maximum amount
which the holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in the
Trust Fund. On each Distribution Date, the respective Certificate Balances of
the Class A, Class B and Class C Certificates (the "REMIC Regular Certificates")
will in each case be (a) increased by any amounts allocated to such Class of
Certificates on such Distribution Date in respect of negative amortization on
the Mortgage Loans, and (b) reduced by any amounts actually
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S-40
distributed on such Class of Certificates on such Distribution Date that are
allocable to principal. The Certificate Balance of the Class R Certificates will
at all times equal the amount, if any, by which the aggregate Stated Principal
Balance of the Mortgage Pool exceeds the aggregate Certificate Balance of the
REMIC Regular Certificates (the "Excess Pool Balance").
Only the Class A and Class B Certificates (the "Offered Certificates")
are offered hereby. The Class C and Class R Certificates (the "Private
Certificates") have not been registered under the Securities Act of 1933 and are
not offered hereby. [___________________________________ has agreed with the
Depositor to purchase the Class C and, except for a nominal interest therein,
the Class R Certificates.]
The Class A Certificates will be issued, maintained and transferred on
the book-entry records of DTC and its Participants in denominations of $1,000
and in integral multiples thereof. The Class B Certificates will be issuable in
fully registered, certificated form in denominations of $____________ and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Class A
Certificate Owner will be entitled to receive a Definitive Class A Certificate
representing its interest in such Class, except under the limited circumstances
described in the Prospectus under "Description of the Certificates-Book-Entry
Registration and Definitive Certificates". Unless and until Definitive Class A
Certificates are issued, all references to actions by holders of the Class A
Certificates will refer to actions taken by DTC upon instructions received from
Class A Certificate Owners through its Participants, and all references herein
to payments, notices, reports and statements to holders of the Class A
Certificates will refer to payments notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Class A Certificates, for
distribution to Class A Certificate Owners through its Participants in
accordance with DTC procedures. See "Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in the Prospectus.
Until Definitive Class A Certificates are issued, interests in such
Class will be transferred on the book-entry records of DTC and its Participants.
The Class B Certificates may be transferred or exchanged, subject to certain
restrictions on the transfer of such Certificates to Plans (see "ERISA
Considerations" herein), at the offices of ___________________________ located
at ______________________________________________, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. ________________________ will initially serve as registrar
(in such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Class A
Certificates.
DISTRIBUTIONS
METHOD, TIMING AND AMOUNT. Distributions on the Certificates will be
made by the Master Servicer, to the extent of available funds, on the 25th day
of each month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Each such distribution will be made by wire transfer in immediately
available funds to the account specified by the Certificateholder at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
will have provided the Master Servicer with wiring instructions [no less than
five business days prior to the related Record Date (which wiring instructions
may be in the form of a standing order applicable to all subsequent
distributions) and is the registered owner of Certificates with an aggregate
initial principal amount of at least $5,000,000], or otherwise by check mailed
to such Certificateholder. The final distribution on any Certificate will be
made in like manner, but only upon presentation and surrender of such
Certificate at the location that will be specified in a notice of the pendency
of such final distribution. All distributions made with respect to a Class of
Certificates will
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S-41
be allocated pro rata among the outstanding Certificates of such Class based on
their respective Percentage Interests. The "Percentage Interest" evidenced by
any Offered Certificate is equal to the initial denomination thereof as of the
Delivery Date, divided by the initial Certificate Balance of the Class to which
it belongs.
The aggregate amount available for distribution to Certificateholders
on each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage
Loans and any REO Properties that is on deposit in the Certificate
Account as of the related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a
Due Date subsequent to the related Due
Period,
(ii) all principal 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
(iii) all amounts in the Certificate Account that
are due or reimbursable to any person other
than the Certificateholders;
(b) all P&I Advances made by the Master Servicer with
respect to such Distribution Date; and
(c) any Compensating Interest Payment made by the Master
Servicer to cover or reduce the amount, if any, by which Prepayment
Interest Shortfalls incurred during the related Due Period exceed
Prepayment Interest Excesses and Prepayment Premiums collected during
the related Due Period. See "Description of the Pooling
Agreements-Certificate Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that
begins on the ______ day of the month preceding the month in which such
Distribution Date occurs and ends on the _____ day of the month in which such
Distribution Date occurs. The "Determination Date" for each Distribution Date is
the _______ day of the month in which such Distribution Date occurs or, if any
such ________ day is not a business day, then the next preceding business day.
PRIORITY. On each Distribution Date, for so long as the Class A and/or
Class B Certificates are outstanding, the Master Servicer will (except as
otherwise described under "-Termination" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in the
following order of priority:
(1) to distributions of interest to the holders of the
Class A Certificates in an amount equal to all
Distributable Certificate Interest in respect of the
Class A Certificates for such Distribution Date and,
to the extent not previously paid, for all prior
Distribution Dates;
(2) to distributions of principal to the holders of the
Class A Certificates in an amount equal to the sum of
(a) the product of (i) the Class A Certificates'
Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such
Distribution Date, plus (b) the entire Unscheduled
Principal Distribution Amount for such Distribution
Date (but not more than would be necessary to reduce
the Certificate Balance of the Class A Certificates
to zero);
(3) to distributions of principal to the holders of the
Class A Certificates in an amount equal to any
Uncovered Portion of the Certificate Balance of the
Class A Certificates immediately prior to such
Distribution Date;
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S-42
(4) to distributions of interest to the holders of the
Class B Certificates in an amount equal to all
Distributable Certificate Interest in respect of the
Class B Certificates for such Distribution Date and,
to the extent not previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the holders of the
Class B Certificates in an amount equal to the sum of
(a) the product of (i) the Class B Certificates'
Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such
Distribution Date, plus (b) if the Class A
Certificates have been retired, then to the extent
not distributed in retirement thereof on such
Distribution Date, the entire Unscheduled Principal
Distribution Amount for such Distribution Date (but
not more than would be necessary to reduce the
Certificate Balance of the Class B Certificates to
zero);
(6) to distributions of principal to the holders of the
Class A Certificates in an amount equal to any
Uncovered Portion of the Certificate Balance of the
Class B Certificates immediately prior to such
Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the
Class A Certificates to zero);
(7) to distributions of principal to the holders of the
Class B Certificates in an amount equal to any
Uncovered Portion of the Certificate Balance of the
Class B Certificates immediately prior to such
Distribution Date, net of any distributions of
principal made on such Distribution Date in respect
of the Class A Certificates as described in the
immediately preceding clause (6);
(8) to distributions of interest to the holders of the
Class C Certificates in an amount equal to all
Distributable Certificate Interest in respect of the
Class C Certificates for such Distribution Date and,
to the extent not previously distributed, for all
prior Distribution Dates;
(9) to distributions of principal to the holders of the
Class C Certificates in an amount equal to the
product of (a) the Class C Certificates' Ownership
Percentage (as calculated immediately prior to such
Distribution Date), multiplied by (b) the Scheduled
Principal Distribution Amount for such Distribution
Date;
(10) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in
reverse alphabetical order of their Class
designations (that is, C, B, A), in an aggregate
amount equal to the product of (a) the Class R
Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date),
multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date (but,
in each case, not more than would be necessary to
reduce the related Certificate Balance to zero);
(11) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in
alphabetical order of their Class designations (that
is, A, B, C), in an aggregate amount equal to any
Uncovered Portion of the Certificate Balance of the
Class C Certificates immediately prior to such
Distribution Date (but, in each case, not more than
would be necessary to reduce the related Certificate
Balance to zero);
(12) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in
reverse alphabetical order of their Class
designations (that is, C, B, A,), in an aggregate
amount equal to _____% of the balance, if any, of the
Available Distribution Amount remaining after the
distributions to be made as described in clauses (1)
through (11) above (such remaining balance, if any,
herein referred to as "Excess Funds") (but, in each
case, not more than would be necessary to reduce the
related Certificate Balance to zero); and
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(13) to distributions to the holders of the Class R
Certificates in an amount equal to the remaining
balance of any Excess Funds.
PASS-THROUGH RATES. The Pass-Through Rates applicable to the Class A
and Class B Certificates for the initial Distribution Date will equal _______%
and ______% per annum, respectively. With respect to any Distribution Date
subsequent to the initial Distribution Date, the Pass-Through Rate for the Class
A Certificates will equal LIBOR for such Distribution Date, plus _____ basis
points, subject to a maximum of ____% per annum and a minimum of ______% per
annum; unless, however, the rate so calculated exceeds the Funds-Available Cap
Rate in respect of the Class A Certificates for such Distribution Date, in which
case the Pass-Through Rate for the Class A Certificates will equal the Weighted
Average Effective Net Mortgage Rate for such Distribution Date. With respect to
any Distribution Date subsequent to the initial Distribution Date, the
Pass-Through Rate for the Class B and Class C Certificates will equal the
Weighted Average Effective Net Mortgage Rate for such Distribution Date.
[The Pass-Through Rate applicable to the Class C Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
for such Distribution Date. The Class R Certificates will have no specified
Pass- Through Rate.]
"LIBOR" for each Distribution Date will be the average of the interbank
offered rates for one month United States dollar deposits in the London market
as determined during the preceding month in accordance with the method described
below. The "Weighted Average Effective Net Mortgage Rate" for each Distribution
Date is the weighted average of the applicable Effective Net Mortgage Rates for
the Mortgage Loans, weighted on the basis of their respective Stated Principal
Balances immediately prior to such Distribution Date. For purposes of
calculating the Weighted Average Effective Net Mortgage Rate for any
Distribution Date, the "applicable Effective Net Mortgage Rate" for each
Mortgage Loan is: (a) if such Mortgage Loan accrues interest on the basis of a
360-day year consisting of twelve 30-day months (a "360/360 basis", which is the
basis of accrual for interest on the REMIC Regular Certificates), the Net
Mortgage Rate in effect for such Mortgage Loan as of the commencement of the
related Due Period; and (b) if such Mortgage Loan does not accrue interest on a
360/360 basis, the annualized rate at which interest would have to accrue during
the one month period preceding the Due Date for such Mortgage Loan during the
related Due Period on a 360/360 basis in order to produce the aggregate amount
of interest (adjusted to the actual Net Mortgage Rate) accrued during such
period. The "Net Mortgage Rate" for each Mortgage Loan is equal to the related
Mortgage Rate in effect from time to time less the Servicing Fee Rate.
The "Funds-Available Cap Rate" applicable to the determination of the
Pass-Through Rate on the Class A Certificates for each Distribution Date will be
an annualized rate equal to the product of (a) the Weighted Average Effective
Net Mortgage Rate for such Distribution Date, multiplied by (b) a fraction,
expressed in decimal form, the numerator of which is the sum of (i) the
Certificate Balance of the Class A Certificates immediately prior to such
Distribution Date and (ii) the Excess Pool Balance immediately prior to such
Distribution Date, and the denominator of which is the Certificate Balance of
the Class A Certificates immediately prior to such Distribution Date.
Accordingly, if the Excess Pool Balance is zero (that is, the aggregate Stated
Principal Balance of the Mortgage Pool is less than or equal to the aggregate
Certificate Balance of the REMIC Regular Certificates), the Funds-Available Cap
Rate applicable to the determination of the Pass-Through Rate for the Class A
Certificates for any Distribution Date will be the Weighted Average Effective
Net Mortgage Rate for such Distribution Date.
DETERMINATION OF LIBOR. LIBOR for the initial Distribution Date will
equal ____% per annum. LIBOR for each subsequent Distribution Date will be
determined as described below on the second LIBOR business day preceding the
Distribution Date in the prior month (each, a "LIBOR Adjustment Date"). A "LIBOR
business day" is any day on which banking institutions in London, New York City
and _______________, are open for dealing in foreign currency and exchange.
On each LIBOR Adjustment Date, the Master Servicer will determine LIBOR
on the basis of the LIBOR quotations of the Reference Banks (as defined below),
as such quotations are available to the Master Servicer as of 11:00 a.m. (London
time) on such LIBOR Adjustment Date. As used herein with respect to a LIBOR
Adjustment Date,
<PAGE>
S-44
"Reference Banks" means four leading banks engaged in transactions in one-month
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on the
Reuters Screen LIBO Page on the LIBOR Adjustment Date in question and (iii)
which have been designated as such by the Master Servicer and are able and
willing to provide such quotations to the Master Servicer on each LIBOR
Adjustment Date; and "Reuters Screen LIBO Page" means the display designated as
page "LIBO" on the Reuters 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 rate quotations of major banks). The initial Reference Banks
will be _______________, ____________________, ______________________ and
______________________. If any Reference Bank designated by the Master Servicer
should be removed from the Reuters Screen LIBO Page or in any other way fails to
meet the qualifications of a Reference Bank, the Master Servicer will be
required to designate an alternative Reference Bank.
On each LIBOR Adjustment Date, LIBOR will be established by the Master
Servicer as follows:
(i) if on any LIBOR Adjustment Date two or more of the Reference Banks
provide such offered rate quotations, LIBOR will be the arithmetic mean of such
offered rate quotations (rounding such arithmetic mean upwards if necessary to
the nearest whole multiple of 1/16%);
(ii) if on any LIBOR Adjustment Date only one of the Reference Banks
provides such offered rate quotations, LIBOR will be whichever is the higher of
(A) LIBOR as determined on the previous LIBOR Adjustment Date and (B) a rate per
annum (the "Reserve Interest Rate") determined by the Master Servicer to be
either (1) the arithmetic mean (rounding such arithmetic mean upwards if
necessary to the nearest whole multiple of 1/16%) of the one-month Eurodollar
lending rates that the New York City banks selected by the Master Servicer are
quoting, on the relevant LIBOR Adjustment Date, to the principal London offices
of leading banks in the London interbank market or (2) if the Master Servicer
can determine no such arithmetic mean, the lowest one-month Eurodollar lending
rate that the New York City banks selected by the Master Servicer are quoting on
such LIBOR Adjustment Date to leading European banks; and
(iii) if on any LIBOR Adjustment Date the Master Servicer is required
but is unable to determine the Reserve Interest Rate in the manner provided in
the immediately preceding clause (ii), LIBOR will be LIBOR as determined on the
previous LIBOR Adjustment Date, or, in the case of the first LIBOR Adjustment
Date, _____% per annum.
The establishment of LIBOR by the Master Servicer on any LIBOR
Adjustment Date, in the absence of manifest error, will be final and binding.
DISTRIBUTABLE CERTIFICATE INTEREST. The "Distributable Certificate
Interest" in respect of each Class of REMIC Regular Certificates for each
Distribution Date represents that portion of the Accrued Certificate Interest in
respect of such Class of Certificates for such Distribution Date that is net of
such Class's allocable share (calculated as described below) of (i) the
aggregate of any Prepayment Interest Shortfalls resulting from voluntary
principal prepayments made on the Mortgage Loans during the related Due Period
that are not offset by Prepayment Interest Excesses and Prepayment Premiums
collected during the related Due Period or covered by the Master Servicer's
Compensating Interest Payment for such Distribution Date (the aggregate of such
Prepayment Interest Shortfalls that are not so offset or covered, as to such
Distribution Date, the "Net Aggregate Prepayment Interest Shortfall"), and (ii)
the aggregate of any negative amortization in respect of the Mortgage Loans for
their respective Due Dates during the related Due Period (the aggregate of such
negative amortization, as to such Distribution Date, the "Aggregate Mortgage
Loan Negative Amortization").
The "Accrued Certificate Interest" in respect of each Class of REMIC
Regular Certificates for each Distribution Date is equal to 30 days' interest at
the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of REMIC Regular Certificates
will equal the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is equal to 30 days'
interest at the Pass-Through Rate applicable to such Class of REMIC Regular
Certificates for such Distribution Date accrued on the related Certificate
Balance (net of
<PAGE>
S-45
any Uncovered Portion thereof) outstanding immediately prior to such
Distribution Date, and the denominator of which is equal to 30 days' interest at
the Weighted Average Effective Net Mortgage Rate for such Distribution Date
accrued on the aggregate Stated Principal Balance of the Mortgage Pool
outstanding immediately prior to such Distribution Date. Any portion of the Net
Aggregate Prepayment Interest Shortfall for any Distribution Date that is not
otherwise allocated to the REMIC Regular Certificates will be deemed to be
allocated to the Class R Certificates.
The Aggregate Mortgage Loan Negative Amortization, if any, for each
Distribution Date will be allocated among the respective Classes of Certificates
in an manner identical to that described in the preceding paragraph for the
allocation of any Net Aggregate Prepayment Interest Shortfall. That portion of
the Aggregate Mortgage Loan Negative Amortization for any Distribution Date that
is allocable to a Class of REMIC Regular Certificates will be added to the
Certificate Balance of such Class of REMIC Regular Certificates and,
accordingly, will constitute the "Certificate Negative Amortization" in respect
thereof for such Distribution Date.
SCHEDULED PRINCIPAL DISTRIBUTION AMOUNT AND UNSCHEDULED PRINCIPAL
DISTRIBUTION AMOUNT. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments, due during or, if and to the
extent not previously received or advanced and distributed to Certificateholders
on a preceding Distribution Date, prior to the related Due Period, in each case
to the extent paid by the related borrower or advanced by the Master Servicer
and included in the Available Distribution Amount for such Distribution Date.
The Scheduled Principal Distribution Amount from time to time will include all
late payments of principal made by a borrower, including late payments in
respect of a delinquent Balloon Payment, regardless of the timing of such late
payments, except to the extent such late payments are otherwise reimbursable to
the Master Servicer for prior P&I Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution
Date will equal the aggregate of: (a) all voluntary prepayments of principal
received on the Mortgage Loans during the related Due Period; and (b) any other
collections (exclusive of payments by borrowers) received on the Mortgage Loans
and any REO Properties during the related Due Period, whether in the form of
Liquidation Proceeds, Insurance Proceeds, net income from REO Property or
otherwise, that were identified and applied by the Master Servicer as recoveries
of previously unadvanced principal of the related Mortgage Loan.
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal Collections and Advances".
The "Ownership Percentage" evidenced by any Class of Certificates as of
any date of determination will equal a fraction, expressed as a percentage, the
numerator of which is the then Certificate Balance of such Class of
Certificates, net (in the case of a Class of REMIC Regular Certificates) of any
Uncovered Portion of such Certificate Balance, and the denominator of which is
the then aggregate Stated Principal Balance of the Mortgage Pool.
CERTAIN CALCULATIONS WITH RESPECT TO INDIVIDUAL MORTGAGE LOANS. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders. The Stated Principal Balance of each Mortgage
Loan will initially equal the Cut-off Date Balance thereof and, on each
Distribution Date, will be increased by the portion of the Aggregate Mortgage
Loan Negative Amortization for such date, and reduced by the portion of the
Distributable Principal Collections and Advances for such date, which in either
case is attributable to such Mortgage Loan. The Stated Principal Balance of a
Mortgage Loan may also be reduced in connection with any forced reduction of the
actual unpaid principal balance thereof imposed by a court presiding over a
bankruptcy proceeding wherein the related borrower is the debtor. See "Certain
Legal Aspects of Mortgage Loans-Foreclosure-Bankruptcy Laws" in the Prospectus.
For purposes of calculating distributions on the Certificates, as well
as the amount of Servicing Fees payable each month, each REO Property will be
treated as if there exists with respect thereto an outstanding mortgage loan (an
"REO Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and
"Mortgage Pool" herein and in the Prospectus,
<PAGE>
S-46
when used in such context, will be deemed to also be references to or to also
include, as the case may be, any "REO Loans". Each REO Loan will generally be
deemed to have the same characteristics as its actual predecessor Mortgage Loan,
including the same adjustable or fixed Mortgage Rate (and, accordingly, the same
Net Mortgage Rate and Effective Net Mortgage Rate) and the same unpaid principal
balance and Stated Principal Balance. Amounts due on such predecessor Mortgage
Loan, including any portion thereof payable or reimbursable to the Master
Servicer, will continue to be "due" in respect of the REO Loan; and amounts
received in respect of the related REO Property, net of payments to be made, or
reimbursement to the Master Servicer for payments previously advanced, in
connection with the operation and management of such property, generally will be
applied by the Master Servicer as if received on the predecessor Mortgage Loan.
However, notwithstanding the terms of the predecessor Mortgage Loan, the Monthly
Payment "due" on an REO Loan will in all cases, for so long as the related
Mortgaged Property is part of the Trust Fund, equal one month's interest thereon
at the applicable Mortgage Rate.
SUBORDINATION
The rights of holders of the Class B Certificates and each Class of the
Private Certificates (collectively, the "Subordinate Certificates") to receive
distributions of amounts collected or advanced on the Mortgage Loans will be
subordinated, to the extent described herein, to the rights of holders of the
Class A Certificates and each other Class of Subordinate Certificates with an
earlier alphabetical Class designation. This subordination is intended to
enhance the likelihood of timely receipt by the holders of the Class A
Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
Certificate Balance of the Class A Certificates. Similarly, but to a lesser
degree, this subordination is also intended to enhance the likelihood of timely
receipt by the holders of the Class B Certificates of the full amount of all
Distributable Certificate Interest payable in respect of such Certificates on
each Distribution Date, and the ultimate receipt by such holders of principal in
an amount equal to the entire Certificate Balance of the Class B Certificates.
The protection afforded to the holders of each Class of Offered Certificates by
means of the subordination of each other Class of Certificates with a later
alphabetical Class designation, will be accomplished by the application of the
Available Distribution Amount on each Distribution Date in accordance with the
order of priority described under "-Distributions-Priority" above. No other form
of Credit Support will be available for the benefit of the holders of the
Offered Certificates.
Allocation to the Class A Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of the Class A
Certificates relative to the actual amortization of the Mortgage Loans. To the
extent that the Class A Certificates are amortized faster than the Mortgage
Loans, the percentage interest evidenced by the Class A Certificates in the
Trust Fund will be decreased (with a corresponding increase in the interest in
the Trust Fund evidenced by the Subordinate Certificates), thereby increasing,
relative to their respective Certificate Balances, the subordination afforded
the Class A Certificates by the Subordinate Certificates. Following retirement
of the Class A Certificates, allocation to the Class B Certificates, for so long
as they are outstanding, of the entire Unscheduled Principal Distribution Amount
for each Distribution Date will provide a similar benefit to such Class of
Certificates as regards the relative amount of subordination afforded thereto by
the Private Certificates.
Losses and other shortfalls experienced with respect to the Mortgage
Loans will not, with the exception of any Net Aggregate Prepayment Interest
Shortfalls, be applied to reduce either the Certificate Balance or the absolute
entitlement to interest of any Class of REMIC Regular Certificates, even though
such losses and shortfalls may cause one or more of such Classes to receive less
than the full amount of principal and interest to which it is entitled. As a
result, the aggregate Stated Principal Balance of the Mortgage Pool at any time
may be less than the aggregate Certificate Balance of the REMIC Regular
Certificates. Such deficit will be allocated to the respective Classes of REMIC
Regular Certificates (in each case to the extent of its Certificate Balance) in
reverse alphabetical order of their Class designations (that is, C, B, A). Such
allocation will not reduce the Certificate Balance of any such Class and is
intended solely to identify the portion (the "Uncovered Portion") of the
Certificate Balance of each such Class for which there is at such time no
corresponding principal amount of Mortgage Loans.
<PAGE>
S-47
P&I ADVANCES
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, a "P&I Advance") out of
its own funds or, subject to the replacement thereof as provided in the Pooling
and Servicing Agreement, funds held in the Certificate Account that are not
required to be part of the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of: (i) all Monthly Payments (net of
the related Servicing Fee), other than Balloon Payments, which were due on the
Mortgage Loans during the related Due Period and delinquent as of the related
Determination Date; (ii) in the case of each Mortgage Loan delinquent in respect
of its Balloon Payment as of the related Determination Date, an amount equal to
30 days' interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee), but
only to the extent that the related borrower has not made a payment sufficient
to cover such amount under any forbearance arrangement or otherwise that has
been included in the Available Distribution Amount for such Distribution Date;
and (iii) in the case of each REO Property, an amount equal to thirty days'
imputed interest with respect thereto at the related Mortgage Rate in effect as
of the commencement of the related Due Period (net of the related Servicing
Fee), but only to the extent that such amount is not covered by any net income
from such REO Property included in the Available Distribution Amount for such
Distribution Date. The Master Servicer's obligations to make P&I Advances in
respect of any Mortgage Loan or REO Property will continue through liquidation
of such Mortgage Loan or disposition of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any P&I Advance made
out of its own funds from any amounts collected in respect of the Mortgage Loan
as to which such P&I Advance was made, whether in the form of late payments,
Insurance Proceeds, Liquidation Proceeds or otherwise ("Related Proceeds").
Notwithstanding the foregoing, the Master Servicer will not be obligated to make
any P&I Advance that it determines in its reasonable good faith judgment would,
if made, not be recoverable out of Related Proceeds (a "Nonrecoverable P&I
Advance"), and the Master Servicer will be entitled to recover any P&I Advance
that it so determines to be a Nonrecoverable P&I Advance out of general funds on
deposit in the Certificate Account. The determination by the Master Servicer
that any prior P&I Advance constitutes a Nonrecoverable P&I Advance or that any
P&I Advance, if made, would constitute a Nonrecoverable P&I Advance, will be
evidenced by an officer's certificate to that effect, accompanied by, among
other things, an appraisal of the related Mortgaged Property or REO Property, as
the case may be, performed during the preceding 12 month period by an
independent MAI-designated appraiser. See "Description of the
Certificates-Advances in Respect of Delinquencies" and "Description of the
Pooling Agreements-Certificate Account" in the Prospectus.
In connection with its recovery of any P&I Advance or reimbursable
servicing expense (each, an "Advance"), the Master Servicer will be entitled to
retain, out of any amounts then on deposit in the Certificate Account, interest
at a per annum rate equal to ________________ (the "Master Servicer
Reimbursement Rate"), accrued on the amount of such Advance from the date made
to but not including the date of reimbursement. The Master Servicer is entitled
to receive as additional servicing compensation the aggregate amount of Penalty
Charges received during each Due Period, but only to the extent that such
Penalty Charges exceed the aggregate amount of interest paid to the Master
Servicer during such Due Period in respect of unreimbursed Advances.
Accordingly, Penalty Charges are deemed to be the first source of funds for
paying the Master Servicer interest on Advances. However, if the aggregate
amount of interest paid to the Master Servicer in respect of unreimbursed
Advances during any Due Period exceeds the aggregate amount of Penalty Charges
collected during such Due Period, such excess will likely be paid out of amounts
received on the Mortgage Loans representing previously unadvanced interest (at
the related Net Mortgage Rate) and principal. If such is the case, shortfalls on
the Certificates will result.
To the extent not offset or covered by Penalty Charges or amounts
otherwise payable on the Private Certificates, interest accrued on outstanding
Advances will result in a reduction in amounts payable on the Class B
Certificates; and to the extent not offset or covered by Penalty Charges or
amounts otherwise payable on the Class B and the Private Certificates, interest
accrued on outstanding Advances will result in a reduction in amounts payable on
the Class A Certificates. To the extent that any holder of an Offered
Certificate must bear the cost of the Master Servicer's Advances,
<PAGE>
S-48
the benefits of such Advances to such holder will be contingent on the ability
of such holder to reinvest the amounts received as a result of such Advances at
a rate of return equal to or greater than the Master Servicer Reimbursement
Rate.
REPORTS TO CERTIFICATEHOLDERS; AVAILABLE INFORMATION
On each Distribution Date, the Master Servicer will be required to
forward by mail to each holder of an Offered Certificate a statement (a
"Distribution Date Statement") providing various items of information relating
to distributions made on such date with respect to the relevant Class and the
recent status of the Mortgage Pool. For a more detailed discussion of the
particular items of information to be provided in each Distribution Date
Statement, as well as a discussion of certain annual information reports to be
furnished by the Master Servicer to persons who at any time during the prior
calendar year were holders of the Offered Certificates, see "Description of the
Certificates-Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the Master Servicer
make available at its offices primarily responsible for servicing the Mortgage
Loans, during normal business hours, for review by any holder of an Offered
Certificate or any person identified to the Trustee as a prospective transferee
of an Offered Certificate, originals or copies of, among other things, the
following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements-Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the Pooling
Agreements-Evidence as to Compliance" in the Prospectus, (e) the most recent
property inspection report prepared by or on behalf of the Master Servicer in
respect of each Mortgaged Property, (f) the most recent Mortgaged Property
annual operating statements, if any, collected by or on behalf of the Master
Servicer, (g) any and all modifications, waivers and amendments of the terms of
a Mortgage Loan entered into by the Master Servicer, and (h) any and all
officers' certificates and other evidence delivered to the Trustee to support
the Master Servicer's determination that any P&I Advance or servicing expense
was or, if made, would be a Nonrecoverable P&I Advance. Copies of any and all of
the foregoing items will be available from the Master Servicer upon request;
however, the Master Servicer will be permitted to require payment of a sum
sufficient to cover the reasonable costs and expenses of providing such copies.
Upon written request of any Certificateholder of record made for
purposes of communicating with other Certificateholders with respect to their
rights under the Pooling and Servicing Agreement, the Certificate Registrar will
afford such Certificateholder access during business hours to the most recent
list of Certificateholders held thereby.
Until such time as Definitive Class A Certificates are issued, the
foregoing information and access will be available to Class A Certificate Owners
only to the extent it is forwarded by or otherwise available through DTC and its
Participants. The manner in which notices and other communications are conveyed
by DTC to Participants, and by Participants to Class A Certificate Owners, will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. The Master Servicer, the
Trustee, the Depositor and the Certificate Registrar are required to recognize
as Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement,
the Voting Rights shall be allocated among the respective Classes of
Certificateholders in proportion to the Certificate Balances of their
Certificates (net, in the case of a Class of REMIC Regular Certificates, of any
Uncovered Portion of the related Certificate Balance). Voting Rights allocated
to a Class of Certificateholders will be allocated among such Certificateholders
in proportion to the Percentage Interests evidenced by their respective
Certificates. See "Description of the Certificates-Voting Rights" in the
Prospectus.
<PAGE>
S-49
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in respect
thereof) or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the assets of the Trust Fund by the
Master Servicer. Written notice of termination of the Pooling and Servicing
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at the
office of the Certificate Registrar or other location specified in such notice
of termination.
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the Trust Fund is required to be made at a price equal to the
greater of (1) the aggregate fair market value of all the Mortgage Loans and REO
Properties then included in the Trust Fund, as mutually determined by the Master
Servicer and the Trustee, and (2) the excess of (a) the sum of (i) the aggregate
Purchase Price of all the Mortgage Loans then included in the Trust Fund and
(ii) the fair market value of all REO Properties then included in the Trust
Fund, as determined by an appraiser mutually agreed upon by the Master Servicer
and the Trustee, over (b) the aggregate of amounts payable or reimbursable to
the Master Servicer under the Pooling and Servicing Agreement. Such purchase
will effect early retirement of the then outstanding Offered Certificates, but
the right of the Master Servicer to effect such termination is subject to the
requirement that the then aggregate Stated Principal Balance of the Mortgage
Pool be less than [10]% of the Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer for the Mortgage Loans and other assets in the Trust Fund (if the Trust
Fund is to be terminated as a result of the purchase described in the preceding
paragraph), together with all other amounts on deposit in the Certificate
Account and not otherwise payable to a person other than the Certificateholders
(see "Description of the Pooling Agreements-Certificate Account" in the
Prospectus), will be applied: FIRST, to distributions of interest to holders of
the Class A Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class A Certificates for such Distribution Date and,
to the extent not previously paid, for all prior Distribution Dates; SECOND, to
distributions of principal to holders of the Class A Certificates in an amount
equal to the sum of the Certificate Balance of the Class A Certificates
outstanding immediately prior to such Distribution Date, plus any Certificate
Negative Amortization in respect of the Class A Certificates for such
Distribution Date; THIRD, to distributions of interest to holders of the Class B
Certificates in an amount equal to all Distributable Certificate Interest in
respect of the Class B Certificates for such Distribution Date and, to the
extent not previously paid, for all prior Distribution Dates; FOURTH, to
distributions of principal to holders of the Class B Certificates in an amount
equal to the sum of the Certificate Balance of the Class B Certificates
outstanding immediately prior to such Distribution Date, plus any Certificate
Negative Amortization in respect of the Class B Certificates for such
Distribution Date; and THEREAFTER, to distributions to holders of the Private
Certificates.
TRUSTEE
____________, a _____________________, will act as Trustee on behalf of
the Certificateholders. The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee. The offices of the Trustee primarily
responsible for the administration of the Trust Fund are located at
_____________________________. See "Description of the Pooling Agreements-the
Trustee", "-Duties of the Trustee", "-Certain Matters Regarding the Trustee" and
"-Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
GENERAL. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the aggregate
amount of distributions on such Certificate.
<PAGE>
S-50
PASS-THROUGH RATE. The Pass-Through Rate applicable to the Class A
Certificates for any Distribution Date will equal LIBOR for such Distribution
Date, plus ______ basis points, subject to a maximum of ____% per annum and a
minimum of _______% per annum; unless, however, the rate so calculated exceeds
the Funds-Available Cap Rate applicable to the Class A Certificates for such
Distribution Date, in which case the Pass-Through Rate for the Class A
Certificates for such Distribution Date will equal the Weighted Average
Effective Net Mortgage Rate for such date. See "Description of the
Certificates-Distributions-Pass-Through Rates" herein. Accordingly, the yield on
the Class A Certificates, in general, will be highly sensitive to monthly
changes in LIBOR.
Listed below are some historical values of LIBOR since January 1988.
LIBOR values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of LIBOR, and no assurance can be
given as to the value of LIBOR on any LIBOR Adjustment Date.
<TABLE>
<CAPTION>
MONTH 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January....................... 7.04% 9.26% 8.32% 7.25% 4.21% 3.19% 3.25% 5.93%
February...................... 6.78 9.55 8.32 6.60 4.18 3.15 3.38 6.09
March......................... 6.82 10.12 8.43 6.60 4.36 3.20 3.63 6.11
April......................... 7.07 10.01 8.44 6.15 4.12 3.17 3.83 6.10
May........................... 7.31 9.79 8.35 5.99 3.94 3.12 4.31 6.07
June.......................... 7.67 9.53 8.31 6.12 4.06 3.18 4.38 6.04
July.......................... 7.99 9.13 8.21 6.02 3.48 3.16 4.54 5.91
August........................ 8.32 8.93 8.12 5.76 3.40 3.18 4.71 5.91
September..................... 8.33 9.02 8.22 5.62 3.25 3.15 4.86 5.86
October....................... 8.35 8.82 8.13 5.34 3.20 3.17 5.07 5.85
November...................... 8.71 8.59 8.05 4.97 3.31 3.18 5.48 5.81
December...................... 9.59 8.77 8.27 4.96 3.71 3.35 6.08 5.85
</TABLE>
Whether the Pass-Through Rate for the Class A Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
rather than the LIBOR-based rate described above will depend on whether and to
what extent LIBOR for that Distribution Date plus ____ basis points (subject to
the maximum and minimum rates per annum described above) exceeds the then
Weighted Average Effective Net Mortgage Rate and, if so, whether and to what
extent there then exists an Excess Pool Balance.
Although ____ of the Mortgage Loans, which represent _____% of the
Initial Pool Balance, are ARM Loans, future fluctuations in LIBOR will not
necessarily be accompanied by corresponding proportionate changes in the then
Weighted Average Effective Net Mortgage Rate because the Indices upon which
adjustments to the Mortgage Rates for the ARM Loans are based may not rise and
fall in a manner consistent with LIBOR. In particular, the COFI Index, which
serves as the Index for ARM Loans that represent _____% of the Initial Pool
Balance, is generally referred to as a lagging index because it tends to rise
and fall more slowly than LIBOR, which is generally referred to as a market
index. See "Description of the Mortgage Pool-Certain Payment Characteristics"
and "-The Eleventh District Cost of Funds Index" herein. Furthermore, the
Mortgage Rates on the ARM Loans may not fully and promptly reflect changes in
the corresponding Indices due to the effect of periodic and lifetime floors and
caps on changes to such Mortgage Rates and the periodicity of Interest Rate
Adjustment Dates for the ARM Loans. [For example, although the initial Weighted
Average Effective Net Mortgage Rate exceeds by _______ percentage points the
initial Pass-Through Rate for the Class A Certificates, most of the Mortgage
Rates in effect for the ARM Loans that provide for minimum lifetime Mortgage
Rates are at their minimum permitted lifetime levels. Consequently, an increase
of _____ percentage points in each of the Indices applicable to the ARM Loans
would result, even if the Mortgage Rates thereon could be contemporaneously
adjusted, in an increase of only _______ percentage points in the Weighted
Average Effective Net Mortgage Rate. A simultaneous increase of _____ percentage
points in LIBOR would therefore narrow, to ______ percentage points, the gap
between the Pass-Through Rate for the Class A Certificates and the Weighted
Average Effective Net Mortgage Rate. In addition, changes in the Weighted
Average Effective Net Mortgage Rate from time to time will depend on changes in
the relative composition of the Mortgage Pool as a result of scheduled
amortization, voluntary prepayments and
<PAGE>
S-51
involuntary liquidations of the Mortgage Loans. See "Description of the Mortgage
Pool" herein and "-Yield Considerations-Rate and Timing of Principal Payments"
below.
As described above, whether the Pass-Through Rate on the Class A
Certificates at any time is based on LIBOR or is equal to the then applicable
Weighted Average Effective Net Mortgage Rate may depend in part upon the
presence of Excess Pool Balance, that is, an excess of the aggregate Stated
Principal Balance of the Mortgage Pool over the aggregate Certificate Balance of
all of the Classes of REMIC Regular Certificates. If the sum of monthly LIBOR
for any Distribution Date plus ________ basis points exceeds the Weighted
Average Effective Net Mortgage Rate for such Distribution Date, then the
Pass-Through Rate for the Class A Certificates will equal (subject to a maximum
rate of __% per annum) the higher LIBOR-based rate rather than the lower
Weighted Average Effective Net Mortgage Rate only if the LIBOR-based rate does
not exceed the applicable Funds-Available Cap Rate. The Funds-Available Cap Rate
applicable to the calculation of the Pass-Through Rate in respect of the Class A
Certificates for any Distribution Date is an annualized rate equal to the
product of the Weighted Average Effective Net Mortgage Rate and a fraction,
expressed as a decimal, the numerator of which is the sum of the Certificate
Balance of the Class A Certificates and the Excess Pool Balance immediately
prior to such Distribution Date, and the denominator of which is the Certificate
Balance of the Class A Certificates immediately prior to such Distribution Date.
Accordingly, the Funds-Available Cap Rate rises with the expansion of the Excess
Pool Balance; and, for any Distribution Date, 30 days' interest at the Weighted
Average Effective Net Mortgage Rate for such Distribution Date accrued on the
Excess Pool Balance, if any, immediately prior thereto represents the maximum
amount by which interest accrued on the Class A Certificates at a LIBOR-based
Pass-Through Rate can exceed interest accrued on such Certificates at the
Weighted Average Effective Net Mortgage Rate. See "Description of the
Certificates-Distributions -Pass-Through Rates" herein. The amount of Excess
Pool Balance outstanding from time to time will depend on the aggregate amount
of Excess Funds, and on the aggregate amount of the Class R Certificates'
allocable share (based on the Ownership Percentage evidenced thereby from time
to time) of Distributable Principal Collections and Advances, in each case
applied to amortize the Certificate Balances of the respective Classes of REMIC
Regular Certificates. As discussed under "Description of the
Certificates-DistributionsPriority" herein, _____% of Excess Funds, and 100% of
the Class R Certificates' allocable share of Distributable Principal Collections
and Advances, will be so applied on each Distribution Date. Excess Funds for any
Distribution Date will generally equal the amount, if any, by which (a) the
portion of the Available Distribution Amount that represents interest on the
Mortgage Loans, exceeds (b) the sum of (i) the aggregate amount of Distributable
Certificate Interest to be paid in respect of the REMIC Regular Certificates on
such Distribution Date, and (ii) the aggregate Uncovered Portion of the
Certificate Balances of the REMIC Regular Certificates immediately prior to such
Distribution Date.
The Pass-Through Rate applicable to the Class B Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
for such date. Accordingly, the yield on the Class B Certificates will be
sensitive to (x) adjustments to the Mortgage Rates on the ARM Loans and (y)
changes in the relative composition of the Mortgage Pool as a result of
scheduled amortization, voluntary prepayments and involuntary liquidations of
the Mortgage Loans. See "Description of the Mortgage Pool" herein and "-Yield
Considerations-Rate and Timing of Principal Payments" below.
RATE AND TIMING OF PRINCIPAL PAYMENTS. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on such Certificates. As and to the extent
described herein, the holders of each Class of Offered Certificates will be
entitled to receive on each Distribution Date their allocable share (calculated
on the basis of the Ownership Percentage evidenced by such Class of Certificates
immediately prior to such date) of the Scheduled Principal Distribution Amount
for such Distribution Date; however, the Unscheduled Principal Distribution
Amount for each Distribution Date will be distributable entirely in respect of
the Class A Certificates, until the Certificate Balance thereof is reduced to
zero, and will thereafter be distributable entirely in respect of the Class B
Certificates. In addition, as and to the extent described herein, distributions
of the Class R Certificates' allocable share of the Scheduled Principal
Distribution Amount for each Distribution Date will be applied in reduction of
the Certificate Balances of the respective Classes of REMIC Regular
Certificates, in reverse alphabetical order of their Class designations. See
"Description of the Certificates-Distributions-Priority" and
"-Distributions-Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. Consequently, the rate and timing of
principal payments on the Offered Certificates will be directly related to the
rate
<PAGE>
S-52
and timing of principal payments on or in respect of the Mortgage Loans
(including principal prepayments on the Mortgage Loans resulting from both
voluntary prepayments by the borrowers and involuntary liquidations). The rate
and timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments are
due and the rate and timing of principal prepayments and other unscheduled
collections thereon (including for this purpose, collections made in connection
with liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the Mortgaged Properties, or purchases of Mortgage Loans out of the
Trust Fund). Prepayments and, assuming the respective stated maturity dates
therefor have not occurred, liquidations and purchases of the Mortgage Loans,
will result in distributions on the Offered Certificates of amounts that would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Defaults on the Mortgage Loans, particularly at or near their stated maturity
dates, may result in significant delays in payments of principal on the Mortgage
Loans (and, accordingly, on the Offered Certificates) while work-outs are
negotiated or foreclosures are completed. See "Servicing of the Mortgage
Loans-Modifications, Waivers and Amendments" herein and "Description of the
Pooling Agreements-Realization Upon Defaulted Mortgage Loans" and "Certain Legal
Aspects of Mortgage Loans-Foreclosure" in the Prospectus.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed on such
Certificates. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield. In general, the earlier a
payment of principal on the Mortgage Loans is distributed on an Offered
Certificate purchased at a discount or premium, the greater will be the effect
on an investor's yield to maturity. As a result, the effect on an investor's
yield of principal payments (to the extent distributable on such investor's
Offered Certificates) occurring at a rate higher (or lower) than the rate
anticipated by the investor during any particular period would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments. Because the rate of principal payments on the Mortgage Loans will
depend on future events and a variety of factors (as described more fully
below), no assurance can be given as to such rate or the rate of principal
prepayments in particular. The Depositor is not aware of any relevant publicly
available or authoritative statistics with respect to the historical prepayment
experience of a large group of mortgage loans comparable to the Mortgage Loans.
The yield to maturity of Offered Certificates that are purchased at a
discount or premium will be similarly affected by payments of principal thereon
made with funds in excess of the Distributable Principal Collections and
Advances to which the holders of such Certificates may be then entitled. As
described herein under "Description of the Certificates-Distributions-Priority",
if there exists an Uncovered Portion of the Certificate Balance of any Class of
REMIC Regular Certificates outstanding immediately prior to a Distribution Date,
distributions will be made, to the extent of the lesser of available funds and
such Uncovered Portion, in reduction of the Certificate Balance(s) of such Class
of REMIC Regular Certificates and each other Class of REMIC Regular
Certificates, if any, with an earlier alphabetical Class designation, in
alphabetical order of such Class designations. Accordingly, losses incurred in
respect of the Mortgage Pool, to the extent creating an Uncovered Portion of the
Certificate Balance of [the Class C] Certificates, could speed amortization of
the Offered Certificates, to the extent described above, beyond any positive
effect on such amortization that would generally result from liquidations of
Mortgage Loans prior to their maturity.
In addition, ____% of the Excess Funds, if any, for each Distribution
Date will be applied in reduction of the Certificate Balances of the respective
Classes of REMIC Regular Certificates, in reverse alphabetical order of their
Class designations. See "Description of the Certificates-Distributions-Priority"
herein. The aggregate amount of Excess Funds on each Distribution Date will
largely be a function of (i) whether the Class A Certificates are outstanding as
of such Distribution Date and, if so, the extent to which the Pass-Through Rate
on the Class A Certificates for such Distribution Date is higher or lower than
the Weighted Average Effective Net Mortgage Rate for such date, and (ii) the
size of the Excess Pool Balance or, conversely, of the aggregate Uncovered
Portion of the Certificate Balances of the REMIC Regular Certificates
immediately prior to such Distribution Date. Because such variables are in turn
dependent on a
<PAGE>
S-53
variety of factors, including, among other things, monthly fluctuations in
LIBOR, adjustments of the Mortgage Rates on the ARM Loans, the relative
composition of the Mortgage Pool from time to time, and the rate and timing of
principal payments and the severity of losses on the Mortgage Loans, no
assurance can be given as to the amount of Excess Funds that will be available
on any Distribution Date.
LOSSES AND SHORTFALLS. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne: FIRST, by the holders of the
Private Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; SECOND, by the holders of the Class B
Certificates, to the extent of amounts otherwise distributable in respect of
their Certificates; and LAST, by the holders of the Class A Certificates. As
more fully described herein under "Description of the
Certificates-Distributions-Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective Classes
of Certificateholders on a PRO RATA basis.
CERTAIN RELEVANT FACTORS. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates, the
terms of the Mortgage Loans (for example, adjustable Mortgage Rates, Lock-out
Periods, provisions requiring the payment of Prepayment Premiums, amortization
terms that require balloon payments and provisions that permit negative
amortization), the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located and the general supply and demand for
rental units in such areas, the quality of management of the Mortgaged
Properties, the servicing of the Mortgage Loans, possible changes in tax laws
and other opportunities for investment. See "Risk Factors-The Mortgage Loans"
and "Description of the Mortgage Pool" herein and "Yield
Considerations-Principal Prepayments" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
Mortgage Rates thereon will generally be limited by lifetime and/or periodic
caps and floors and, in each case, will be based on the related Index (which may
not rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool-Certain
Payment Characteristics" and "-The Eleventh District Cost of Funds Index"
herein. As a result, the Mortgage Rates on the ARM Loans at any time may not be
comparable to prevailing market interest rates. In addition, as prevailing
market interest rates decline, and without regard to whether the Mortgage Rates
on the ARM Loans decline in a manner consistent therewith, related borrowers may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate, or (ii) taking
advantage of an initial "teaser rate" (a mortgage interest rate below what it
would otherwise be if the applicable index and gross margin were applied) on
another adjustable rate mortgage loan. The Mortgage Loans may be prepaid at any
time and, in [most] cases (approximately _____% of the Initial Pool Balance),
may be prepaid in whole or in part without payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
<PAGE>
S-54
DELAY IN PAYMENT OF DISTRIBUTIONS. Because monthly distributions will
not be made to Certificateholders until a date that is scheduled to be at least
_____ days and as many as ______ days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming such
prices did not account for such delay).
UNPAID DISTRIBUTABLE CERTIFICATE INTEREST. As described under
"Description of the Certificates-Distributions-Priority" herein, if the portion
of the Available Distribution Amount distributable in respect of interest on
either Class of Offered Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such Class, the shortfall
will be distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the
average amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be influenced
by, among other things, the rate at which principal on the Mortgage Loans is
paid or otherwise collected or advanced and by the availability of any amounts
other than Distributable Principal Collections and Advances to amortize the
Certificate Balance of its Class. As and to the extent described herein, the
holders of each Class of Offered Certificates will be entitled to receive on
each Distribution Date their allocable share (calculated on the basis of the
Ownership Percentage evidenced by such Class of Certificates immediately prior
to such date) of the Scheduled Principal Distribution Amount for such
Distribution Date; however, the Unscheduled Principal Distribution Amount for
each Distribution Date will be distributable entirely in respect of the Class A
Certificates, until the Certificate Balance thereof is reduced to zero, and will
thereafter be distributable entirely in respect of the Class B Certificates. In
addition, as and to the extent described herein, distributions of the Class R
Certificates' allocable share of the Scheduled Principal Distribution Amount for
each Distribution Date, together with _____% of all Excess Funds, if any, for
such Distribution Date, will be applied in reduction of the Certificate Balances
of the respective Classes of REMIC Regular Certificates, in reverse alphabetical
order of their Class designations; while any distributions in respect of an
Uncovered Portion of the Certificate Balance of any Class of REMIC Regular
Certificates will be applied, to the extent of such Uncovered Portion, in
reduction of the Certificate Balance(s) of such Class of REMIC Regular
Certificates and each other Class of REMIC Regular Certificates, if any, with an
earlier alphabetical Class designation, in alphabetical order of such Class
designations. See "Description of the Certificates-Distributions-Priority" and
"-Distributions-Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. As a consequence of the foregoing, the
weighted average life of the Class A Certificates will be shorter, and the
weighted average life of the Class B Certificates may be longer, than would
otherwise be the case if Distributable Principal Collections and Advances and
any other amounts being applied in reduction of the Certificate Balances of the
REMIC Regular Certificates were being distributed on a PRO RATA basis among the
respective Classes thereof.
______ Mortgage Loans, which represent ____% of the Initial Pool
Balance, permit negative amortization. Although it is impossible to predict the
degree of Mortgage Loan negative amortization that will actually be experienced
with respect to the Mortgage Pool following the Cut-off Date, the allocation of
negative amortization to any Class of Offered Certificates (and the
corresponding increase in the Certificate Balance of such Class) will have the
effect of extending the weighted average life of such Certificates. As more
fully described herein under "Description of the
Certificates-Distributions-Distributable Certificate Interest", any negative
amortization experienced by the Mortgage Loans during a particular Due Period
will be allocated among the respective Classes of Certificates generally on a
PRO RATA basis on the related Distribution Date.
Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this Prospectus Supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed
<PAGE>
S-55
constant annual rate of prepayment each month, expressed as a per annum
percentage of the then scheduled principal balance of the pool of mortgage
loans. As used in each of the following tables, the column headed "0%" assumes
that none of the Mortgage Loans is prepaid before maturity. The columns headed
"___%", "___%", "___%" and "___%" assume that prepayments on the Mortgage Loans
are made at those CPRs. There is no assurance, however, that prepayments of the
Mortgage Loans will conform to any level of CPR, and no representation is made
that the Mortgage Loans will prepay at the CPRs shown or at any other prepayment
rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each Class of Offered Certificates that would be outstanding after
each of the dates shown at various CPRs and the corresponding weighted average
life of each such Class of Offered Certificates. The tables have been prepared
on the basis of the following assumptions, among others: [(i) scheduled monthly
payments of principal and interest on the Mortgage Loans will be timely received
(with no defaults) and will be distributed on the 25th day of each month
commencing in ________ 199___; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan, until
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of ________, 199__, subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 360/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the Cut-off
Date will continue to be due (a) in the case of each Fixed Rate Loan, on each
Due Date until maturity and, (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due Date
until maturity will be calculated reflecting the appropriate Mortgage Rate and
remaining amortization term, subject to such Mortgage Loan's periodic payment
cap or negative amortization limits, if any; (v) principal prepayments on the
Mortgage Loans will be received on their respective Due Dates at the respective
CPRs set forth in the tables, and there will be no Net Aggregate Prepayment
Interest Shortfalls in connection therewith; (vi) the Mortgage Loan Seller will
not be required to repurchase any Mortgage Loan, and the Master Servicer will
not exercise its option to purchase all the Mortgage Loans and thereby cause an
early termination of the Trust Fund; and (vii) the Pass-Through Rate for the
Class A Certificates will remain at _____% per annum.] To the extent that the
Mortgage Loans have characteristics that differ from those assumed in preparing
the tables set forth below, each Class of the Offered Certificates may mature
earlier or later than indicated by the tables. It is highly unlikely that the
Mortgage Loans will prepay at any constant rate until maturity or that all the
Mortgage Loans will prepay at the same rate. In addition, variations in the
actual prepayment experience and the balance of the Mortgage Loans that prepay
may increase or decrease the percentages of initial Certificate Balances (and
weighted average lives) shown in the following tables. Such variations may occur
even if the average prepayment experience of the Mortgage Loans were to equal
any of the specified CPR percentages.
Investors are urged to conduct their own analyses of the rates at which
the Mortgage Loans may be expected to prepay.
<PAGE>
S-56
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class A Certificates and sets forth the
percentage of the initial Certificate Balance of the Class A Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
<TABLE>
<CAPTION>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
DATE 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date................................................ 100.0 100.0 100.0 100.0 100.0
_________ 25, 1996...........................................
_________ 25, 1997...........................................
_________ 25, 1998...........................................
_________ 25, 1999...........................................
_________ 25, 2000...........................................
_________ 25, 2001...........................................
_________ 25, 2002...........................................
Weighted Average Life (years)(A).............................
</TABLE>
- ----
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class A Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class A Certificate.
<PAGE>
S-57
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
<TABLE>
<CAPTION>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
DATE 0% % % % %
- ---- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Delivery Date............................................ 100.0 100.0 100.0 100.0 100.0
_________ 25, 1996.......................................
_________ 25, 1997.......................................
_________ 25, 1998.......................................
_________ 25, 1999.......................................
_________ 25, 2000.......................................
_________ 25, 2001.......................................
_________ 25, 2002.......................................
Weighted Average Life (years)(A).........................
</TABLE>
- ----
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class B Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class B Certificate.
<PAGE>
S-58
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the Offered
Certificates will be used by the Depositor to purchase the Mortgage Loans and to
pay certain expenses in connection with the issuance of the Certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates,
________________________________________, counsel to the Depositor, will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the Pooling and Servicing Agreement, for Federal income tax
purposes, the Trust Fund will qualify as a REMIC under the Internal Revenue Code
of 1986 (the "Code"). For Federal income tax purposes, the Class R Certificates
will be the sole class of "residual interests" in the REMIC, and the Class A,
Class B and Class C 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-REMICs" in the Prospectus.
The __________ Certificates [may] [will] [will not] be treated as
having been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, 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
[a CPR of __%]. No representation is made that the Mortgage Loans will prepay at
that 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 ___________________ Certificates may be treated for Federal income
tax purposes as having been issued at a premium. Whether any holder of [either]
such Class of Certificates 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 [each] such Class of
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 Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C) of the
Code, and "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code, and interest (including original issue discount, if any) on the Offered
Certificates will be interest described in Section 856(c)(3)(B) of the Code.
Moreover, the Offered Certificates will be "obligation[s] . . . which . . .
[are] principally secured by an interest in real property" within the meaning of
Section 860(A)(3)(C) of the Code. See "Certain Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding the Federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences-REMICs" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, 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 Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code (each, a "Plan") should carefully review with its legal advisors
whether the purchase or holding of Offered 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 thereto.
<PAGE>
S-59
[The U.S. Department of Labor issued to Merrill Lynch, Pierce, Fenner &
Smith Incorporated an individual prohibited transaction exemption, Prohibited
Transaction Exemption 90-29 (the "Exemption"), 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, such as the Mortgage Pool, and the purchase, sale and holding of mortgage
pass-through certificates, such as the Class A Certificates, underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this discussion, 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 a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm'slength transaction
with an unrelated party. SECOND, the rights and interests evidenced by the Class
A Certificates must not be subordinated 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 other member of the
"Restricted Group", which consists of any Underwriter, the Depositor, the Master
Servicer, the Trustee, any sub-servicer, and any borrower with respect to
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 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 Pooling and Servicing
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 subordinated 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 issuance of the
Class A Certificates that they be rated not lower than "__" by each Rating
Agency; thus, the third general condition set forth above is satisfied with
respect to such Certificates as of the Delivery Date. In addition, the fourth
general condition set forth above is also satisfied as of the Delivery Date. 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
purchase, the Class A Certificates continue to satisfy the third and fourth
general conditions set forth above. A fiduciary of a Plan contemplating
purchasing any purchase of a Class A Certificate must make its own determination
that the first, fifth and sixth general conditions set forth above will be
satisfied with respect to such Class A Certificate as of the date of such
purchase.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm 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 other prohibited transaction exemptions. See "ERISA Considerations" in
the Prospectus.]
[Because the characteristics of the Class B Certificates do not meet
the requirements of the Exemption, the purchase or holding of such Certificates
by a Plan may result in prohibited transactions or the imposition of excise
taxes or civil penalties. As a result,] no transfer of a [Class B] Certificate
or any interest therein may be made to a Plan or
<PAGE>
S-60
to any person who is directly or indirectly purchasing such [Class B]
Certificate or interest therein on behalf of, as named fiduciary of, as trustee
of, or with assets of a Plan, unless the prospective transferee provides the
Certificate Registrar with a certification of facts and an opinion of counsel
which establish to the satisfaction of the Certificate Registrar that such
transfer will not result in a violation of Section 406 of ERISA or Section 4975
of the Code or cause the Master Servicer or the Trustee to be deemed a fiduciary
of such Plan or result in the imposition of an excise tax under Section 4975 of
the Code. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
[As long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization, the Class A Certificates will constitute "mortgage related
securities" within the meaning of the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"), and as such will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or of any
State 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. Under SMMEA, however, if
a State enacted legislation on or prior to October 3, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities," such securities will constitute legal investments for
entities subject to such legislation only to the extent provided therein.
Certain States have enacted legislation which overrides the preemption
provisions of SMMEA.
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.]
The [Class B] Certificates will not be "mortgage related securities"
for purposes of SMMEA. As a result, the appropriate characterization of the
[Class B] Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the [Class B]
Certificates, is subject to significant interpretive uncertainties.
The Depositor makes no representation as to the ability of
particular investors to purchase the Offered Certificates under applicable legal
investment or other restrictions. All institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered
Certificates constitute legal investments for them or are subject to investment,
capital or other restrictions.
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Offered Certificates
will be purchased from the Depositor by the Underwriter, an affiliate of the
Depositor, upon issuance. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor estimated to be
approximately $_______, will be _______% of the initial aggregate Certificate
Balance thereof, plus accrued interest.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The Underwriter may effect such
transactions by selling the Offered Certificates to or through dealers, and such
dealers may receive compensation in the
<PAGE>
S-61
form of underwriting discounts, concessions or commissions from the Underwriter.
In connection with the purchase and sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Offered Certificates
may be deemed to be underwriters and any profit on the resale of the Offered
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Securities Act").
Purchasers of the Offered Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Offered Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
The Depositor also has been advised by the Underwriter that it, through
one or more of its affiliates, currently intends to make a market in the Offered
Certificates; however, it has no obligation to do so, any market making may be
discontinued at any time and there can be no assurance that an active public
market for the Offered Certificates will develop. See "Risk Factors-Limited
Liquidity" herein and in the Prospectus.
THE DEPOSITOR HAS AGREED TO INDEMNIFY THE UNDERWRITER AND EACH PERSON,
IF ANY, WHO CONTROLS THE UNDERWRITER WITHIN THE MEANING OF SECTION 15 OF THE
SECURITIES ACT AGAINST, OR MAKE CONTRIBUTIONS TO THE UNDERWRITER AND EACH SUCH
CONTROLLING PERSON WITH RESPECT TO, CERTAIN LIABILITIES, INCLUDING LIABILITIES
UNDER THE SECURITIES ACT.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and the
Underwriter by ____________________________________________.
RATING
It is a condition to issuance that the Class A Certificates be rated
not lower than "__", and the Class B Certificates be rated not lower than "__",
by ____________________________________.
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding frequency of
prepayments on the Mortgage Loans.
There can be no assurance as to whether any rating agency not requested
to rate the Offered Certificates will nonetheless issue a rating to either or
both Classes thereof and, if so, what such rating or ratings would be. A rating
assigned to either Class of Offered Certificates by a rating agency that has not
been requested by the Depositor to do so may be lower than the rating assigned
thereto by ___________________________.
The ratings on the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
See "Risk Factors-Limited Nature of Ratings" in the Prospectus.
<PAGE>
S-62
<TABLE>
<CAPTION>
INDEX OF PRINCIPAL DEFINITIONS
<S> <C>
360/360 basis ..............................................................................................................S-43
Accrued Certificate Interest....................................................................................................S-44
Aggregate Mortgage Loan Negative Amortization..............................................................................S-6, S-44
ARM Loans ....................................................................................................iii, S-3, S-20
Available Distribution Amount..............................................................................................S-8, S-41
Balloon Payment .........................................................................................................S-4, S-21
Certificate Balance..............................................................................................................iii
Certificate Negative Amortization..........................................................................................S-6, S-45
Certificate Registrar...........................................................................................................S-40
Certificates ............................................................................................................i, S-1
Class .................................................................................................................i
Class A Certificate Owner........................................................................................................S-2
Code ........................................................................................................S-13, S-58
COFI ARM Loans ....................................................................................................iii, S-3, S-20
COFI Index ..........................................................................................................iii, S-3
Compensating Interest Payment.............................................................................................S-12, S-37
Constant Prepayment Rate........................................................................................................S-54
CPR ..............................................................................................................S-54
Custodian ..............................................................................................................S-34
Cut-off Date ...............................................................................................................iii
Cut-off Date Balance.............................................................................................................S-4
Cut-off Date LTV Ratio..........................................................................................................S-30
Debt Service Coverage Ratio.....................................................................................................S-30
Definitive Class A Certificate...................................................................................................S-2
Delivery Date ................................................................................................................ii
Depositor ...............................................................................................................iii
Determination Date..............................................................................................................S-41
Distributable Certificate Interest........................................................................................S-10, S-44
Distributable Principal Collections and Advances..........................................................................S-11, S-45
Distribution Date ....................................................................................................iii, S-8, S-40
Distribution Date Statement.....................................................................................................S-48
DTC ...............................................................................................................S-2
Due Date ...............................................................................................................S-3
Due Period .........................................................................................................S-8, S-41
Effective Net Mortgage Rate................................................................................................S-7, S-43
ERISA ........................................................................................................S-14, S-58
ERISA Considerations............................................................................................................S-59
Excess Funds ........................................................................................................S-10, S-42
Excess Pool Balance...................................................................................................S-6, S-8, S-40
FHLB of San Francisco...........................................................................................................S-21
Fixed Rate Loans ....................................................................................................iii, S-3, S-20
Form 8-K ..............................................................................................................S-36
Funds-Available Cap Rate..............................................................................................iii, S-7, S-43
Gross Margin ...............................................................................................................S-3
Index ....................................................................................................iii, S-3, S-20
Initial Pool Balance.............................................................................................................iii
Interest Rate Adjustment Date....................................................................................................S-3
LIBOR .........................................................................................................S-7, S-43
Lock-out Expiration Date...................................................................................................S-4, S-21
Lock-out Period .........................................................................................................S-4, S-21
Master Servicer Reimbursement Rate........................................................................................S-11, S-47
Monthly Payments ..........................................................................................................iii, S-2
Mortgage ..............................................................................................................S-19
Mortgage File ..............................................................................................................S-34
Mortgage Loan Purchase Agreement...........................................................................................S-1, S-32
Mortgage Loan Seller.................................................................................................iii, S-20, S-32
Mortgage Loans ...............................................................................................................iii
Mortgage Note ..............................................................................................................S-19
Mortgage Pool ...............................................................................................................iii
Mortgage Rate ..........................................................................................................iii, S-3
Mortgaged Property.........................................................................................................S-2, S-19
Net Aggregate Prepayment Interest Shortfall...............................................................................S-12, S-44
Net Mortgage Rate .........................................................................................................S-7, S-43
Net Operating Income............................................................................................................S-30
Nonrecoverable P&I Advance......................................................................................................S-47
Offered Certificates....................................................................................................i, S-1, S-40
Ownership Percentage......................................................................................................S-11, S-45
P&I Advance ........................................................................................................S-11, S-47
Participants ...............................................................................................................S-2
Pass-Through Rate ...............................................................................................................iii
Payment Adjustment Date..........................................................................................................S-3
Payment Cap .........................................................................................................S-3, S-20
Penalty Charges ..............................................................................................................S-37
Percentage Interest.............................................................................................................S-41
Permitted Investments...........................................................................................................S-37
Plan ........................................................................................................S-14, S-58
Pooling and Servicing Agreement............................................................................................S-5, S-39
Prepayment Interest Excess................................................................................................S-12, S-37
Prepayment Interest Shortfall.............................................................................................S-12, S-37
Prepayment Premiums........................................................................................................S-4, S-21
Private Certificates.......................................................................................................S-1, S-40
Purchase Price ..............................................................................................................S-34
Record Date ...............................................................................................................S-8
Related Proceeds ..............................................................................................................S-47
REMIC .........................................................................................................iii, S-13
REMIC Regular Certificates.................................................................................................S-1, S-39
REO Loan ..............................................................................................................S-45
REO Property ........................................................................................................S-11, S-39
Scheduled Principal Distribution Amount.........................................................................................S-10
Servicing Fee .........................................................................................................S-1, S-36
Servicing Fee Rate.........................................................................................................S-1, S-36
SMMEA ..............................................................................................................S-15
Stated Principal Balance...................................................................................................S-6, S-45
Subordinate Certificates..................................................................................................S-12, S-46
Treasury Index ...............................................................................................................S-3
Trust Fund ..........................................................................................................iii, S-6
Uncovered Portion .........................................................................................................S-6, S-46
Underwriter .................................................................................................................i
Unscheduled Principal Distribution Amount.......................................................................................S-11
Weighted Average Effective Net Mortgage Rate...............................................................................S-7, S-43
</TABLE>
<PAGE>
S-63
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
<PAGE>
S-64
<TABLE>
<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING MERRILL LYNCH MORTGAGE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO INVESTORS, INC.
BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION 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 ANY SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. $______________
CLASS A AND CLASS B
TABLE OF CONTENTS MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 199_-___
VARIABLE PASS-THROUGH RATE
PAGE -----------
Prospectus Supplement
Summary................................................ S-1 PROSPECTUS SUPPLEMENT
Risk Factors........................................... S-16 __________, 199_
Description of the Mortgage Pool....................... S-19
Servicing of the Mortgage Loans........................ S-36 -----------
Description of the Certificates........................ S-39
Yield and Maturity Considerations...................... S-49
Use of Proceeds........................................ S-58
Certain Federal Income Tax Consequences................ S-58
ERISA Considerations................................... S-58 MERRILL LYNCH & CO.
Legal Investment....................................... S-60
Method of Distribution................................. S-60
Legal Matters.......................................... S-61
Rating................................................. S-61
Prospectus
Available Information.................................. 2
Incorporation of Certain Information by Reference...... 3
Summary of Prospectus.................................. 8
Risk Factors........................................... 18
Description of the Trust Funds......................... 24
Yield and Maturity Considerations...................... 28
The Depositor.......................................... 33
Use of Proceeds........................................ 33
Description of the Certificates........................ 34
Description of the Pooling Agreements.................. 42
Description of Credit Support.......................... 55
Certain Legal Aspects of Mortgage Loans................ 57
Certain Federal Income Tax Consequences................ 66
</TABLE>
<PAGE>
S-65
State Tax Considerations............................... 92
ERISA Considerations................................... 92
Legal Investment....................................... 95
Method of Distribution................................. 96
Legal Matters.......................................... 97
Financial Information.................................. 97
Rating................................................. 97
Index of Principal Definitions......................... 98
<PAGE>
Information contained herein is subject to completion or amendment. Offers to
buy these securities may not be accepted without the delivery of a final
prospectus supplement and prospectus. This prospectus supplement and the
accompanying prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1996
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
The mortgage pass-through certificates (the "Offered
Certificates") offered hereby and by the supplements hereto (each, a "Prospectus
Supplement") will be offered from time to time in series. The Offered
Certificates of each series, together with any other mortgage pass-through
certificates of such series, are collectively referred to herein as the
"Certificates".
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 primarily of a segregated pool of one or
more of various types of multifamily or commercial mortgage loans (the "Mortgage
Loans"), mortgage-backed securities ("MBS") that evidence interests in, or that
are secured by pledges of, one or more of various types of multifamily or
commercial mortgage loans, or a combination of Mortgage Loans and MBS
(collectively, "Mortgage Assets"). Mortgage Loans (or mortgage loans underlying
an MBS) may be delinquent or non-performing as of the date Certificates of a
series are issued, if so specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, the Trust Fund for a series of
Certificates 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 Certificates" and
"Description of Credit Support".
Each series of Certificates will consist of one or more
classes of Certificates, and such class or classes (including classes of Offered
Certificates) may (i) provide for the accrual of interest thereon based on a
fixed, variable or adjustable rate; (ii) be senior or subordinate to one or more
other classes of Certificates in entitlement to certain distributions on the
Certificates; (iii) be entitled to distributions of principal, with
disproportionately small, nominal or no distributions of interest; (iv) be
entitled to distributions of interest, with disproportionately small, nominal or
no distributions of principal; (v) provide for distributions of principal and/or
interest that commence only following the occurrence of certain events, such as
the retirement of one or more other classes of Certificates of such series; (vi)
provide for distributions of principal to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal to be made, subject to available funds, based on a specified principal
payment schedule or other methodology. See "Description of the Certificates".
Distributions in respect of the Certificates of each series
will be made on a monthly, quarterly, semi-annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from the
assets of the related Trust Fund.
No Certificates of any series will represent an obligation of
or interest in the Depositor or any of its affiliates, except to the limited
extent described herein and in the related Prospectus Supplement. Neither the
Certificates of any series nor the 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 (the "Certificateholders")
pursuant to a Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a series will be
affected by, among other things, the rate of payment of principal (including
prepayments) on the Mortgage Assets in the related Trust Fund and the timing of
receipt of such payments as described herein and in the related Prospectus
Supplement. See "Yield and Maturity Considerations". A Trust Fund may be subject
to early termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates".
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" (a "REMIC") for
federal income tax purposes. See "Certain Federal Income Tax Consequences"
herein.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE 18 OF THIS PROSPECTUS AND SUCH INFORMATION AS MAY BE SET FORTH
UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE
PURCHASING ANY OFFERED CERTIFICATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
PRIOR TO ISSUANCE THERE WILL HAVE BEEN NO MARKET FOR THE
CERTIFICATES OF ANY SERIES AND THERE CAN BE NO ASSURANCE THAT A SECONDARY MARKET
FOR ANY OFFERED CERTIFICATES WILL DEVELOP OR THAT, IF IT DOES DEVELOP, IT WILL
CONTINUE. SEE "RISK FACTORS." THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE
SALES OF THE OFFERED CERTIFICATES OF ANY SERIES UNLESS ACCOMPANIED BY THE
PROSPECTUS SUPPLEMENT FOR SUCH SERIES.
The Offered Certificates of any series may be offered through
one or more different methods, including offerings through underwriters, as more
fully described under "Method of Distribution" herein and in the related
Prospectus Supplement.
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, each Prospectus
Supplement will, among other things, set forth, as and to the extent
appropriate: (i) a description of the class or classes of Offered Certificates
of the related series, including the payment provisions with respect to each
such class, the aggregate principal amount of each such class (the "Certificate
Balance"), the rate at which interest will accrue from time to time, if at all,
with respect to each such class (the "Pass-Through Rate") or the method of
determining such rate; (ii) information with respect to any other classes of
Certificates of the same series; (iii) the respective dates on which
distributions are to be made to Certificateholders; (iv) information as to the
assets constituting the related Trust Fund, including the general
characteristics of the assets included therein, including the Mortgage Assets
and any Credit Support and Cash Flow Agreements (with respect to the
Certificates of any series, the "Trust Assets"); (v) the circumstances, if any,
under which the related Trust Fund may be subject to early termination; (vi)
additional information with respect to the method of distribution of such
Offered Certificates; (vii) whether one or more REMIC elections will be made and
the designation of the "regular interests" and "residual interests" in each
REMIC to be created; (viii) the initial percentage ownership interest in the
related Trust Fund to be evidenced by each class of Certificates of such series;
(ix) information concerning the trustee (as to any series, the "Trustee") of the
related Trust Fund; (x) information concerning the master servicer (as to any
series, the "Master Servicer") and any special servicer (as to any series, the
"Special Servicer") engaged to administer the related Mortgage Assets; (xi)
information as to the nature and extent of any subordination in entitlement to
distributions of any class of Certificates of such series; and (xii) whether
such Offered Certificates 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 Certificates. This Prospectus and the Prospectus Supplement relating to
the Offered Certificates of each series 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, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048.
No person has been authorized to give any information or to
make any representation not contained in this Prospectus and any related
Prospectus Supplement and, if given or made, such information or representation
must not be relied upon. This Prospectus and any related Prospectus Supplement
do not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Offered Certificates, or an offer of the Offered
Certificates to any person in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus at any time does not
imply that information herein is correct as of any time subsequent to its date;
however, if any material change occurs while this Prospectus is required by law
to be delivered, this Prospectus will be amended or supplemented accordingly.
The related Master Servicer or Trustee will be required to
mail to holders of the Offered Certificates of each series periodic unaudited
reports concerning the related Trust Fund. If beneficial interests in a class of
Offered Certificates are being held and transferred in book-entry format through
the facilities of The Depository Trust Company ("DTC") as described herein, then
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to a nominee of DTC as the
registered holder of the Offered Certificates. The means by which notices and
other communications are conveyed by DTC to its participating organizations, and
directly or indirectly through such participating organizations to the
beneficial owners of the applicable Offered Certificates, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. See "Description of the
Certificates--Reports to Certificateholders" and "--Book-Entry Registration and
Definitive
2
<PAGE>
Certificates", and "Description of the Pooling 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"), and the rules
and regulations 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 Certificates evidencing interests
therein. The Depositor, upon request, 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 Certificates, a copy of any
or all documents or reports incorporated herein by reference, in each case to
the extent such documents or reports relate to one or more of such classes of
such Offered Certificates, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to its principal
executive office at 250 Vesey Street, Fifteenth Floor, New York, New York
10281-1315, Attention: Secretary, or by telephone at (212) 449-0336. The
Depositor has determined that its financial statements will not be material to
the offering of any Offered Certificates.
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Prospectus Supplement.................................................................................. 2
AVAILABLE INFORMATION.................................................................................. 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...................................................... 3
SUMMARY OF PROSPECTUS.................................................................................. 8
RISK FACTORS........................................................................................... 18
Limited Liquidity............................................................................. 18
Limited Assets................................................................................ 18
Prepayments; Average Life of Certificates; Yields............................................. 19
Limited Nature of Ratings..................................................................... 20
Risks Associated with Certain Mortgage Loans and Mortgaged Properties......................... 20
Balloon Payments; Borrower Default............................................................ 21
Credit Support Limitations.................................................................... 21
Leases and Rents.............................................................................. 22
Environmental Risks........................................................................... 22
ERISA Considerations.......................................................................... 22
Certain Federal Tax Considerations Regarding REMIC Residual Certificates...................... 23
Book-Entry Registration....................................................................... 23
Delinquent and Non-Performing Mortgage Loans.................................................. 23
DESCRIPTION OF THE TRUST FUNDS......................................................................... 24
General....................................................................................... 24
Mortgage Loans................................................................................ 24
General.............................................................................. 24
Default and Loss Considerations with Respect to the Mortgage Loans................... 24
Payment Provisions of the Mortgage Loans............................................. 26
Mortgage Loan Information in Prospectus Supplements.................................. 26
MBS........................................................................................... 27
Certificate Accounts.......................................................................... 27
Credit Support................................................................................ 28
Cash Flow Agreements.......................................................................... 28
YIELD AND MATURITY CONSIDERATIONS...................................................................... 28
General....................................................................................... 28
Pass-Through Rate............................................................................. 28
Payment Delays................................................................................ 28
Certain Shortfalls in Collections of Interest................................................. 29
Yield and Prepayment Considerations........................................................... 29
Weighted Average Life and Maturity............................................................ 30
Controlled Amortization Classes and Companion Classes......................................... 31
Other Factors Affecting Yield, Weighted Average Life and Maturity............................. 32
Balloon Payments; Extensions of Maturity............................................. 32
Negative Amortization................................................................ 32
Foreclosures and Payment Plans....................................................... 32
Losses and Shortfalls on the Mortgage Assets......................................... 33
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Additional Certificate Amortization.................................................. 33
THE DEPOSITOR.......................................................................................... 33
USE OF PROCEEDS........................................................................................ 33
DESCRIPTION OF THE CERTIFICATES........................................................................ 34
General....................................................................................... 34
Distributions................................................................................. 34
Distributions of Interest on the Certificates................................................. 35
Distributions of Certificate Principal........................................................ 36
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of Equity
Participations................................................................................ 36
Allocation of Losses and Shortfalls........................................................... 36
Advances in Respect of Delinquencies.......................................................... 37
Reports to Certificateholders................................................................. 37
Voting Rights................................................................................. 40
Termination................................................................................... 40
Book-Entry Registration and Definitive Certificates........................................... 40
DESCRIPTION OF THE POOLING AGREEMENTS.................................................................. 42
General....................................................................................... 42
Assignment of Mortgage Loans; Repurchases..................................................... 42
Representations and Warranties; Repurchases................................................... 43
Certificate Account........................................................................... 44
General.............................................................................. 44
Deposits............................................................................. 44
Withdrawals.......................................................................... 45
Collection and Other Servicing Procedures..................................................... 47
Modifications, Waivers and Amendments of Mortgage Loans....................................... 47
Sub-Servicers................................................................................. 47
Special Servicers............................................................................. 48
Realization Upon Defaulted Mortgage Loans..................................................... 48
Hazard Insurance Policies..................................................................... 49
Due-On-Sale and Due-On-Encumbrance Provisions................................................. 50
Servicing Compensation and Payment of Expenses................................................ 50
Evidence as to Compliance..................................................................... 51
Certain Matters Regarding the Master Servicer and the Depositor............................... 51
Events of Default............................................................................. 52
Rights Upon Event of Default.................................................................. 53
Amendment..................................................................................... 53
List of Certificateholders.................................................................... 54
The Trustee................................................................................... 54
Duties of the Trustee......................................................................... 54
Certain Matters Regarding the Trustee......................................................... 54
Resignation and Removal of the Trustee........................................................ 54
DESCRIPTION OF CREDIT SUPPORT.......................................................................... 55
General....................................................................................... 55
Subordinate Certificates...................................................................... 55
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Cross-Support Provisions...................................................................... 56
Insurance or Guarantees with Respect to Mortgage Loans........................................ 56
Letter of Credit.............................................................................. 56
Certificate Insurance and Surety Bonds........................................................ 56
Reserve Funds................................................................................. 56
Credit Support with Respect to MBS............................................................ 57
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................................................ 57
General....................................................................................... 57
Types of Mortgage Instruments................................................................. 57
Leases and Rents.............................................................................. 58
Personalty.................................................................................... 58
Junior Mortgages; Rights of Senior Lenders.................................................... 58
Foreclosure................................................................................... 59
General.............................................................................. 59
Foreclosure procedures vary from state to state...................................... 59
Judicial Foreclosure................................................................. 60
Non-Judicial Foreclosure/Power of Sale............................................... 60
Limitations on the Rights of Mortgage Lenders........................................ 60
Rights of Redemption................................................................. 61
Anti-Deficiency Legislation.......................................................... 61
Leasehold Considerations............................................................. 62
Bankruptcy Laws............................................................................... 62
Environmental Considerations.................................................................. 63
General.............................................................................. 63
Superlien Laws....................................................................... 63
CERCLA............................................................................... 63
Certain Other Federal and State Laws................................................. 64
Additional Considerations............................................................ 64
Due-On-Sale and Due-On-Encumbrance............................................................ 65
Subordinate Financing......................................................................... 65
Default Interest and Limitations on Prepayments............................................... 65
Applicability of Usury Laws................................................................... 65
Soldiers' and Sailors' Civil Relief Act Of 1940............................................... 66
Americans with Disabilities Act............................................................... 66
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................................ 66
General....................................................................................... 66
REMICs........................................................................................ 67
Classification of REMICs............................................................. 67
Characterization of Investments in REMIC Certificates................................ 68
Tiered REMIC Structures.............................................................. 68
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.............................................. 69
General.............................................................................. 69
Original Issue Discount.............................................................. 69
Market Discount...................................................................... 71
Premium.............................................................................. 72
Realized Losses...................................................................... 72
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES............................................. 73
General.............................................................................. 73
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Taxable Income of the REMIC.......................................................... 74
Basis Rules, Net Losses and Distributions............................................ 75
Excess Inclusions.................................................................... 76
Noneconomic REMIC Residual Certificates.............................................. 77
Mark-to-Market Rules................................................................. 77
Possible Pass-Through of Miscellaneous Itemized Deductions........................... 78
Sales of REMIC Certificates.......................................................... 79
Prohibited Transactions Tax and Other Taxes.......................................... 80
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations........................................................................ 80
Termination.......................................................................... 81
Reporting and Other Administrative Matters........................................... 81
Backup Withholding with Respect to REMIC Certificates................................ 82
Foreign Investors in REMIC Certificates.............................................. 82
Grantor Trust Funds........................................................................... 83
Classification of Grantor Trust Funds................................................ 83
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES................................. 83
Grantor Trust Fractional Interest Certificates....................................... 83
Grantor Trust Strip Certificates..................................................... 83
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.......................... 84
General.............................................................................. 84
If Stripped Bond Rules Apply......................................................... 84
If Stripped Bond Rules Do Not Apply.................................................. 86
Market Discount...................................................................... 87
Premium.............................................................................. 89
Taxation of Owners of Grantor Trust Strip Certificates............................... 89
Possible Application of Proposed Contingent Payment Rules............................ 90
Sales of Grantor Trust Certificates.................................................. 90
Grantor Trust Reporting.............................................................. 91
Backup Withholding................................................................... 91
Foreign Investors.................................................................... 91
STATE AND OTHER TAX CONSEQUENCES....................................................................... 92
ERISA CONSIDERATIONS................................................................................... 92
General....................................................................................... 92
Plan Asset Regulations........................................................................ 92
Prohibited Transaction Exemptions............................................................. 93
LEGAL INVESTMENT....................................................................................... 94
METHOD OF DISTRIBUTION................................................................................. 95
LEGAL MATTERS.......................................................................................... 96
FINANCIAL INFORMATION.................................................................................. 96
RATING................................................................................................. 97
INDEX OF PRINCIPAL DEFINITIONS......................................................................... 98
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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 CERTIFICATES CONTAINED IN THE PROSPECTUS SUPPLEMENT TO
BE PREPARED AND DELIVERED IN CONNECTION WITH THE OFFERING OF OFFERED
CERTIFICATES OF SUCH SERIES. AN INDEX OF PRINCIPAL DEFINITIONS IS INCLUDED AT
THE END OF THIS PROSPECTUS.
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Title of Certificates.................................Mortgage Pass-Through Certificates, issuable in series (the
"Certificates").
Depositor.............................................Merrill Lynch Mortgage Investors, Inc., a wholly-owned
limited purpose subsidiary of Merrill Lynch Mortgage
Capital Inc. (the "Depositor") See "The Depositor".
Master Servicer.......................................The master servicer (the "Master Servicer"), if any, for a
series of Certificates will be named in the related
Prospectus Supplement and may be an affiliate of the
Depositor. See "Description of the Pooling
Agreements--Collection and Other Servicing Procedures".
Special Servicer......................................The special servicer (the "Special Servicer"), if any, for a
series of Certificates will be named, or the
circumstances under which a Special Servicer will be
appointed will be described, in the related Prospectus
Supplement. See "Description of the Pooling
Agreements--Special Servicers".
Trustee...............................................The trustee (the "Trustee") for each series of Certificates
will be named in the related Prospectus Supplement. See
"Description of the Pooling Agreements--The Trustee".
The Trust Assets......................................Each series of Certificates will represent in the aggregate
the entire beneficial ownership interest in a Trust Fund
consisting primarily of:
A. Mortgage Assets..............................The Mortgage Assets with respect to each series of
Certificates will, in general, consist of a pool of
mortgage loans (collectively, the "Mortgage Loans")
secured by liens on, or security interests in, (i)
residential properties consisting of five or more rental
or cooperatively-owned dwelling units (the
"Multifamily Properties") or (ii) office buildings,
shopping centers, retail stores, hotels or motels,
nursing homes, hospitals or other health-care related
facilities, mobile home parks, warehouse facilities,
mini-warehouse facilities or self- storage facilities,
industrial plants, mixed use or other types of income-
producing properties or unimproved land (the
"Commercial Properties"). If so specified in the related
Prospectus Supplement, a Trust Fund may include
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Mortgage Loans secured by liens on real estate projects
under construction. If so specified in the related
Prospectus Supplement, some Mortgage Loans may be
delinquent or non-performing as of the date of their
deposit into the related Trust Fund. The Mortgage Loans
will not be guaranteed or insured by the Depositor, any of
its affiliates or, unless otherwise specified in the
Prospectus Supplement, by any governmental agency or
instrumentality or other person.
As and to the extent described in the related Prospectus
Supplement, a Mortgage Loan (i) 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 at
the borrower's election from an adjustable to a fixed
Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate, (ii) may provide for level payments to
maturity or for payments that adjust from time to time
to accommodate changes in the Mortgage Rate or to
reflect the occurrence of certain events, and may
permit negative amortization, (iii) may be fully
amortizing over its term to maturity, or may provide
for little or no amortization over its term and thus
require a balloon payment on its stated maturity date,
(iv) may contain a prohibition on prepayment or
require payment of a premium or a yield maintenance
penalty in connection with a prepayment and (v) 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. Unless otherwise provided in
the related Prospectus Supplement, each Mortgage
Loan will have had an original term to maturity of not
more than 40 years, and will have been originated by
a person other than the Depositor. See "Description of
the Trust Funds--Mortgage Loans".
If and to the extent specified in the related Prospectus
Supplement, the Mortgage Assets that constitute a
particular Trust Fund may also include or consist solely
of (i) private mortgage participations, mortgage
pass-through certificates or other mortgage-backed
securities or (ii) certificates insured or guaranteed by
the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA") or the
Governmental National Mortgage Association ("GNMA") or the
Federal Agricultural Mortgage Corporation ("FAMC")
(collectively, the mortgage-backed securities referred to
in clauses (i) and (ii), "MBS"), provided that each MBS
will evidence an interest in, or will be secured by a
pledge of, one or more mortgage loans that conform
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to the descriptions of the Mortgage Loans contained
herein. See "Description of the Trust Funds--MBS".
Each Mortgage 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
(a "Mortgage Asset Seller"), which prior holder may or may
not be the originator of such Mortgage Loan or the issuer
of such MBS and may be an affiliate of the Depositor.
B. Certificate Account..........................Each Trust Fund will include one or more accounts
(collectively,the "Certificate Account") established and
maintained on behalf of the Certificateholders 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
Mortgage Assets and other assets in the Trust Fund. A
Certificate 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 Trust Funds--Certificate Accounts" and
"Description of the Pooling Agreements --Certificate
Account".
C. Credit Support...............................If so provided in the related Prospectus Supplement,
partial or full protection against certain defaults and
losses on the Mortgage Assets in the related Trust
Fund may be provided to one or more classes of
Certificates of the related series in the form of
subordination of one or more other classes of
Certificates of such series, which other classes may
include one or more classes of Offered Certificates, 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 Certificates of any series, "Credit Support"). The
amount and types of any Credit Support, the
identification of the entity providing it (if applicable)
and related information will be set forth in the related
Prospectus Supplement. See "Risk Factors--Credit
Support Limitations", "Description of the Trust
Funds--Credit Support" and "Description of Credit
Support".
D. Cash Flow Agreements.........................If so provided in the related Prospectus Supplement, a
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
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agreements, currency exchange agreements or similar
agreements designed to reduce the effects of interest rate
or currency exchange rate fluctuations on the Mortgage
Assets or on one or more classes of Certificates. 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 contain certain information
that pertains to the obligor under any such Cash Flow
Agreement. See "Description of the Trust Funds--Cash Flow
Agreements".
Description of Certificates...........................Each series of Certificates will be issued in one or more
classes pursuant to a pooling and servicing agreement or
other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement") and
will represent in the aggregate the entire beneficial
ownership interest in the related Trust Fund.
Each series of Certificates will consist of one or more
classes of Certificates, and such class or classes
(including classes of Offered Certificates) may (i) be
senior (collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate Certificates") to
one or more other classes of Certificates in entitlement
to certain distributions on the Certificates; (ii) be
entitled to distributions of principal, with
disproportionately small, nominal or no distributions of
interest (collectively, "Stripped Principal
Certificates"); (iii) be entitled to distributions of
interest, with disproportionately small, nominal or no
distributions of principal (collectively, "Stripped
Interest Certificates"); (iv) provide for distributions of
principal and/or interest that commence only after the
occurrence of certain events, such as the retirement of
one or more other classes of Certificates of such series;
(v) provide for distributions of principal to be made,
from time to time or for designated periods, at a rate
that is faster (and, in some cases, substantially faster)
or slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of
principal are received on the Mortgage Assets in the
related Trust Fund; or (vi) provide for distributions of
principal to be made, subject to available funds, based on
a specified principal payment schedule or other
methodology.
Each class of Certificates, other than certain classes of
Stripped Interest Certificates and certain REMIC Residual
Certificates (as defined below), will have a
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stated principal amount (a "Certificate Balance"); and
each class of Certificates, other than certain classes of
Stripped Principal Certificates and certain REMIC Residual
Certificates, will accrue interest on its Certificate
Balance or, in the case of certain classes of Stripped
Interest Certificates, on a notional amount ("Notional
Amount"), based on a fixed, variable or adjustable
interest rate (a "Pass-Through Rate"). The related
Prospectus Supplement will specify the Certificate
Balance, Notional Amount and PassThrough Rate for each
class of Offered Certificates, as applicable, or, in the
case of a variable or adjustable Pass-Through Rate, the
method for determining the Pass-Through Rate.
The Certificates 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 "Risk Factors--Limited Assets" and
"Description of the Certificates".
Distributions of Interest on the
Certificates....................................Interest on each class of Offered Certificates (other than
certain classes of Stripped Principal Certificates and
Stripped Interest Certificates and certain REMIC
Residual Certificates) of each series will accrue at the
applicable Pass-Through Rate on the Certificate
Balance or, in the case of certain classes of Stripped
Interest Certificates, the Notional Amount thereof
outstanding from time to time and will be distributed to
Certificateholders as provided in the related Prospectus
Supplement (each of the specified dates on which
distributions are to be made, a "Distribution Date").
Distributions of interest with respect to one or more
classes of Certificates (collectively, "Accrual
Certificates") may not commence until the occurrence
of certain events, such as the retirement of one or more
other classes of Certificates, and interest accrued with
respect to a class of Accrual Certificates prior to the
occurrence of such an event will either be added to the
Certificate Balance thereof or otherwise deferred.
Distributions of interest with respect to one or more
classes of Certificates may be reduced to the extent of
certain delinquencies, losses and other contingencies
described herein and in the related Prospectus
Supplement. See "Risk Factors--Prepayments; Average
Life of Certificates; Yields", "Yield and Maturity
Considerations", and "Description of the
Certificates--Distributions of Interest on the
Certificates".
Distributions of Certificate Principal................Each class of the Certificates of each series (other than
certain classes of Stripped Interest Certificates and/or
REMIC Residual Certificates) will have a Certificate
Balance which, as of any date, will represent the
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maximum amount that the holders thereof are then entitled
to receive in respect of principal from future cash flow
on the Mortgage Assets in the related Trust Fund. Unless
otherwise specified in the related Prospectus Supplement,
the initial aggregate Certificate Balance of all classes
of a series of Certificates will not exceed the
outstanding principal balance of the related Mortgage
Assets as of a specified date (the "Cut-off Date"), after
application of scheduled payments due on or before such
date, whether or not received. As and to the extent
described in the related Prospectus Supplement,
distributions of principal with respect to each series of
Certificates will be made on each Distribution Date to the
holders of the class or classes of Certificates of such
series entitled thereto until the Certificate Balances of
such Certificates have been reduced to zero. Distributions
of principal with respect to one or more classes of
Certificates (i) may be made at a rate that is faster
(and, in some cases, substantially faster) than the rate
at which payments or other collections of principal are
received on the Mortgage Assets in the related Trust Fund;
(ii) may not commence until the occurrence of certain
events, such as the retirement of one or more other
classes of Certificates of the same series, or may be made
at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or
other collections of principal are received on the
Mortgage Assets in the related Trust Fund; (iii) may be
made, subject to available funds, based on a specified
principal payment schedule (any such class, a "Controlled
Amortization Class"); and (iv) may be contingent on the
specified principal payment schedule for a Controlled
Amortization Class of the same series and the rate at
which payments and other collections of principal on the
Mortgage Assets in the related Trust Fund are received
(any such class, a "Companion Class"). Unless otherwise
specified in the related Prospectus Supplement,
distributions of principal of any class of Certificates
will be made on a PRO RATA basis among all of the
Certificates of such class. See "Description of the
Certificates--Distributions of Certificate Principal".
Advances..............................................If and to the extent provided in the related Prospectus
Supplement, the Master Servicer and/or other specified
person will be obligated to make, or have the option of
making, certain advances with respect to delinquent
scheduled payments of principal and/or interest on the
Mortgage Loans in the related Trust Fund. Any such
advances made with respect to a particular Mortgage
Loan will be reimbursable from subsequent recoveries
in respect of such Mortgage Loan and otherwise to the
extent described herein and in the related Prospectus
Supplement. If and to the extent provided in the
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Prospectus Supplement for a series of Certificates, the
Master Servicer or other specified person will be entitled
to receive interest on its advances for the period that
they are outstanding, payable from amounts in the related
Trust Fund. See "Description of the Certificates--Advances
in Respect of Delinquencies". If a Trust Fund includes
MBS, any comparable advancing obligation of a party to the
related Pooling Agreement, or of a party to the related
MBS Agreement, will be described in the related Prospectus
Supplement.
Termination...........................................If so specified in the related Prospectus Supplement, a
series of Certificates may be subject to optional early
termination by means of the repurchase of the
Mortgage Assets in the related Trust Fund by the party
or parties 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 Certificate Balance of a specified class or classes
of Certificates by a specified percentage or amount, a
party specified therein may be authorized or required
to solicit bids for the purchase of all of the Mortgage
Assets of the Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth
therein. See "Description of the
Certificates--Termination".
Registration of Book-Entry Certificates...............If so provided in the related Prospectus Supplement, one
or more classes of the Offered Certificates of any
series will be offered in book-entry format
(collectively, "Book-Entry Certificates") through the
facilities of The Depository Trust Company ("DTC").
Each class of Book-Entry Certificates will be initially
represented by one or more Certificates registered in
the name of a nominee of DTC. No person acquiring
an interest in a class of Book-Entry Certificates (a
"Certificate Owner") will be entitled to receive a
Certificate of such class in fully registered, definitive
form (a "Definitive Certificate"), except under the
limited circumstances described herein. See "Risk
Factors--Book-Entry Registration" and "Description of
the Certificates--Book-Entry Registration and
Definitive Certificates".
Tax Status of the Certificates........................The Certificates of each series will constitute either
(i)"regular interests" ("REMIC Regular Certificates") and
"residual interests" ("REMIC Residual Certificates") in a
Trust Fund, or a designated portion thereof, treated as a
REMIC under Sections 860A through 860G of the Internal
Revenue Code of 1986 (the "Code"), or (ii) interests
("Grantor Trust Certificates") in a Trust Fund treated as
a grantor trust under applicable provisions of the Code.
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A. REMIC........................................REMIC Regular Certificates generally will be treated as
debt obligations of the applicable REMIC for federal
income tax purposes. In general, to the extent the
assets and income of the REMIC are treated as
qualifying assets and income under the following
sections of the Code, REMIC Regular Certificates
owned by a thrift institution will be treated as
"qualifying real property loans" within the meaning of
Section 593(d) of the Code, and REMIC Regular
Certificates owned by a real estate investment trust will
be treated as "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code and interest income
therefrom will be treated as "interest on obligations
secured by mortgages on real property" for purposes of
Section 856(c)(3)(B) of the Code. In addition, REMIC
Regular Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code.
Moreover, if 95% or more of the assets and the income
of the REMIC qualify for any of the foregoing
treatments, the REMIC Regular Certificates will
qualify for the foregoing treatments in their entirety.
However, REMIC Regular Certificates owned by a
thrift institution will constitute assets described in
Section 7701(a)(19)(C) of the Code only if so specified
in the related Prospectus Supplement. Holders of
REMIC Regular Certificates must report income with
respect thereto on the accrual method, regardless of
their method of tax accounting generally. Holders of
any class of REMIC Regular Certificates issued with
original issue discount generally will be required to
include the original issue discount in income as it
accrues, which will be determined using an initial
prepayment assumption and taking into account, from
time to time, actual prepayments occurring at a rate
different than the prepayment assumption. See "Certain
Federal Income Tax
Consequences--REMICs--Taxation of Owners of
REMIC Regular Certificates".
REMIC Residual Certificates generally will be treated as
representing an interest in qualifying assets and income
to the same extent described above for institutions
subject to Sections 593(d), 856(c)(5)(A) and 856(c)(3)(B)
of the Code, but not for purposes of Section
7701(a)(19)(C) of the Code unless otherwise stated in the
related Prospectus Supplement. A portion (or, in certain
cases, all) of the income from REMIC Residual Certificates
(i) may not be offset by any losses from other activities
of the holder of such REMIC Residual Certificates (except
generally with respect to thrift institutions described in
Section 593 of the Code, if such REMIC Residual
Certificate has "significant value"), (ii) may be treated
as unrelated business taxable income for holders of REMIC
Residual Certificates that are subject to tax on unrelated
business
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<S> <C>
taxable income (as defined in Section 511 of the Code),
and (iii) may be subject to foreign withholding rules. See
"Certain Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Residual Certificates".
B. Grantor Trust................................Unless otherwise provided in the related Prospectus
Supplement, Grantor Trust Certificates may be either
Certificates that have a Certificate Balance and a Pass-
Through Rate or that are Stripped Principal Certificates
(collectively, "Grantor Trust Fractional Interest
Certificates"), or may be Stripped Interest Certificates.
Owners of Grantor Trust Fractional Interest Certificates will
be treated for federal income tax purposes as owners of an
undivided PRO RATA interest in the assets of the related
Trust Fund, and generally will be required to report their
PRO RATA share of the entire gross income (including
amounts incurred as servicing or other fees and expenses)
from the Mortgage Assets and will be entitled, subject to
certain limitations, to deduct their PRO RATA shares of
any servicing or other fees and expenses incurred during
the year. Holders of Grantor Trust Fractional Interest
Certificates generally will be treated as owning an
interest in qualifying assets and income under Sections
593(d), 856(c)(5)(A), 856(c)(3)(B) and 860G(a)(3) of the
Code, but will not be so treated for purposes of Section
7701(a)(19)(C) of the Code unless otherwise stated in the
related Prospectus Supplement.
It is unclear whether Stripped Interest Certificates will be
treated as representing an ownership interest in
qualifying assets and income under Sections 593(d),
856(c)(5)(A) and 856(c)(3)(B) of the Code, although
the policy considerations underlying those Sections
suggest that such treatment should be available.
However, such Certificates will not be treated as
representing an ownership interest in assets described
in Section 7701(a)(19)(C) of the Code unless otherwise
stated in the related Prospectus Supplement. The
taxation of holders of Stripped Interest Certificates is
uncertain in various respects, including in particular the
method such holders should use to recover their
purchase price and to report their income with respect
to such Stripped Interest Certificates. See "Certain
Federal Income Tax Consequences--Grantor Trust
Funds".
Investors are advised to consult their tax advisors and to
review "Certain Federal Income Tax Consequences"
herein and in the related Prospectus Supplement.
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<S> <C>
ERISA Considerations..................................Fiduciaries of employee benefit plans 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 are subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code, should carefully review with
their legal advisors whether the purchase or holding of
Offered Certificates 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 Prospectus
Supplement.
Legal Investment......................................The Offered Certificates of any series will constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
only if so specified in the related Prospectus
Supplement. Investors whose investment authority is
subject to legal restrictions should consult their own
legal advisors to determine whether and to what extent
the Offered Certificates constitute legal investments for
them. See "Legal Investment" herein and in the related
Prospectus Supplement.
Rating................................................At their respective dates of issuance, each class of Offered
Certificates will be rated not lower than investment
grade by one or more nationally recognized statistical
rating agencies (each, a "Rating Agency"). See
"Rating" herein and in the related Prospectus
Supplement.
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RISK FACTORS
In considering an investment in the Offered Certificates of
any series, investors should consider, among other things, the following factors
and any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly pertain
to and be influenced by the characteristics or behavior of the mortgage loans
underlying any MBS included in such Trust Fund.
LIMITED LIQUIDITY
Merrill Lynch, Pierce, Fenner & Smith Incorporated, itself or
through one or more of its affiliates, currently expects to make a secondary
market in the Offered Certificates of each series, but has no obligation to do
so. However, there can be no assurance that a secondary market for the Offered
Certificates of any series will develop or, if it does develop, that it will
provide holders with liquidity of investment or will continue for as long as
such Certificates remain outstanding. Furthermore, because, among other things,
the timing of receipt of payments with respect to a pool of multifamily or
commercial mortgage loans may be substantially more difficult to predict than
that of a pool of single family mortgage loans, any such secondary market that
does develop may provide less liquidity to investors than any comparable market
for securities that evidence interests in single-family mortgage loans.
The primary source of continuing information regarding the
Offered Certificates of any series, including information regarding the status
of the related Mortgage Assets and any Credit Support for such Certificates,
will be the periodic reports to Certificateholders delivered pursuant to the
related Pooling Agreement as described herein under the heading "Description of
the Certificates--Reports to Certificateholders". There can be no assurance that
any additional continuing information regarding the Offered Certificates of any
series will be available through any other source, and the limited nature of
such information may adversely affect the liquidity thereof, even if a secondary
market for such Certificates does develop.
Except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights, and
the Offered Certificates of each series are subject to early retirement only
under certain specified circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination".
LIMITED ASSETS
Unless otherwise specified in the related Prospectus
Supplement, neither the Offered Certificates of any series nor the Mortgage
Assets in the related Trust Fund will be guaranteed or insured by the Depositor
or any of its affiliates, by any governmental agency or instrumentality or by
any other person; and no Offered Certificate of any series will represent a
claim against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make payments
on such Certificates, no other assets will be available for payment of the
deficiency. Additionally, certain amounts on deposit from time to time remaining
in certain funds or accounts constituting part of a Trust Fund, including the
Certificate Account and any accounts maintained as Credit Support, may be
withdrawn under certain conditions that will be described in the related
Prospectus Supplement, for purposes other than the payment of principal of or
interest on the related series of Certificates. If so provided in the Prospectus
Supplement for a series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Distribution Date in respect of which losses or
shortfalls in collections on the Mortgage Assets have been incurred, the amount
of such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations specified
in such Prospectus Supplement.
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PREPAYMENTS; AVERAGE LIFE OF CERTIFICATES; YIELDS
For a number of reasons, including the difficulty of
predicting the rate of prepayments on the Mortgage Loans in a particular Trust
Fund, the amount and timing of distributions of principal and/or interest on the
Offered Certificates of the related series may be highly unpredictable.
Prepayments on the Mortgage Loans in any Trust Fund will result in a faster rate
of principal payments on one or more classes of the related Certificates than if
payments on such Mortgage Loans were made as scheduled. Thus, the prepayment
experience on the Mortgage Loans may affect the average life of each class of
such Certificates, including a class of Offered Certificates. The rate of
principal payments on pools of mortgage loans varies among pools and from time
to time is influenced by a variety of economic, demographic, geographic, social,
tax, legal and other factors. For example, if prevailing interest rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans included in a
Trust Fund, principal prepayments are likely to be higher than if prevailing
rates remain at or above the rates borne by those Mortgage Loans. Conversely, if
prevailing interest rates rise significantly above the Mortgage Rates borne by
the Mortgage Loans included in a Trust Fund, principal prepayments thereon are
likely to be lower than if prevailing interest rates remain at or below the
rates borne by those Mortgage Loans. There can be no assurance as to the rate of
prepayments on the Mortgage Loans in any Trust Fund or that such rate will
conform to any model described herein or in any Prospectus Supplement. As a
result, depending on the anticipated rate of prepayment for the Mortgage Loans
in any Trust Fund, the retirement of any class of Certificates of the related
series could occur significantly earlier or later than expected.
The extent to which prepayments on the Mortgage Loans in any
Trust Fund ultimately affect the average life of any class of Certificates of
the related series will depend on the terms of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on any
Distribution Date the holders of such Certificates are entitled to a PRO RATA
share of the prepayments (including prepayments occasioned by defaults) on the
Mortgage Loans in the related Trust Fund that are distributable on such date, to
a disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases, may
be none) of such prepayments. A class of Certificates that entitles the holders
thereof to a disproportionately large share of prepayments enhances the risk of
early retirement of such class ("call risk") if the rate of prepayment is faster
than anticipated; while a class of Certificates that entitles the holders
thereof to a disproportionately small share of prepayments enhances the risk of
an extended average life of such class ("extension risk") if the rate of
prepayment is slower than anticipated. As and to the extent described in the
related Prospectus Supplement, the respective entitlements of the various
classes of Certificateholders of any series to receive payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related Trust
Fund may vary based on the occurrence of certain events (e.g., the retirement of
one or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
A series of Certificates may include one or more Controlled
Amortization Classes that will be entitled to receive principal distributions
according to a specified principal payment schedule. Although prepayment risk
cannot be eliminated entirely for any class of Certificates, it can be reduced
substantially in the case of a Controlled Amortization Class so long as the
actual rate of prepayments on the Mortgage Loans in the related Trust Fund
remains relatively constant at the rate, or within the range of rates, of
prepayment used to establish the specific principal payment schedule for such
Certificates. However, the reduction of prepayment risk afforded to a Controlled
Amortization Class comes at the expense of one or more Companion Classes of the
same series, any of which Companion Classes may also be a class of Offered
Certificates. In general, and as more specifically described in the related
Prospectus Supplement, a Companion Class will entitle the holders thereof to a
disproportionately large share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively fast, and to a
disproportionately small share of those prepayments when the rate of prepayment
is relatively slow, and thus absorbs some (but not all) of the "call risk"
and/or "extension risk" that would otherwise affect the related Controlled
Amortization Class if all payments of principal of the Mortgage Loans were
allocated on a PRO RATA basis.
A series of Certificates may also include one or more classes
of Offered Certificates offered at a premium or discount. Yields on such classes
of Certificates will be sensitive, and in some cases extremely
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<PAGE>
sensitive, to prepayments on the Mortgage Loans in the related Trust Fund and,
where the amount of interest payable with respect to a class is
disproportionately large, as compared to the amount of principal, as with
certain classes of Stripped Interest Certificates, a holder might fail to recoup
its original investment under some prepayment scenarios. An investor should
consider, in the case of any Offered Certificate purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. See "Yield and Maturity 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 Offered
Certificates will reflect only its assessment of the likelihood that holders of
Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Pooling Agreement. Such rating
will not constitute an assessment of the likelihood that principal prepayments
on the related Mortgage Loans 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 related Trust Fund. Neither will such rating
address the possibility that prepayments on the related Mortgage Loans at a
higher or lower rate than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor that purchases an
Offered Certificate at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
The amount, type and nature of Credit Support, if any,
provided with respect to a series of Certificates will be determined on the
basis of criteria established by each Rating Agency rating classes of the
Certificates of such series. Those criteria are sometimes based upon an
actuarial analysis of the behavior of mortgage loans in a larger group. However,
there can be no assurance that the historical data supporting any such actuarial
analysis will accurately reflect future experience, or that the data derived
from a large pool of mortgage loans will accurately predict the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Loans. In
other cases, such criteria may be based upon determinations of the values of the
Mortgaged Properties that provide security for the Mortgage Loans. However, no
assurance can be given that those values will not decline in the future. See
"Description of Credit Support" and "Rating".
RISKS ASSOCIATED WITH CERTAIN MORTGAGE LOANS AND MORTGAGED PROPERTIES
Mortgage loans made on the security of multifamily or
commercial property may entail risks of delinquency and foreclosure, and risks
of loss in the event thereof, that are greater than similar risks associated
with loans made on the security of single-family property. See "Description of
the Trust Funds--Mortgage Loans". The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. A number of the Mortgage Loans may be secured by liens on
owner-occupied Mortgaged Properties or on Mortgaged Properties leased to a
single tenant. Accordingly, a decline in the financial condition of the borrower
or single tenant, as applicable, may have a disproportionately greater effect on
the net operating income from such Mortgaged Properties than would be the case
with respect to Mortgaged Properties with multiple tenants. Furthermore, the
value of any Mortgaged Property may be adversely affected by risks generally
incident to interests in real property, including changes in general or local
economic conditions and/or specific industry segments; declines in real estate
values; declines in rental or occupancy rates; increases in interest rates, real
estate tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; acts of
God; and other factors beyond the control of a Master Servicer.
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In addition, additional risk may be presented by the type and
use of a particular Mortgaged Property. For instance, specialty properties (such
as hotels, health care facilities, self-storage facilities and restaurants) are
often characterized by substantial operating risk associated with the particular
industry or business that is in addition to traditional real estate risk. Also,
specialty properties frequently are of such design that they may not be readily
converted to alternative uses if that industry or business declines.
It is anticipated that some or all of the Mortgage Loans
included in any Trust Fund will be nonrecourse loans or loans for which recourse
may be restricted or unenforceable. As to those Mortgage Loans, recourse in the
event of borrower default will be limited to the specific real property and
other assets, if any, that were pledged to secure the Mortgage Loan. However,
even with respect to those Mortgage Loans that provide for recourse against the
borrower and its assets generally, there can be no assurance that enforcement of
such recourse provisions will be practicable, or that the assets of the borrower
will be sufficient to permit a recovery in respect of a defaulted Mortgage Loan
in excess of the liquidation value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss
risks in individual Mortgage Loans in a particular Trust Fund will generally be
greater than for pools of single-family loans because Mortgage Loans in a Trust
Fund will generally consist of a smaller number of higher balance loans than
would a pool of single-family loans of comparable aggregate unpaid principal
balance.
BALLOON PAYMENTS; BORROWER DEFAULT
Certain of the Mortgage Loans included in a Trust Fund may not
be fully amortizing (or may not amortize at all) over their terms to maturity
and, thus, will require substantial principal payments (that is, balloon
payments) at their stated maturity. Mortgage Loans of this type involve a
greater degree of risk than self-amortizing loans because the ability of a
borrower to make a balloon payment typically will depend upon its ability either
to fully refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the borrower to make the balloon payment. The ability of a
borrower to accomplish either of these goals will be affected by a number of
factors, including the value of the related Mortgaged Property, the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Mortgaged Property, the financial condition and operating
history of the borrower and the related Mortgaged Property, tax laws, rent
control laws (with respect to certain residential properties), Medicaid and
Medicare reimbursement rates (with respect to hospitals and nursing homes),
prevailing general economic conditions and the availability of credit for loans
secured by commercial or multifamily, as the case may be, real properties
generally.
If and to the extent specified in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or a Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to which a
payment default is imminent. While a Master Servicer generally will be required
to determine that any such extension or modification is reasonably likely to
produce a greater recovery on a present value basis than liquidation, there can
be no assurance that any such extension or modification will in fact increase
the present value of receipts from or proceeds of the affected Mortgage Loans.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for the Offered Certificates of each
series will describe any Credit Support provided with respect thereto. 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 originator or other
parties.
A series of Certificates may include one or more classes of
Subordinate Certificates (which may include Offered Certificates), if so
provided in the related Prospectus Supplement. Although subordination is
intended to reduce the risk to holders of Senior Certificates of delinquent
distributions or ultimate losses,
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the amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Certificates 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
Certificates of such series has been fully repaid. As a result, the impact of
losses and shortfalls experienced with respect to the Mortgage Assets may fall
primarily upon those classes of Certificates having a lower priority of payment.
Moreover, if a form of Credit Support covers more than one series of
Certificates, holders of Certificates of one series will be subject to the risk
that such Credit Support will be exhausted by the claims of the holders of
Certificates of one or more other series.
The amount of any applicable Credit Support supporting one or
more classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria established
by each Rating Agency rating such classes of Certificates based on an assumed
level of defaults, delinquencies and losses on the underlying Mortgage Assets
and other factors. There can, however, be no assurance that the loss experience
on the related Mortgage Assets will not exceed such assumed levels. See
"--Limited Nature of Ratings", "Description of the Certificates" and
"Description of Credit Support".
LEASES AND RENTS
The Mortgage Loans included in any Trust Fund typically will
be secured by an assignment of leases and rents pursuant to which the borrower
assigns to the lender its right, title and interest as landlord under the leases
of the related Mortgaged Property, and the income derived therefrom, as further
security for the related Mortgage Loan, while retaining a license to collect
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect rents. Some state laws may
require that the lender take possession of the Mortgaged Property and obtain a
judicial appointment of a receiver before becoming entitled to collect the
rents. In addition, if bankruptcy or similar proceedings are commenced by or in
respect of the borrower, the lender's ability to collect the rents may be
adversely affected. See "Certain Legal Aspects of Mortgage Loans--Leases and
Rents".
ENVIRONMENTAL RISKS
Under the laws of certain states, contamination of real
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over an existing mortgage lien on
such property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, if agents or employees of the lender have become sufficiently involved
in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage. See "Certain
Legal Aspects of Mortgage Loans--Environmental Considerations". If a Trust Fund
includes Mortgage Loans and the related Prospectus Supplement does not otherwise
specify, the related Pooling Agreement will contain provisions generally to the
effect that the Master Servicer, acting on behalf of the Trust Fund, may not
acquire title to a Mortgaged Property or assume control of its operation unless
the Master Servicer, based upon a report prepared by a person who regularly
conducts environmental audits, has made the determination that it is appropriate
to do so, as described under "Description of the Pooling Agreements--Realization
Upon Defaulted Mortgage Loans." These provisions are designed to reduce
substantially the risk of liability for costs associated with remediation of a
hazardous environmental condition, but there can be no assurance in a given case
that those risks can be eliminated entirely.
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee
benefit plans and transactions involving the assets of such plans. Due to the
complexity of regulations that govern such plans, prospective investors that are
subject to ERISA are urged to consult their own counsel regarding consequences
under
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ERISA of acquisition, ownership and disposition of the Offered Certificates of
any series. See "ERISA Considerations".
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 under "Certain Federal Income Tax
Consequences--REMICs". Accordingly, under certain circumstances, holders of
Offered Certificates that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. The requirement that
holders of REMIC Residual Certificates report their PRO RATA share of the
taxable income and net loss of the REMIC will continue until the Certificate
Balances of all classes of Certificates of the related series have been reduced
to zero, even though holders of REMIC Residual Certificates have received full
payment of their stated interest and principal. A portion (or, in certain
circumstances, all) of such Certificateholder's share of the REMIC taxable
income may be treated as "excess inclusion" income to such holder, which (i)
generally will not be subject to offset by losses from other activities, (ii)
for a tax-exempt holder, will be treated as unrelated business taxable income
and (iii) for a foreign holder, will not qualify for exemption from withholding
tax. Individual holders of REMIC Residual Certificates may be limited in their
ability to deduct servicing fees and other expenses of the REMIC. In addition,
REMIC Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the taxable
income arising in a given year on a REMIC Residual Certificate will not be equal
to the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on a REMIC Residual Certificate may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics.
BOOK-ENTRY REGISTRATION
If so provided in the related Prospectus Supplement, one or
more classes of the Offered Certificates of any series will be issued as
Book-Entry Certificates. Each class of Book-Entry Certificates will be initially
represented by one or more Certificates registered in the name of a nominee for
DTC. As a result, unless and until corresponding Definitive Certificates are
issued, the Certificate Owners with respect to any class of Book-Entry
Certificates will be able to exercise the rights of Certificateholders only
indirectly through DTC and its participating organizations ("Participants"). In
addition, the access of Certificate Owners to information regarding the
Book-Entry Certificates in which they hold interests may be limited. The means
by which notices and other communications are conveyed by DTC to its
Participants, and directly and indirectly through such Participants to
Certificate Owners, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Furthermore, as described herein, Certificate Owners may experience delays in
the receipt of payments on the Book-Entry Certificates, and the ability of any
Certificate Owner to pledge or otherwise take actions with respect to its
interest in the Book-Entry Certificates may be limited due to the lack of a
physical certificate evidencing such interest. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates".
DELINQUENT AND NON-PERFORMING MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Trust
Fund for a particular series of Certificates may include Mortgage Loans that are
past due or are non-performing as of the date they are deposited in the Trust
Fund. If so specified in the related Prospectus Supplement, the servicing of
such Mortgage Loans will be performed by a Special Servicer. Credit Support
provided with respect to a particular series of Certificates may not cover all
losses related to such delinquent or non-performing Mortgage Loans, and
investors should consider the risk that the inclusion of such Mortgage Loans in
the Trust Fund may adversely affect the rate of defaults and prepayments on the
Mortgage Loans in the Trust Fund and the yield on the Offered Certificates of
such series. See "Description of the Trust Funds--Mortgage Loans-General".
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DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i)
multifamily and/or commercial mortgage loans (the "Mortgage Loans"), (ii)
mortgage participations, pass-through certificates or other mortgage-backed
securities ("MBS") that evidence interests in, or that are secured by pledges
of, one or more of various types of multifamily or commercial mortgage loans or
(iii) a combination of Mortgage Loans and MBS (collectively, "Mortgage Assets").
Each Trust Fund will be established by Merrill Lynch Mortgage Investors, Inc.
(the "Depositor"). Each Mortgage 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 (a "Mortgage Asset Seller"), which prior
holder may or may not be the originator of such Mortgage Loan or the issuer of
such MBS and may be an affiliate of the Depositor. The Mortgage Assets will not
be guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under the
heading "--Mortgage Loans," unless otherwise noted, applies equally to mortgage
loans underlying any MBS included in a particular Trust Fund.
MORTGAGE LOANS
GENERAL. The Mortgage Loans will be evidenced by promissory
notes (the "Mortgage Notes") secured by mortgages, deeds of trust or similar
security instruments (the "Mortgages") that create liens on properties (the
"Mortgaged Properties") consisting of (i) residential properties consisting of
five or more rental or cooperatively-owned dwelling units in high-rise, mid-rise
or garden apartment buildings or other residential structures ("Multifamily
Properties") or (ii) office buildings, retail stores, hotels or motels, nursing
homes, hospitals or other health care-related facilities, mobile home parks,
warehouse facilities, mini-warehouse facilities, self-storage facilities,
industrial plants, mixed use or other types of income-producing properties or
unimproved land ("Commercial Properties"). The Multifamily Properties may
include mixed commercial and residential structures and may include apartment
buildings owned by private cooperative housing corporations ("Cooperatives").
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
will create a first priority mortgage lien on a Mortgaged Property. A Mortgage
may create a lien on a borrower's leasehold estate in a property; however,
unless otherwise specified in the related Prospectus Supplement, the term of any
such leasehold will exceed the term of the Mortgage Note by at least two years.
Each Mortgage Loan will have been originated by a person (the "Originator")
other than the Depositor.
If so specified in the related Prospectus Supplement, Mortgage
Assets for a series of Certificates may include Mortgage Loans made on the
security of real estate projects under construction. In that case, the related
Prospectus Supplement will describe the procedures and timing for making
disbursements from construction reserve funds as portions of the related real
estate project are completed. In addition, the Mortgage Assets for a particular
series of Certificates may include Mortgage Loans that are delinquent or
non-performing as of the date such Certificates are issued. In that case, the
related Prospectus Supplement will set forth, as to each such Mortgage Loan,
available information as to the period of such delinquency or non-performance,
any forbearance arrangement then in effect, the condition of the related
Mortgaged Property and the ability of the Mortgaged Property to generate income
to service the mortgage debt.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO THE MORTGAGE
LOANS. Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an
income-producing property is typically dependent upon the successful operation
of such property (that is, its ability to generate income.) Moreover, some or
all of the Mortgage Loans included in a particular Trust Fund may be
non-recourse loans, which means that, absent special facts, recourse in the case
of default will be limited to the Mortgaged Property and such other assets, if
any, that were pledged to secure repayment of the Mortgage Loan.
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Lenders typically look to the Debt Service Coverage Ratio of a
loan secured by income-producing property as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement, "Net Operating Income" means, for
any given period, the total operating revenues derived from a Mortgaged Property
during such period, minus the total operating expenses incurred in respect of
such Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans (including the related Mortgage Loan) secured by liens on the Mortgaged
Property. The Net Operating Income of a Mortgaged Property will fluctuate over
time and may or may not be sufficient to cover debt service on the related
Mortgage Loan at any given time. As the primary source of the operating revenues
of a non-owner occupied income-producing property, rental income (and
maintenance payments from tenant-stockholders of a Cooperative) may be affected
by the condition of the applicable real estate market and/or area economy. In
addition, properties typically leased, occupied or used on a short-term basis,
such as certain health care-related facilities, hotels and motels, and
mini-warehouse and self-storage facilities, tend to be affected more rapidly by
changes in market or business conditions than do properties typically leased for
longer periods, such as warehouses, retail stores, office buildings and
industrial plants. Commercial Properties may be owner-occupied or leased to a
single tenant. Thus, the Net Operating Income of such a Mortgaged Property may
depend substantially on the financial condition of the borrower or the single
tenant, and Mortgage Loans secured by liens on such properties may pose greater
risks than loans secured by liens on Multifamily Properties or on multi-tenant
Commercial Properties.
Increases in operating expenses due to the general economic
climate or economic conditions in a locality or industry segment, such as
increases in interest rates, real estate tax rates, energy costs, labor costs
and other operating expenses, and/or to changes in governmental rules,
regulations and fiscal policies, may also affect the risk of default on a
Mortgage Loan. As may be further described in the related Prospectus Supplement,
in some cases leases of Mortgaged Properties may provide that the lessee, rather
than the borrower/landlord, is responsible for payment of operating expenses
("Net Leases"). However, the existence of such "net of expense" provisions will
result in stable Net Operating Income to the borrower/landlord only to the
extent that the lessee is able to absorb operating expense increases while
continuing to make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage
loan as a measure of risk of loss if a property must be liquidated following a
default. Unless otherwise defined in the related Prospectus Supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then outstanding principal balance of the
Mortgage Loan and the outstanding principal balance of any loan secured by a
lien on the related Mortgaged Property prior to the lien of the related
Mortgage, to (ii) the Value of such Mortgaged Property. The "Value" of a
Mortgaged Property, is generally its fair market value determined in an
appraisal obtained by the originator at the origination of such loan. The lower
the Loan-to-Value Ratio, the greater the percentage of the borrower's equity in
a Mortgaged Property, and thus the greater the cushion provided to the lender
against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an
accurate measure of the risk of liquidation loss in a pool of Mortgage Loans.
For example, 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
determined at loan origination, and will likely continue to fluctuate from time
to time based upon changes in economic conditions and the real estate market.
Moreover, even when current, an appraisal is not necessarily a reliable estimate
of value. Appraised values of income-producing properties are generally based on
the market comparison method (recent resale value of comparable properties at
the date of the appraisal), the cost replacement method (the cost of replacing
the property at such date), the income capitalization method (a projection of
value based upon the property's projected net cash flow), or upon a selection
from or interpolation of the values derived from such methods. Each of these
appraisal methods can present analytical difficulties. It is often difficult to
find truly comparable properties that have recently been sold; the replacement
cost of a property may have
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little to do with its current market value; and income capitalization is
inherently based on inexact projections of income and expense and the selection
of an appropriate capitalization rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of default and
loss risks, is even more difficult.
While the Depositor believes that the foregoing considerations
are important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans there is no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular Mortgage
Loan, they are complete or relevant. See "Risk Factors--Risks Associated with
Certain Mortgage Loans and Mortgaged Properties" and "--Balloon Payments;
Borrower Default".
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Unless otherwise
specified in the related Prospectus Supplement, all of the Mortgage Loans will
have had original terms to maturity of not more than 40 years and will provide
for scheduled payments of principal, interest or both, to be made on specified
dates ("Due Dates") that occur monthly, quarterly or semi-annually. A Mortgage
Loan (i) 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 at the borrower's election from an adjustable to a
fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, (ii) may
provide for level payments to maturity or for payments that adjust from time to
time to accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain events, and may permit negative amortization, (iii) may be fully
amortizing over its term to maturity, or may provide for little or no
amortization over its term and thus require a balloon payment on its stated
maturity date, and (iv) may contain a prohibition on prepayment (the period of
such prohibition, a "Lock-out Period" and its date of expiration, a "Lock-out
Expiration 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. A Mortgage Loan may also contain
a provision that entitles the lender to a share of profits realized from the
operation or disposition of the Mortgaged Property (an "Equity Participation"),
as described in the related Prospectus Supplement. If holders of any class or
classes of Offered Certificates of a series will be entitled to all or a portion
of an Equity Participation, the related Prospectus Supplement will describe the
Equity Participation and the method or methods by which distributions in respect
thereof will be made to such holders.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. Each
Prospectus Supplement will contain certain information pertaining to the
Mortgage Loans which will generally be current as of a date specified in the
related Prospectus Supplement and which, to the extent then applicable and
specifically known to the Depositor, will include the following: (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans, (ii) the type or types of
property that provide security for repayment of the Mortgage Loans, (iii) the
original and remaining terms to maturity of the Mortgage Loans, and the
seasoning of the Mortgage Loans, (iv) the earliest and latest origination date
and maturity date and weighted average original and remaining terms to maturity
of the Mortgage Loans, (v) the original Loan-to-Value Ratios 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 geographic
distribution of the Mortgaged Properties on a state-by-state basis, (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 or indices upon which such adjustments are based, the
adjustment dates, the range of gross margins and the weighted average gross
margin, and any limits on Mortgage Rate adjustments at the time of any
adjustment and over the life of the ARM Loan, (x) Debt Service Coverage Ratios
either at origination or as of a more recent date (or both) and (xi) information
regarding the payment characteristics of the Mortgage Loans, including without
limitation balloon payment and other amortization provisions. In appropriate
cases, the related Prospectus Supplement will also contain certain information
available to the Depositor that pertains to the provisions of leases and the
nature of tenants of the Mortgaged Properties. If the Depositor is unable to
tabulate the specific information described above at the time Offered
Certificates of a series are initially offered, more general information of the
nature described above will be provided in the related Prospectus Supplement,
and specific information will be set forth in a report which will be
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available to purchasers of those Certificates at or before the initial issuance
thereof and will be filed as part of a Current Report on Form 8-K with the
Commission within fifteen days following such issuance.
MBS
MBS may include (i) private (that is, not guaranteed or
insured by the United States or any agency or instrumentality thereof) mortgage
participations, mortgage pass-through certificates or other mortgage-backed
securities or (ii) certificates insured or guaranteed by FHLMC, FNMA, GNMA or
FAMC, provided that each MBS will evidence an interest in, or will be secured by
a pledge of, mortgage loans that conform to the descriptions of the Mortgage
Loans contained herein.
Any MBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, an indenture or similar
agreement (an "MBS Agreement"). The issuer (the "MBS Issuer") of the MBS and/or
the servicer (the "MBS Servicer") of the underlying mortgage loans will have
entered into the MBS Agreement, generally with a trustee (the "MBS Trustee") or,
in the alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. 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.
Reserve funds, subordination or other credit support similar
to that described for the Certificates under "Description of Credit Support" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any Rating Agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that
evidence interests in MBS will specify, to the extent available, (i) the
aggregate approximate initial and outstanding principal amount 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) the pass-through or bond rate
of the MBS or the formula for determining such rates, (iv) the payment
characteristics of the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as
applicable, (vi) a description of the credit support, if any, (vii) the
circumstances under which the related underlying mortgage loans, or the MBS
themselves, may be purchased prior to their maturity, (viii) the terms on which
mortgage loans may be substituted for those originally underlying the MBS, (ix)
the servicing fees payable under the MBS Agreement, (x) to the extent available
to the Depositor, the type of information in respect of the underlying mortgage
loans described under "--Mortgage Loans--Mortgage Loan Information in Prospectus
Supplements" and (xi) the characteristics of any cash flow agreements that
relate to the MBS.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts
(collectively, the "Certificate Account") established and maintained on behalf
of the Certificateholders 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 Mortgage Assets and other assets in the Trust Fund. A
Certificate 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.
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CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial
or full protection against certain defaults and losses on the Mortgage Assets in
the related Trust Fund may be provided to one or more classes of Certificates in
the related series in the form of subordination of one or more other classes of
Certificates in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee or reserve fund, among
others, or by a combination thereof (any such coverage with respect to the
Certificates of any series, "Credit Support"). The amount and types of Credit
Support, the identity of the entity providing it (if applicable) and related
information with respect to each type of Credit Support, if any, will be set
forth in the Prospectus Supplement for the Offered Certificates of each series.
See "Risk Factors--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 designed to reduce the
effects of interest rate or currency exchange rate fluctuations on the Mortgage
Assets on one or more classes of Certificates. The principal terms of any such
guaranteed investment contract or other agreement (any such agreement, a "Cash
Flow Agreement"), and the identity of the Cash Flow Agreement obligor, will be
described in the related Prospectus Supplement.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price
paid by the Certificateholder, the Pass-Through Rate of the Certificate and the
amount and timing of distributions on the Certificate. See "Risk
Factors--Prepayments; Average Life of Certificates; Yields". The following
discussion contemplates a Trust Fund that consists solely of Mortgage Loans.
While the characteristics and behavior of mortgage loans underlying MBS can
generally be expected to have the same effect on the yield to maturity and/or
weighted average life of a Class of Certificates as will the characteristics and
behavior of comparable Mortgage Loans, the effect may differ due to the payment
characteristics of the MBS. If a Trust Fund includes MBS, the related Prospectus
Supplement will discuss the effect that the MBS payment characteristics may have
on the yield to maturity and weighted average lives of the Offered Certificates
offered thereby.
PASS-THROUGH RATE
The Certificates of any class within a series may have a
fixed, variable or adjustable PassThrough Rate, which may or may not be based
upon the interest rates borne by the Mortgage Loans in the related Trust Fund.
The Prospectus Supplement with respect to the Offered Certificates of any series
will specify the Pass-Through Rate for each class of such Certificates or, in
the case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Loan on the Pass-Through Rate of one
or more classes of Offered Certificates; and whether the distributions of
interest on the Offered Certificates of any class will be dependent, in whole or
in part, on the performance of any obligor under a Cash Flow Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time
will elapse between the date upon which payments on the Mortgage Loans in the
related Trust Fund are due and the Distribution Date on which such payments are
passed through to Certificateholders. That delay will effectively reduce the
yield that would otherwise be produced if payments on such Mortgage Loans were
distributed to Certificateholders on or near the date they were due.
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CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a
Mortgage Loan, the borrower is generally charged interest only for the period
from the Due Date of the preceding scheduled payment up to the date of such
prepayment, instead of for the full accrual period, that is, the period from the
Due Date of the preceding scheduled payment up to the Due Date for the next
scheduled payment. However, interest accrued on any series of Certificates and
distributable thereon on any Distribution Date will generally correspond to
interest accrued on the principal balance of Mortgage Loans for their respective
full accrual periods. Consequently, if a prepayment on any Mortgage Loan is
distributable to Certificateholders on a particular Distribution Date, but such
prepayment is not accompanied by interest thereon for the full accrual period,
the interest charged to the borrower (net of servicing and administrative fees)
may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the
Certificates of the related series. If and to the extent that any such shortfall
is allocated to a class of Offered Certificates, the yield thereon will be
adversely affected. The Prospectus Supplement for a series of Certificates will
describe the manner in which any such shortfalls will be allocated among the
classes of such Certificates. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to apply some or all of its
servicing compensation for the corresponding period to offset the amount of any
such shortfalls. The related Prospectus Supplement will also describe any other
amounts available to offset such shortfalls. See "Description of the Pooling
Agreements--Servicing Compensation and Payment of Expenses".
YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate
of principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or Notional Amount, if
applicable) of such Certificate. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules thereof (which, in
the case of ARM Loans, will change periodically to accommodate adjustments to
their Mortgage Rates), the dates on which any balloon payments are due, and the
rate of principal prepayments thereon (including for this purpose, prepayments
resulting from liquidations of Mortgage Loans due to defaults, casualties or
condemnations affecting the Mortgaged Properties, or purchases of Mortgage Loans
out of the Trust Fund). Because the rate of principal prepayments on the
Mortgage Loans in any Trust Fund will depend on future events and a variety of
factors (as discussed more fully below), it is impossible to predict with
assurance.
The extent to which the yield to maturity of a class of
Offered Certificates of any series may vary from the anticipated yield will
depend upon the degree to which they are purchased at a discount or premium and
when, and to what degree, payments of principal on the Mortgage Loans in the
related Trust Fund are in turn distributed on such Certificates (or, in the case
of a class of Stripped Interest Certificates, result in the reduction of the
Notional Amount thereof). Further, an investor should consider, in the case of
any Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the related
Trust Fund could result in an actual yield to such investor that is lower than
the anticipated yield and, in the case of any Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a prepayment of principal on the
Mortgage Loans is distributed on an Offered Certificate purchased at a discount
or premium (or, if applicable, is allocated in reduction of the Notional Amount
thereof), the greater will be the effect on the investor's yield to maturity. As
a result, the effect on such investor's yield of principal payments (to the
extent distributable in reduction of the principal balance or Notional Amount of
such investor's Offered Certificates) occurring at a rate higher (or lower) than
the rate anticipated by the investor during any particular period would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
A class of Certificates, including a class of Offered
Certificates, may provide that on any Distribution Date the holders of such
Certificates are entitled to a PRO RATA share of the prepayments (including
prepayments occasioned by defaults) on the Mortgage Loans in the related Trust
Fund that are distributable on such date, to a disproportionately large share
(which, in some cases, may be all) of such prepayments, or
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to a disproportionately small share (which, in some cases, may be none) of such
prepayments. As and to the extent described in the related Prospectus
Supplement, the respective entitlements of the various classes of
Certificateholders of any series to receive payments (and, in particular,
prepayments) of principal of the Mortgage Loans in the related Trust Fund may
vary based on the occurrence of certain events (e.g., the retirement of one or
more classes of Certificates of such series) or subject to certain contingencies
(e.g., prepayment and default rates with respect to such Mortgage Loans).
In general, the Notional Amount of a class of Stripped
Interest Certificates will either (i) be based on the principal balances of some
or all of the Mortgage Assets in the related Trust Fund or (ii) equal the
Certificate Balances of one or more of the other classes of Certificates of the
same series. Accordingly, the yield on such Stripped Interest Certificates will
be directly related to the amortization of such Mortgage Assets or such classes
of Certificates, as the case may be. Thus, if a class of Certificates of any
series consists of Stripped Interest Certificates or Stripped Principal
Certificates, a lower than anticipated rate of principal prepayments on the
Mortgage Loans in the related Trust Fund will negatively affect the yield to
investors in Stripped Principal Certificates, and a higher than anticipated rate
of principal prepayments on such Mortgage Loans will negatively affect the yield
to investors in Stripped Interest Certificates.
The Depositor is not aware of any relevant publicly available
or authoritative statistics with respect to the historical prepayment experience
of a large group of multifamily or commercial mortgage loans. However, the
extent of prepayments of principal of the Mortgage Loans in any Trust Fund may
be affected by a number of factors, including, without limitation, the
availability of mortgage credit, the relative economic vitality of the area in
which the Mortgaged Properties are located, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage Loans, possible changes in
tax laws and other opportunities for investment. In addition, the rate of
principal payments on the Mortgage Loans in any Trust Fund may be affected by
the existence of Lock-out Periods and requirements that principal prepayments be
accompanied by Prepayment Premiums, and by the extent to which such provisions
may be practicably enforced.
The rate of prepayment on a pool of mortgage loans is also
affected by prevailing market interest rates for mortgage loans of a comparable
type, term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. In addition, as prevailing market interest rates decline, even
borrowers with ARM Loans that have experienced a corresponding interest rate
decline may have an increased incentive to refinance for purposes of either (i)
converting to a fixed rate loan and thereby "locking in" such rate or (ii)
taking advantage of the initial "teaser rate" (a mortgage interest rate below
what it would otherwise be if the applicable index and gross margin were
applied) on another adjustable rate mortgage loan.
Depending on prevailing market interest rates, the outlook for
market interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. The Depositor
will make no representation as to the particular factors that will affect the
prepayment of the Mortgage Loans in any Trust Fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment on such Mortgage Loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the
Mortgage Loans in any Trust Fund will affect the ultimate maturity and the
weighted average life of one or more classes of the Certificates of such series.
Weighted average life refers to the average amount of time that will elapse from
the date of issuance of an instrument until each dollar of the principal amount
of such instrument is repaid to the investor.
The weighted average life and maturity of a class of
Certificates of any series will be influenced by the rate at which principal on
the related Mortgage Loans, whether in the form of scheduled
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amortization or prepayments (for this purpose, the term "prepayment" includes
voluntary prepayments, liquidations due to default and purchases of Mortgage
Loans out of the related Trust Fund), is paid to such class. Prepayment rates on
loans are 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. CPR represents an assumed constant rate of
prepayment each month (expressed as an annual percentage) relative to the then
outstanding principal balance of a pool of loans for the life of such loans. SPA
represents an assumed variable rate of prepayment each month (expressed as an
annual percentage) relative to the then outstanding principal balance of a pool
of loans, with different prepayment assumptions often expressed as percentages
of SPA. For example, a prepayment assumption of 100% of SPA assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of 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 particular pool of
loans. Moreover, the CPR and SPA models were developed based upon historical
prepayment experience for single-family loans. Thus, it is unlikely that the
prepayment experience of the Mortgage Loans included in any Trust Fund will
conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of
Certificates will contain tables, if applicable, setting forth the projected
weighted average life of each class of Offered Certificates of such series and
the percentage of the initial Certificate 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
related Mortgage Loans are made at rates corresponding to various percentages of
CPR or SPA, or at such other rates specified in such Prospectus Supplement. Such
tables and assumptions will illustrate the sensitivity of the weighted average
lives of the Certificates to various assumed prepayment rates and will not be
intended to predict, or to provide information that will enable investors to
predict, the actual weighted average lives of the Certificates.
CONTROLLED AMORTIZATION CLASSES AND COMPANION CLASSES
A series of Certificates may include one or more Controlled
Amortization Classes that are designed to provide increased protection against
prepayment risk by transferring that risk to one or more Companion Classes.
Unless otherwise specified in the related Prospectus Supplement, each Controlled
Amortization Class will either be a Planned Amortization Class (a "PAC") or a
Targeted Amortization Class (a "TAC"). In general, distributions of principal on
a PAC are made in accordance with a specified amortization schedule so long as
prepayments on the underlying Mortgage Loans occur within a specified range of
constant prepayment rates and, as described below, so long as one or more
Companion Classes remain to absorb excess cash flows and make up for shortfalls.
For example, if the rate of prepayments is significantly higher than expected,
the excess prepayments may retire the Companion Classes much earlier than
expected, thus leaving the PAC without further prepayment protection. A TAC is
similar to a PAC, but a TAC structure generally does not draw on Companion
Classes to make up cash flow shortfalls, and will generally not provide
protection to the TAC against the risk that prepayments occur more slowly than
expected.
In general, the reduction of prepayment risk afforded to a
Controlled Amortization Class comes at the expense of one or more Companion
Classes of the same series (any of which may also be a class of Offered
Certificates) which absorb a disproportionate share of the overall prepayment
risk of a given structure. As more particularly described in the related
Prospectus Supplement, the holders of a Companion Class will receive a
disproportionately large share of prepayments when the rate of prepayment
exceeds the rate assumed in structuring the Controlled Amortization Class, and
(in the case of a Companion Class that supports a PAC) a disproportionately
small share of prepayments (or no prepayments) when the rate of prepayment falls
below that assumed rate. Thus, as and to the extent described in the related
Prospectus Supplement, a Companion Class will absorb a disproportionate share of
the risk that a relatively fast rate of
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prepayments will result in the early retirement of the investment, that is,
"call risk," and, if applicable, the risk that a relatively slow rate of
prepayments will extend the average life of the investment, that is, "extension
risk" that would otherwise be allocated to the related Controlled Amortization
Class. Accordingly, Companion Classes can exhibit significant average life
variability.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
BALLOON PAYMENTS; EXTENSIONS OF MATURITY. Some or all of the
Mortgage Loans included in a particular Trust Fund may require that balloon
payments be made at maturity. Because the ability of a borrower 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 Mortgage
Loans that require balloon payments may default at maturity, or that the
maturity of such a Mortgage Loan may be extended in connection with a workout.
In the case of defaults, recovery of proceeds may be delayed by, among other
things, bankruptcy of the borrower or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the Master Servicer or a Special Servicer, to the extent and under the
circumstances set forth herein and in the related Prospectus Supplement, may be
authorized to modify Mortgage Loans that are in default or as to which a payment
default is imminent. Any defaulted balloon payment or modification that extends
the maturity of a Mortgage Loan may delay distributions of principal on a class
of Offered Certificates and thereby extend the weighted average life of such
Certificates and, if such Certificates were purchased at a discount, reduce the
yield thereon.
NEGATIVE AMORTIZATION. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization. In general, such Mortgage Loans by their terms limit the amount by
which scheduled payments may adjust in response to changes in Mortgage Rates
and/or provide that scheduled payment amounts will adjust less frequently than
the Mortgage Rates. Accordingly, during a period of rising interest rates, the
scheduled payment on a Mortgage Loan that permits negative amortization may be
less than the amount necessary to amortize the loan fully over its remaining
amortization schedule and pay interest at the then applicable Mortgage Rate. In
that case, the Mortgage Loan balance would amortize more slowly than necessary
to repay it over such schedule and, if the amount of scheduled payment were less
than the amount necessary to pay current interest at the applicable Mortgage
Rate, the loan balance would negatively amortize to the extent of the amount of
the interest shortfall. Conversely, during a period of declining interest rates,
the scheduled payment on such a Mortgage Loan may exceed the amount necessary to
amortize the loan fully over its remaining amortization schedule and pay
interest at the then applicable Mortgage Rate. In that case, the excess would be
applied to principal, thereby resulting in amortization at a rate faster than
necessary to repay the Mortgage Loan balance over such schedule.
A slower or negative rate of Mortgage Loan amortization would
correspondingly be reflected in a slower or negative rate of amortization for
one or more classes of Certificates of the related series. Accordingly, the
weighted average lives of Mortgage Loans that permit negative amortization (and
that of the classes of Certificates to which any such negative amortization
would be allocated or which would bear the effects of a slower rate of
amortization on such Mortgage Loans) may increase as a result of such feature. A
faster rate of Mortgage Loan amortization will shorten the weighted average life
of such Mortgage Loans and, correspondingly, the weighted average lives of those
classes of Certificates then entitled to a portion of the principal payments on
such Mortgage Loans. The related Prospectus Supplement will describe, if
applicable, the manner in which negative amortization in respect of the Mortgage
Loans in any Trust Fund is allocated among the respective classes of
Certificates of the related series.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and
the principal amount of the Mortgage Loans that are foreclosed in relation to
the number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average lives of those Mortgage Loans
and, accordingly, the weighted average lives of and yields on the Certificates
of the related series. Servicing decisions made with respect to the Mortgage
Loans, including the use of payment plans prior to a demand for acceleration and
the restructuring of Mortgage Loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular Mortgage Loans and thus the
weighted average lives of and yields on the Certificates of the related series.
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LOSSES AND SHORTFALLS ON THE MORTGAGE ASSETS. The yield to
holders of the Offered Certificates of any series will directly depend on the
extent to which such holders are required to bear the effects of any losses or
shortfalls in collections arising out of defaults on the Mortgage Loans in the
related Trust Fund and the timing of such losses and shortfalls. In general, the
earlier that any such loss or shortfall occurs, the greater will be the negative
effect on yield for any class of Certificates that is required to bear the
effects thereof.
The amount of any losses or shortfalls in collections on the
Mortgage Assets in any Trust Fund (to the extent not covered or offset by draws
on any reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement, such
allocations may result in reductions in the entitlements to interest and/or
Certificate Balances of one or more such classes of Certificates, or may be
effected simply by a prioritization of payments among such classes of
Certificates. The yield to maturity on a class of Subordinate Certificates may
be extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
ADDITIONAL CERTIFICATE AMORTIZATION. In addition to entitling
the holders thereof to a specified portion (which may range from none to all) of
the principal payments received on the Mortgage Assets in the related Trust
Fund, one or more classes of Certificates of any series, including one or more
classes of Offered Certificates of such series, may provide for distributions of
principal thereof from (i) amounts attributable to interest accrued but not
currently distributable on one or more classes of Accrual Certificates, (ii)
Excess Funds or (iii) any other amounts described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
"Excess Funds" will, in general, represent that portion of the amounts
distributable in respect of the Certificates of any series on any Distribution
Date that represent (i) interest received or advanced on the Mortgage Assets in
the related Trust Fund that is in excess of the interest currently distributable
on the Certificates of such series, as well as any interest accrued but not
currently distributable on any Accrual Certificates of such series, or (ii)
Prepayment Premiums, payments from Equity Participations or any other amounts
received on the Mortgage Assets in the related Trust Fund that do not constitute
interest thereon or principal thereof.
The amortization of any class of Certificates out of the
sources described in the preceding paragraph would shorten the weighted average
life of such Certificates and, if such Certificates were purchased at a premium,
reduce the yield thereon. The related Prospectus Supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of Certificates out of such sources would have any
material effect on the rate at which such Certificates are amortized.
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a
Delaware corporation organized on June 13, 1986 as a wholly-owned limited
purpose finance subsidiary of Merrill Lynch Mortgage Capital Inc. (a
wholly-owned indirect subsidiary of Merrill Lynch & Co.). The Depositor
maintains its principal office at World Financial Center, North Tower-Fifteenth
Floor, 250 Vesey Street, New York, New York 10281- 1315. Its telephone number is
(212) 449-0336. The Depositor does not have, nor is it expected in the future to
have, any significant assets.
USE OF PROCEEDS
The net proceeds to be received from the sale of the
Certificates of any series will be applied by the Depositor to the purchase of
Trust Assets or will be used by the Depositor for general corporate purposes.
The Depositor expects to sell the Certificates from time to time, but the timing
and amount of offerings of Certificates will depend on a number of factors,
including the volume of Mortgage Assets acquired by the Depositor, prevailing
interest rates, availability of funds and general market conditions.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series will consist of one or more
classes and will represent the entire beneficial ownership interest in the Trust
Fund created pursuant to the related Pooling Agreement. Each series of
Certificates may consist of one or more classes of Certificates (including
classes of Offered Certificates) that (i) provide for the accrual of interest
thereon at a fixed, variable or adjustable rate; (ii) are senior (collectively,
"Senior Certificates") or subordinate (collectively, "Subordinate Certificates")
to one or more other classes of Certificates in entitlement to certain
distributions on the Certificates; (iii) are entitled to distributions of
principal, with disproportionately small, nominal or no distributions of
interest (collectively, "Stripped Principal Certificates"); (iv) are entitled to
distributions of interest, with disproportionately small, nominal or no
distributions of principal (collectively, "Stripped Interest Certificates"); (v)
provide for distributions of principal and/or interest thereon that commence
only after the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; (vi) provide for
distributions of principal to be made, from time to time or for designated
periods, at a rate that is faster (and, in some cases, substantially faster) or
slower (and, in some cases, substantially slower) than the rate at which
payments or other collections of principal are received on the Mortgage Assets
in the related Trust Fund; or (vii) provide for distributions of principal to be
made, subject to available funds, based on a specified principal payment
schedule or other methodology.
Each class of Offered Certificates of a series will be issued
in minimum denominations corresponding to the Certificate Balances or, in case
of Stripped Interest Certificates or REMIC Residual Certificates, Notional
Amounts or percentage interests, specified in the related Prospectus Supplement.
As provided in the related Prospectus Supplement, one or more classes of Offered
Certificates of any series may be issued in fully registered, definitive form
(such Certificates, "Definitive Certificates") or may be offered in book-entry
format (such Certificates, "Book-Entry Certificates") through the facilities of
The Depository Trust Company ("DTC"). The Offered Certificates of each series
(if issued as Definitive Certificates) may be transferred or exchanged, subject
to any restrictions on transfer described in the related Prospectus Supplement,
at the location specified in the related Prospectus Supplement, without the
payment of any service charge, other than any tax or other governmental charge
payable in connection therewith. Interests in a class of Book-Entry Certificates
will be transferred on the book-entry records of DTC and its participating
organizations. See "Risk Factors--Limited Liquidity", "--Limited Assets" and
"--Book-Entry Registration".
DISTRIBUTIONS
Distributions on the Certificates of each series will be made
by or on behalf of the related Trustee or Master Servicer on each Distribution
Date as specified in the related Prospectus Supplement from the Available
Distribution Amount for such series and such Distribution Date. Unless otherwise
provided in the related Prospectus Supplement, the "Available Distribution
Amount" for any series of Certificates and any Distribution Date will refer to
the total of all payments or other collections (or advances in lieu thereof) on,
under or in respect of the Mortgage Assets and any other assets included in the
related Trust Fund that are available for distribution to the Certificateholders
of such series on such date. The particular components of the Available
Distribution Amount for any series on each Distribution Date will be more
specifically described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus
Supplement, distributions on the Certificates of each series (other than the
final distribution in retirement of any such Certificate) will be made to the
persons in whose names such Certificates are registered at the close of business
on the last business day of the month preceding the month in which the
applicable Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated PRO RATA among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has
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provided the Trustee or other person required to make such payments with wiring
instructions (which may be provided in the form of a standing order applicable
to all subsequent distributions) no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus Supplement,
such Certificateholder holds Certificates in the requisite amount or
denomination specified therein), or by check mailed to the address of such
Certificateholder as it appears on the Certificate Register; provided, however,
that the final distribution in retirement of any class of Certificates (whether
Definitive Certificates or BookEntry Certificates) will be made only upon
presentation and surrender of such Certificates at the location specified in the
notice to Certificateholders of such final distribution.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain
classes of Stripped Principal Certificates and certain REMIC Residual
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which may be fixed, variable or adjustable. The related Prospectus
Supplement will specify the Pass-Through Rate or, in the case of a variable or
adjustable Pass-Through Rate, the method for determining the Pass-Through Rate,
for each class. Unless otherwise specified in the related Prospectus Supplement,
interest on the Certificates of each series will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of
any class (other than any class of Certificates that will be entitled to
distributions of accrued interest commencing only on the Distribution Date, or
under the circumstances, specified in the related Prospectus Supplement
("Accrual Certificates"), and other than any class of Stripped Principal
Certificates or REMIC Residual Certificates that is not entitled to any
distributions of interest) will be made on each Distribution Date based on the
Accrued Certificate 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 Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates (other than certain classes of Stripped Interest
Certificates and REMIC Residual Certificates), "Accrued Certificate Interest"
for each Distribution Date will be equal to interest at the applicable
PassThrough Rate accrued for a specified period (generally the period between
Distribution Dates) on the outstanding Certificate Balance thereof immediately
prior to such Distribution Date. Unless otherwise provided in the related
Prospectus Supplement, Accrued Certificate Interest for each Distribution Date
on Stripped Interest Certificates will be similarly calculated except that it
will accrue on a notional amount (a "Notional Amount") that is either (i) based
on the principal balances of some or all of the Mortgage Assets in the related
Trust Fund or (ii) equal to the Certificate Balances of one or more other
classes of Certificates of the same series. Reference to a Notional Amount with
respect to a class of Stripped Interest Certificates is solely for convenience
in making certain calculations and does not represent the right to receive any
distributions of principal. If so specified in the related Prospectus
Supplement, the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise be
added to the Certificate Balance of) one or more classes of the Certificates of
a series will be reduced to the extent that any Prepayment Interest Shortfalls,
as described under "Yield and Maturity Considerations--Certain Shortfalls in
Collections of Interest", exceed the amount of any sums (including, if and to
the extent specified in the related Prospectus Supplement, the Master Servicer's
servicing compensation) that are applied to offset such shortfalls. The
particular manner in which such shortfalls will be allocated among some or all
of the classes of Certificates 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 Certificates, that may otherwise be
added to the Certificate Balance of) a class of Offered Certificates may be
reduced as a result of any other contingencies, including delinquencies, losses
and deferred interest on or in respect of the Mortgage Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Certificate Interest otherwise distributable
on a class of Certificates by reason of the allocation to such class of a
portion of any deferred interest on or in respect of the Mortgage Assets in the
related Trust Fund will result in a corresponding increase in the Certificate
Balance of such class. See "Risk Factors--Prepayments; Average Life of
Certificates; Yields" and "Yield and Maturity Considerations".
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DISTRIBUTIONS OF CERTIFICATE PRINCIPAL
Each class of Certificates of each series (other than certain
classes of Stripped Interest Certificates of REMIC Residual Certificates) will
have a "Certificate Balance" which, at any time, will equal the then maximum
amount that the holders of Certificates of such class will be entitled to
receive in respect of principal out of the future cash flow on the Mortgage
Assets and other assets included in the related Trust Fund. The outstanding
Certificate Balance of a class of Certificates will be reduced by distributions
of principal made thereon from time to time and, if so provided in the related
Prospectus Supplement, further by any losses incurred in respect of the related
Mortgage Assets allocated thereto from time to time. In turn, the outstanding
Certificate Balance of a class of Certificates may be increased as a result of
any deferred interest on or in respect of the related Mortgage Assets that is
allocated thereto from time to time, and will be increased, in the case of a
class of Accrual Certificates prior to the Distribution Date on which
distributions of interest thereon are required to commence, by the amount of any
Accrued Certificate Interest in respect thereof (reduced as described above).
Unless otherwise provided in the related Prospectus Supplement, the initial
aggregate Certificate Balance of all classes of a series of Certificates will
not be greater than the aggregate outstanding principal balance of the related
Mortgage Assets as of the applicable Cut-off Date, after application of
scheduled payments due on or before such date, whether or not received. As and
to the extent described in the related Prospectus Supplement, distributions of
principal with respect to a series of Certificates will be made on each
Distribution Date to the holders of the class or classes of Certificates of such
series entitled thereto until the Certificate Balances of such Certificates have
been reduced to zero. Distributions of principal with respect to one or more
classes of Certificates may be made at a rate that is faster (and, in some
cases, substantially faster) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund, may not commence until the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of the same series, or
may be made at a rate that is slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are received
on such Mortgage Assets. In addition, distributions of principal with respect to
one or more classes of Certificates (each such class, a "Controlled Amortization
Class") may be made, subject to available funds, based on a specified principal
payment schedule and, with respect to one or more classes of Certificates (each
such class, a "Companion Class"), may be contingent on the specified principal
payment schedule for a Controlled Amortization Class of the same series and the
rate at which payments and other collections of principal on the Mortgage Assets
in the related Trust Fund are received. Unless otherwise specified in the
related Prospectus Supplement, distributions of principal of any class of
Certificates will be made on a PRO RATA basis among all of the Certificates of
such class.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement,
Prepayment Premiums or payments in respect of Equity Participations received on
or in connection with the Mortgage Assets in any Trust Fund will be distributed
on each Distribution Date to the holders of the class of Certificates of the
related series entitled thereto in accordance with the provisions described in
such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the
Mortgage Assets in any Trust Fund (to the extent not covered or offset by draws
on any reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement, such
allocations may result in reductions in the entitlements to interest and/or in
the Certificate Balances of one or more such classes of Certificates, or may be
effected simply by a prioritization of payments among such classes of
Certificates.
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ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus
Supplement, the related Master Servicer and/or other specified person (including
a provider of Credit Support) may be obligated to advance, or have the option of
advancing, on or before each Distribution Date, from its or their own funds or
from excess funds held in the related Certificate Account that are not part of
the Available Distribution Amount for the related series of Certificates for
such Distribution Date, an amount up to the aggregate of any payments of
principal (other than any balloon payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date. Unless otherwise provided in the related
Prospectus Supplement, a "Due Period" is the period between Distribution Dates,
and scheduled payments on the Mortgage Loans in any Trust Fund that became due
during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related Master Servicer or other specified
person, be distributed on the Distribution Date next succeeding such
Determination Date.
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. Accordingly, all advances made from the advancing person's own funds
will be reimbursable out of related recoveries on the Mortgage Loans (including
amounts received under any instrument of Credit Support) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and such other
specific sources as may be identified in the related Prospectus Supplement,
including in the case of a series that includes one or more classes of
Subordinate Certificates, collections on other Mortgage Loans in the related
Trust Fund that would otherwise be distributable to the holders of one or more
classes of such Subordinate Certificates. No advance will be required to be made
by the Master Servicer or by any other person if, in the good faith judgment of
the Master Servicer or such other person, such advance would not be recoverable
from Related Proceeds or another specifically identified source (any such
advance, a "Nonrecoverable Advance"); and, if previously made by a Master
Servicer or another person, a Nonrecoverable Advance will be reimbursable from
any amounts in the related Certificate Account prior to any distributions being
made to the related series of Certificateholders.
If advances have been made from excess funds in a Certificate
Account, the Master Servicer or other person that advanced such funds will be
required to replace such funds in the Certificate Account on any future
Distribution Date to the extent that funds then in the Certificate Account are
insufficient to permit full distributions to Certificateholders on such date. If
so specified in the related Prospectus Supplement, the obligation of a Master
Servicer or other specified person to make advances may be secured by a cash
advance reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus
Supplement, any entity making advances will be entitled to receive interest
thereon for the period that such advances are outstanding at the rate specified
in such Prospectus Supplement, and such entity will be entitled to payment of
such interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Certificateholders or as otherwise
provided in the related Pooling Agreement and described in such Prospectus
Supplement.
The Prospectus Supplement for any series of Certificates
evidencing an interest in a Trust Fund that includes MBS will describe any
comparable advancing obligation of a party to the related Pooling Agreement or
of a party to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to
the holders of each class of the Offered Certificates of a series, a Master
Servicer or Trustee, as provided in the related Prospectus Supplement, will
forward to each such holder, a statement (a "Distribution Date Statement") that,
unless otherwise provided in the related Prospectus Supplement, will set forth,
among other things, in each case to the extent applicable:
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(i) the amount of such distribution to holders of
Certificates of such class that was applied to reduce the
Certificate Balance thereof;
(ii) the amount of such distribution to holders of
Certificates of such class that is allocable to Accrued
Certificate Interest;
(iii) the amount, if any, of such distribution to
holders of Certificates of such class that is allocable to (A)
Prepayment Premiums and (B) payments on account of Equity
Participations;
(iv) the amount of servicing compensation received by
the related Master Servicer (and, if payable directly out of
the related Trust Fund, by any Special Servicer and any
SubServicer) and such other customary information as such
Master Servicer or the related Trustee, as the case may be,
deems necessary or desirable, or that a Certificateholder
reasonably requests, to enable Certificateholders 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 related
Mortgage Loans on, or as of a specified date shortly prior to,
such Distribution Date;
(vii) the number and aggregate principal balance of
any Mortgage Loans 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 each Mortgage Loan that is
delinquent in respect of three or more scheduled payments, (A)
the loan number thereof, (B) the unpaid balance thereof, (C)
whether the delinquency is in respect of any balloon payment,
(D) the aggregate amount of unreimbursed servicing expenses
and unreimbursed advances in respect thereof, (E) if
applicable, the aggregate amount of any interest accrued and
payable to the related Master Servicer, a Special Servicer
and/or any other entity on related servicing expenses and
related advances, (F) whether a notice of acceleration has
been sent to the borrower and, if so, the date of such notice
and (G) a brief description of the status of any foreclosure
proceedings or negotiations with the borrower;
(ix) with respect to any Mortgage Loan liquidated
during the related Prepayment Period (that is, the specified
period, generally equal in length to the time period between
Distribution Dates, during which prepayments and other
unscheduled collections on the Mortgage Loans in the related
Trust Fund must be received in order to be distributed on a
particular Distribution Date) in connection with a default
thereon or by reason of being purchased out of the related
Trust Fund, (A) the loan number thereof, (B) the manner in
which it was liquidated, (C) the aggregate amount of
Liquidation Proceeds received, (D) the portion of such
Liquidation Proceeds payable or reimbursable to the related
Master Servicer or a Special Servicer in respect of such
Mortgage Loan and (E) the amount of any loss to
Certificateholders;
(x) with respect to each Mortgaged Property acquired
through foreclosure, deed-inlieu of foreclosure or otherwise
(an "REO Property") and included in the related Trust Fund as
of the end of the related Due Period or Prepayment Period, as
applicable, (A) the loan number of the related Mortgage Loan,
(B) the date of acquisition, (C) the principal balance of the
related Mortgage Loan (calculated as if such Mortgage Loan
were still outstanding taking into account certain limited
modifications to the terms thereof specified in the related
Pooling Agreement), (D) the aggregate amount of unreimbursed
servicing
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expenses and unreimbursed advances in respect thereof and (E)
if applicable, the aggregate amount of interest accrued and
payable to the related Master Servicer, a Special Servicer
and/or any other entity on related servicing expenses and
related advances;
(xi) with respect to any REO Property sold during the
related Prepayment Period, (A) the loan number of the related
Mortgage Loan, (B) the aggregate amount of sales proceeds, (C)
the portion of such sales proceeds payable or reimbursable to
the related Master Servicer or a Special Servicer in respect
of such REO Property or the related Mortgage Loan and (D) the
amount of any loss to Certificateholders in respect of the
related Mortgage Loan;
(xii) the Certificate Balance or Notional Amount, as
the case may be, of each class of Certificates (including any
class of Certificates not offered hereby) at the close of
business on such Distribution Date, separately identifying any
reduction in such Certificate Balance due to the allocation of
any losses in respect of the related Mortgage Loans and any
increase in the Certificate Balance of a class of Accrual
Certificates in the event that Accrued Certificate Interest
has been added to such balance;
(xiii) the aggregate amount of principal prepayments
made on the Mortgage Loans during the related Prepayment
Period;
(xiv) the amount deposited in or withdrawn from any
reserve fund on such Distribution Date, and the amount
remaining on deposit in such reserve fund as of the close of
business on such Distribution Date;
(xv) the amount of any Accrued Certificate Interest
due but not paid on such class of Offered Certificates at the
close of business on such Distribution Date;
(xvi) if such class of Offered Certificates has a
variable Pass-Through Rate or an adjustable Pass-Through Rate,
the Pass-Through Rate applicable thereto for such Distribution
Date and, if determinable, for the next succeeding
Distribution Date; and
(xvii) if the related Trust Fund includes one or more
instruments of Credit Support, such as a letter of credit, an
insurance policy and/or a surety bond, the amount of coverage
under each such instrument as of the close of business on such
Distribution Date.
In the case of information furnished pursuant to subclauses
(i)-(iv) above, the amounts will be expressed as a dollar amount per minimum
denomination of the relevant class of Offered Certificates or per a specified
portion of such minimum denomination. The Prospectus Supplement for each series
of Offered Certificates will describe any additional information to be included
in reports to the holders of such Certificates.
Within a reasonable period of time after the end of each
calendar year, the related Master Servicer or Trustee, as the case may be, will
be required to furnish to each person who at any time during the calendar year
was a holder of an Offered Certificate a statement containing 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 Certificateholder.
Such obligation will be deemed to have been satisfied to the extent that
substantially comparable information is provided pursuant to any requirements of
the Code as are from time to time in force. See, however, "Description of the
Certificates--Book-Entry Registration and Definitive Certificates".
If the Trust Fund for a series of Certificates includes MBS,
the ability of the related Master Servicer or Trustee, as the case may be, to
include in any Distribution Date Statement information regarding the mortgage
loans underlying such MBS will depend on the reports received with respect to
such MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the
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Distribution Date Statements that will be forwarded to the holders of the
Offered Certificates of that series in connection with distributions made to
them.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as
to such series, the "Voting Rights") will be allocated among the respective
classes of such series in the manner described in the related Prospectus
Supplement.
Certificateholders will generally have a right to vote only
with respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements--Amendment". The holders of specified
amounts of Certificates of a particular series will have the collective right to
remove the related Trustee and also to cause the removal of the related Master
Servicer in the case of an Event of Default on the part of the Master Servicer.
See "Description of the Pooling Agreements--Events of Default", "--Rights Upon
Event of Default" and "--Resignation and Removal of the Trustee".
TERMINATION
The obligations created by the Pooling Agreement for each
series of Certificates will terminate upon the payment (or provision for
payment) to Certificateholders of that series of all amounts held in the related
Certificate Account, or otherwise by the related Master Servicer or Trustee or
by a Special Servicer, and required to be paid to such Certificateholders
pursuant to such Pooling Agreement following the earlier of (i) the final
payment or other liquidation of the last Mortgage Asset subject thereto or the
disposition of all property acquired upon foreclosure of any Mortgage Loan
subject thereto and (ii) the purchase of all of the assets of the related Trust
Fund by the party entitled to effect such termination, under the circumstances
and in the manner that will be described in the related Prospectus Supplement.
Written notice of termination of a Pooling Agreement will be given to each
Certificateholder of the related series, and the final distribution will be made
only upon presentation and surrender of the Certificates of such series at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series
of Certificates may be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by a party that will be
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
Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount, a party identified therein will be authorized or
required to solicit bids for the purchase of all the assets of the related Trust
Fund, or of a sufficient portion of such assets to retire such class or classes,
under the circumstances and in the manner set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or
more classes of the Offered Certificates of any series will be offered in
book-entry format through the facilities of The Depository Trust Company
("DTC"), and each such class will be represented by one or more global
Certificates registered in the name of DTC or its nominee.
DTC is a limited-purpose trust company organized under the New
York Banking Law, a "banking corporation" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the 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 computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. "Direct Participants", which maintain accounts with
DTC, include securities brokers and dealers (including Merrill Lynch, Pierce,
Fenner & Smith Incorporated), banks, trust companies and clearing corporations
and may include certain other
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organizations. DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the DTC system also
is available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The Rules applicable to
DTC and its Participants are on file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must
be made by or through Direct Participants, which will receive a credit for the
Book-Entry Certificates on DTC's records. The ownership interest of each actual
purchaser of a Book-Entry Certificate (a "Certificate Owner") will in turn be
recorded on the records of Direct and Indirect Participants. Certificate Owners
will not receive written confirmation from DTC of their purchases, but
Certificate Owners are expected to receive written confirmations providing
details of such transactions, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which each Certificate Owner
entered into the transaction. Transfers of ownership interest in the Book-Entry
Certificates will be accomplished by entries made on the books of Participants
acting on behalf of Certificate Owners. Certificate Owners will not receive
certificates representing their ownership interests in the Book-Entry
Certificates, except in the event that use of the book-entry system for the
Book-Entry Certificates of any series is discontinued as described below.
DTC will not know the identity of actual Certificate Owners of
the Book-Entry Certificates; DTC's records reflect only the identity of the
Direct Participants to whose accounts such Certificates are credited. The
Participants will remain responsible for keeping account of their holdings on
behalf of their customers. Notices and other communications conveyed by DTC to
Direct Participants, by Direct Participants to Indirect Participants, and by
Direct Participants and Indirect Participants to Certificate Owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to
DTC. DTC's practice is to credit Direct Participants' accounts on the related
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such date. Disbursement of such distributions by Participants to Certificate
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of each such
Participant (and not of DTC, the Depositor or any Trustee or Master Servicer),
subject to any statutory or regulatory requirements as may be in effect from
time to time. Under a book-entry system, Certificate Owners may receive payments
after the related Distribution Date.
Unless otherwise provided in the related Prospectus
Supplement, the only "Certificateholder" (as such term is used in the related
Pooling Agreement) of a Book-Entry Certificate will be the nominee of DTC, and
the Certificate Owners will not be recognized as Certificateholders under the
Pooling Agreement. Certificate Owners will be permitted to exercise the rights
of Certificateholders under the related Pooling Agreement only indirectly
through the Participants who in turn will exercise their rights through DTC. The
Depositor is informed that DTC will take action permitted to be taken by a
Certificateholder under a Pooling Agreement only at the direction of one or more
Participants to whose account with DTC interests in the BookEntry Certificates
are credited.
Because DTC can act only on behalf of Participants, who in
turn act on behalf of Indirect Participants and certain Certificate Owners, the
ability of a Certificate Owner to pledge its interest in BookEntry Certificates
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of its interest in Book-Entry Certificates, may be
limited due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus
Supplement, Certificates initially issued in book-entry form will be issued in
fully registered, certificated form (as so issued, "Definitive Certificates") to
Certificate Owners or their nominees, 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
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depository with respect to such Certificates 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 with respect to such Certificates.
Upon the occurrence of either of the events described in the preceding sentence,
DTC will be required to notify all Participants of the availability through DTC
of Definitive Certificates. Upon surrender by DTC of the certificate or
certificates representing a class of Book-Entry Certificates, together with
instructions for reregistration, the Trustee or other designated party will be
required to issue to the Certificate Owners identified in such instructions the
Definitive Certificates to which they are entitled, and thereafter the holders
of such Definitive Certificates will be recognized as Certificateholders under
the related Pooling Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a
pooling and servicing agreement or other agreement specified in the related
Prospectus Supplement (in either case, a "Pooling Agreement"). In general, the
parties to a Pooling Agreement will include the Depositor, the Trustee, the
Master Servicer and, in some cases, a Special Servicer appointed as of the date
of the Pooling Agreement. However, a Pooling Agreement that relates to a Trust
Fund that consists solely of MBS may not include a Master Servicer or other
servicer as a party. All parties to each Pooling Agreement under which
Certificates of a series are issued will be identified in the related Prospectus
Supplement.
A form of a Pooling and Servicing Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
However, the provisions of each Pooling Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. The following summaries describe certain provisions that may appear
in a Pooling Agreement under which Certificates that evidence interests in
Mortgage Loans will be issued. The Prospectus Supplement for a series of
Certificates will describe any provision of the related Pooling Agreement that
materially differs from the description thereof contained in this Prospectus
and, if the related Trust Fund includes MBS, will summarize all of the material
provisions of the related Pooling Agreement. The summaries herein 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 Pooling Agreement for each series of
Certificates and the description of such provisions in the related Prospectus
Supplement. As used herein with respect to any series, the term "Certificate"
refers to all of the Certificates 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 Pooling Agreement (without exhibits)
that relates to any series of Certificates without charge upon written request
of a holder of a Certificate of such series addressed to Merrill Lynch Mortgage
Investors, Inc., World Financial Center, North Tower-Fifteenth Floor, 250 Vesey
Street, New York, New York 10281-1315. Attention: Secretary.
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the
Depositor will assign (or cause to be assigned) to the designated Trustee the
Mortgage Loans to be included in the related Trust Fund, together with, unless
otherwise specified in the related Prospectus Supplement, all principal and
interest to be received on or with respect to such Mortgage Loans after the
Cut-off Date, other than principal and interest due on or before the Cut-off
Date. The Trustee will, concurrently with such assignment, deliver the
Certificates to or at the direction of the Depositor in exchange for the
Mortgage Loans and the other assets to be included in the Trust Fund for such
series. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Pooling Agreement. Such schedule generally will include
detailed information that pertains to each Mortgage Loan included in the related
Trust Fund, which information will typically include the address of the related
Mortgaged Property and type of such property; the Mortgage Rate and, if
applicable, the applicable index, gross margin, adjustment date and any rate cap
information; the original and remaining term to maturity; the original
amortization term; the original and outstanding principal balance; and the
Loan-toValue Ratio and Debt Service Coverage Ratio as of the date indicated.
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With respect to each Mortgage Loan to be included in a Trust
Fund, the Depositor will deliver (or cause to be delivered) to the related
Trustee (or to a custodian appointed by the Trustee) certain loan documents
which, unless otherwise specified in the related Prospectus Supplement, will
include the original Mortgage Note endorsed, without recourse, 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. Unless otherwise provided in the related Prospectus
Supplement, the related Pooling Agreement will require that the Depositor or
other party thereto promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records.
The related Trustee (or the custodian appointed by the
Trustee) will be required to review the Mortgage Loan documents within a
specified period of days after receipt thereof, and the Trustee (or the
custodian) will hold such documents in trust for the benefit of the
Certificateholders of the related series. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective, in either case such that interests of the Certificateholders are
materially and adversely affected, the Trustee (or such custodian) will be
required to notify the Master Servicer and the Depositor, and the Master
Servicer will be required to notify the relevant Mortgage Asset Seller. In that
case, and if the Mortgage Asset Seller cannot deliver the document or cure the
defect within a specified number of days after receipt of such notice, then
unless otherwise specified in the related Prospectus Supplement, the Mortgage
Asset Seller will be obligated to replace the related Mortgage Loan or
repurchase it from the Trustee at a price that will be specified in the related
Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus
Supplement, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign certain representations and warranties, (the
person making such representations and warranties, the "Warranting Party")
covering, by way of example: (i) the accuracy of the information set forth for
such Mortgage Loan on the schedule of Mortgage Loans appearing as an exhibit to
the related Pooling Agreement; (ii) the enforceability of the related Mortgage
Note and Mortgage and the existence of title insurance insuring the lien
priority of the related Mortgage; (iii) the Warranting Party's title to the
Mortgage Loan and the authority of the Warranting Party to sell the Mortgage
Loan; and (iv) the payment status of the Mortgage Loan. Each Warranting Party
will be identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus
Supplement, each Pooling Agreement will provide that the Master Servicer and/or
Trustee will be required to notify promptly any Warranting Party of any breach
of any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the related
Certificateholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will be
obligated to repurchase such Mortgage Loan from the Trustee within a specified
period at a price that will be specified in the related Prospectus Supplement.
If so provided in the Prospectus Supplement for a series of Certificates, a
Warranting Party, in lieu of repurchasing a Mortgage Loan as to which a breach
has occurred, will have the option, exercisable upon certain conditions and/or
within a specified period after initial issuance of such series of Certificates,
to replace such Mortgage Loan with one or more other mortgage loans, in
accordance with standards that will be described in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, this repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates of any series for a breach of representation and warranty by a
Warranting Party. Moreover, neither the Depositor (unless it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or replace a
Mortgage Loan if a Warranting Party defaults on its obligation to do so.
The dates as of which representations and warranties have been
made by a Warranting Party will be specified in the related Prospectus
Supplement. In some cases, such representations and warranties will have been
made as of a date prior to the date upon which the related series of
Certificates is issued, and thus may not address events that may occur following
the date as of which they were made. However, the Depositor will not include any
Mortgage Loan in the Trust Fund for any series of Certificates if anything has
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come to the Depositor's attention that would cause it to believe that the
representations and warranties made in respect of such Mortgage Loan will not be
accurate in all material respects as of such date of issuance.
CERTIFICATE ACCOUNT
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 Mortgage Loans (collectively, the "Certificate Account"), which will be
established so as to comply with the standards of each Rating Agency that has
rated any one or more classes of Certificates of the related series. As
described in the related Prospectus Supplement, a Certificate Account may be
maintained either as an interest-bearing or a non-interest-bearing account, and
the funds held therein may be held as cash or invested in United States
government securities and other investment grade obligations specified in the
related Pooling Agreement ("Permitted Investments"). Unless otherwise provided
in the related Prospectus Supplement, any interest or other income earned on
funds in the Certificate Account will be paid to the related Master Servicer or
Trustee as additional compensation. If permitted by such Rating Agency or
Agencies and so specified in the related Prospectus Supplement, a Certificate
Account may contain funds relating to more than one series of mortgage
pass-through certificates and may contain other funds representing payments on
mortgage loans owned by the related Master Servicer or serviced by it on behalf
of others.
DEPOSITS. Unless otherwise provided in the related Pooling
Agreement and described in the related Prospectus Supplement, the related Master
Servicer, Trustee or Special Servicer will be required to deposit or cause to be
deposited in the Certificate Account for each Trust Fund within a certain period
following receipt (in the case of collections and payments), the following
payments and collections received, or advances made, by the Master Servicer, the
Trustee or any Special Servicer subsequent to the Cut-off Date (other than
payments due on or before the Cut-off Date):
(i) all payments on account of principal, including
principal prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the
Mortgage Loans, including any default interest collected, in
each case net of any portion thereof retained by the Master
Servicer, any Special Servicer or Sub-Servicer as its
servicing compensation or as compensation to the Trustee;
(iii) all proceeds received under any hazard, title
or other insurance policy that provides coverage with respect
to a Mortgaged Property or the related Mortgage Loan (other
than proceeds applied to the restoration of the property or
released to the related borrower in accordance with the
customary servicing practices of the Master Servicer (or, if
applicable, a Special Servicer) and/or the terms and
conditions of the related Mortgage (collectively, "Insurance
Proceeds") and all other amounts received and retained in
connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or
otherwise ("Liquidation Proceeds"), together with the net
operating income (less reasonable reserves for future
expenses) derived from the operation of any Mortgaged
Properties acquired by the Trust Fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn
from any fund that constitutes Credit Support for the related
series of Certificates as described under "Description of
Credit Support";
(v) any advances made as described under "Description
of the Certificates--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";
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(vii) all proceeds of the purchase of any Mortgage
Loan, or property acquired in respect thereof, by the
Depositor, any Mortgage Asset Seller or any other specified
person as described under "--Assignment of Mortgage Loans;
Repurchases" and "--Representations and Warranties;
Repurchases", all proceeds of the purchase of any defaulted
Mortgage Loan as described under "--Realization Upon Defaulted
Mortgage Loans", and all proceeds of any Mortgage Asset
purchased as described under "Description of the
Certificates--Termination" (all of the foregoing, also,
"Liquidation Proceeds");
(viii) any amounts paid by the Master Servicer to
cover Prepayment Interest Shortfalls arising out of the
prepayment of Mortgage Loans as described under "--Servicing
Compensation and Payment of Expenses";
(ix) to the extent that any such item does not
constitute additional servicing compensation to the Master
Servicer or a Special Servicer, any payments on account of
modification or assumption fees, late payment charges,
Prepayment Premiums or Equity Participations on the Mortgage
Loans;
(x) all payments required to be deposited in the
Certificate 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 the
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
Certificate Account; and
(xii) any other amounts required to be deposited in
the Certificate Account as provided in the related Pooling
Agreement and described in the related Prospectus Supplement.
WITHDRAWALS. Unless otherwise provided in the related Pooling
Agreement and described in the related Prospectus Supplement, a Master Servicer,
Trustee or Special Servicer may make withdrawals from the Certificate Account
for each Trust Fund for any of the following purposes:
(i) to make distributions to the Certificateholders
on each Distribution Date;
(ii) to reimburse the Master Servicer or any other
specified person for unreimbursed amounts advanced by it as
described under "Description of the Certificates--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) on and principal of the particular
Mortgage Loans with respect to which the advances were made or
out of amounts drawn under any form of Credit Support with
respect to such Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special
Servicer for unpaid servicing fees earned by it and certain
unreimbursed servicing expenses incurred by it with respect to
Mortgage Loans in the Trust Fund 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 Mortgage Loans 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 Mortgage Loans and properties;
(iv) to reimburse the Master Servicer or any other
specified person for any advances described in clause (ii)
above made by it and any servicing expenses referred to in
clause (iii) above incurred by it which, in the good faith
judgment of the Master Servicer or such other
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person, will not be recoverable from the amounts described in
clauses (ii) and (iii), respectively, such reimbursement to be
made from amounts collected on other Mortgage Loans in the
related Trust Fund or, if and to the extent so provided by the
related Pooling Agreement and described in the related
Prospectus Supplement, only from that portion of amounts
collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate
Certificates of the related series;
(v) if and to the extent described in the related
Prospectus Supplement, to pay the Master Servicer, a Special
Servicer or another specified entity (including a provider of
Credit Support) interest accrued on the advances described in
clause (ii) above made by it and the servicing expenses
described in clause (iii) above incurred by it while such
remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the
Trust Fund for environmental site assessments performed with
respect to Mortgaged Properties that constitute security for
defaulted Mortgage Loans, and for any containment, clean-up or
remediation of hazardous wastes and materials present on such
Mortgaged Properties, as described under "--Realization Upon
Defaulted Mortgage Loans";
(vii) to reimburse the 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 the
Master Servicer and the Depositor";
(viii) if and to the extent described in the related
Prospectus Supplement, to pay the fees of the Trustee;
(ix) 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";
(x) to pay the Master Servicer or the Trustee, as
additional compensation, interest and investment income earned
in respect of amounts held in the Certificate Account;
(xi) to pay (generally from related income) for costs
incurred in connection with the operation, management and
maintenance of any Mortgaged Property acquired by the Trust
Fund by foreclosure or otherwise;
(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 Mortgage Loan or a
property acquired in respect thereof in connection with the
liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of
counsel obtained pursuant to the related Pooling Agreement for
the benefit of Certificateholders;
(xv) to make any other withdrawals permitted by the
related Pooling Agreement and described in the related
Prospectus Supplement; and
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(xvi) to clear and terminate the Certificate Account
upon the termination of the Trust Fund.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer for any mortgage pool, directly or through
Sub-Servicers, will be required to make reasonable efforts to collect all
scheduled Mortgage Loan payments and will be required to follow such collection
procedures as it would follow with respect to mortgage loans that are comparable
to such Mortgage Loans and held for its own account, provided such procedures
are consistent with (i) the terms of the related Pooling Agreement and any
related instrument of Credit Support included in the related Trust Fund, (ii)
applicable law and (iii) the servicing standard specified in the Pooling
Agreement and in the related Prospectus Supplement (the "Servicing Standard").
The Master Servicer will also be required to perform other
customary functions of a servicer of comparable loans, including maintaining
escrow or impound accounts for payment of taxes, insurance premiums and similar
items, or otherwise monitoring the timely payment of those items; attempting to
collect delinquent payments; supervising foreclosures; conducting property
inspections on a periodic or other basis; managing Mortgaged Properties acquired
through or in lieu of foreclosure (each, an "REO Property"); and maintaining
servicing records relating to the Mortgage Loans. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be responsible for
filing and settling claims in respect of particular Mortgage Loans under any
applicable instrument of Credit Support. See "Description of Credit Support".
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
A Master Servicer may agree to modify, waive or amend any term
of any Mortgage Loan serviced by it in a manner consistent with the Servicing
Standard; provided that, unless otherwise set forth in the related Prospectus
Supplement, the modification, waiver or amendment will not (i) affect the amount
or timing of any scheduled payments of principal or interest on the Mortgage
Loan or (ii) in the judgment of the Master Servicer, materially impair the
security for the Mortgage Loan or reduce the likelihood of timely payment of
amounts due thereon. Unless otherwise provided in the related Prospectus
Supplement, a Master Servicer also may agree to any other modification, waiver
or amendment if, in its judgment (i) a material default on the Mortgage Loan has
occurred or a payment default is imminent and (ii) such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to the
Mortgage Loan on a present value basis than would liquidation.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in
respect of the Mortgage Loans serviced by it to one or more third-party
servicers (each, a "Sub-Servicer"), but the Master Servicer will remain liable
for such obligations under the related Pooling Agreement unless otherwise
provided in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, each sub-servicing agreement between a Master
Servicer and a Sub-Servicer (a "Sub-Servicing Agreement") must provide that, if
for any reason the Master Servicer 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 Pooling Agreement is sufficient to pay such fees. 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 a Pooling Agreement. See "--Certificate Account" and
"--Servicing Compensation and Payment of Expenses".
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SPECIAL SERVICERS
If and to the extent specified in the related Prospectus
Supplement, a special servicer (the "Special Servicer") may be a party to the
related Pooling Agreement or may be appointed by the Master Servicer or another
specified party to perform certain specified duties (for example, the servicing
of defaulted Mortgage Loans) in respect of the servicing of the related Mortgage
Loans. The Master Servicer will be liable for the performance of a Special
Servicer only if, and to the extent, set forth in such Prospectus Supplement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A borrower's failure to make required Mortgage Loan payments
may mean that operating income is insufficient to service the mortgage debt, or
may reflect the diversion of that income from the servicing of the mortgage
debt. In addition, a borrower that is unable to make Mortgage Loan payments may
also be unable to make timely payment of taxes and to otherwise maintain and
insure the related Mortgaged Property. In general, the related Master Servicer
will be required to monitor any Mortgage 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 borrower if cure is likely,
inspect the related Mortgaged Property 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 any such corrective
action or the need for additional initiatives.
The time within which the Master Servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders may vary considerably depending on the
particular Mortgage Loan, the Mortgaged Property, the borrower, the presence of
an acceptable party to assume the Mortgage Loan and the laws of the jurisdiction
in which the Mortgaged Property is located. If a borrower files a bankruptcy
petition, the Master Servicer may not be permitted to accelerate the maturity of
the related Mortgage Loan or to foreclose on the Mortgaged Property for a
considerable period of time. See "Certain Legal Aspects of Mortgage Loans".
A Pooling Agreement may grant to the Master Servicer, a
Special Servicer, a provider of Credit Support and/or the holder or holders of
certain classes of Certificates of the related series a right of first refusal
to purchase from the Trust Fund, at a predetermined purchase price (which, if
insufficient to fully fund the entitlements of Certificateholders to principal
and interest thereon, will be specified in the related Prospectus Supplement),
any Mortgage Loan as to which a specified number of scheduled payments are
delinquent. In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer may offer to sell any defaulted Mortgage Loan 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 of the related Mortgaged Property. Unless otherwise provided
in the related Prospectus Supplement, the related Pooling Agreement will require
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 Mortgage Loan. In the absence
of any bid determined in accordance with the related Pooling Agreement to be
fair, the Master Servicer will generally be required to proceed with respect to
such defaulted Mortgage Loan as described below.
If a default on a Mortgage Loan has occurred or, in the Master
Servicer's judgment, is imminent, the Master Servicer, on behalf of the Trustee,
may at any time institute foreclosure proceedings, exercise any power of sale
contained in the related Mortgage, obtain a deed in lieu of foreclosure, or
otherwise acquire title to the related Mortgaged Property, by operation of law
or otherwise, if such action is consistent with the Servicing Standard. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
may not, however, acquire title to any Mortgaged Property or take any other
action that would cause the Trustee, for the benefit of Certificateholders of
the related series, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the
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Master Servicer has previously determined, based on a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the Trust Fund), that:
(i) either the Mortgaged Property is in compliance
with applicable environmental laws and regulations or, if not,
that taking such actions as are necessary to bring the
Mortgaged Property into compliance therewith is reasonably
likely to produce a greater recovery on a present value basis
than not taking such actions; and
(ii) either there are no circumstances or conditions
present at the Mortgaged Property that have resulted in any
contamination for which investigation, testing, monitoring,
containment, clean-up or remediation could be required under
any applicable environmental laws and regulations or, if such
circumstances or conditions are present for which any such
action could be required, taking such actions with respect to
the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such
actions. See "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations".
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 for
more than 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 generally be required to 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. If the Trust Fund acquires title to
any Mortgaged Property, the Master Servicer, on behalf of the Trust Fund, may
retain an independent contractor to manage and operate such property. The
retention of an independent contractor, however, will not relieve the Master
Servicer of its obligation to manage such Mortgaged Property in a manner
consistent with the Servicing Standard.
If Liquidation Proceeds collected with respect to a defaulted
Mortgage Loan are less than the outstanding principal balance of the defaulted
Mortgage Loan plus interest accrued thereon plus the aggregate amount of
reimbursable expenses incurred by the Master Servicer with respect to such
Mortgage Loan, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to reimburse itself from the
Liquidation Proceeds recovered on any defaulted Mortgage Loan, prior to the
distribution of such Liquidation Proceeds to Certificateholders, amounts that
represent unpaid servicing compensation in respect of the Mortgage Loan,
unreimbursed servicing expenses incurred with respect to the Mortgage Loan and
any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan.
If any Mortgaged Property suffers damage that the proceeds, if
any, of the related hazard insurance policy are insufficient to fully restore,
the Master Servicer will not be required to expend its own funds to restore the
damaged property unless (and to the extent not otherwise provided in the related
Prospectus Supplement) it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus
Supplement, each Pooling Agreement will require the related Master Servicer to
cause each Mortgage Loan borrower to maintain a hazard insurance policy that
provides for such coverage as is required under the related Mortgage or, if the
Mortgage permits the holder thereof to dictate to the borrower the insurance
coverage to be maintained on the related Mortgaged Property, such coverage as is
consistent with the requirements of the Servicing Standard. Unless otherwise
specified in the related Prospectus Supplement, such coverage generally will be
in an amount equal to the
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lesser of the principal balance owing on such Mortgage Loan and the replacement
cost of the Mortgaged Property, 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 concerning covered losses is furnished by borrowers. All amounts
collected by the Master Servicer under any such policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with the Master Servicer's normal servicing
procedures and/or to the terms and conditions of the related Mortgage and
Mortgage Note) will be deposited in the related Certificate Account. The Pooling
Agreement may provide that the Master Servicer may satisfy its obligation to
cause each borrower to maintain such a hazard insurance policy by maintaining a
blanket policy insuring against hazard losses on all of the Mortgage Loans in
the related Trust Fund. If such blanket policy contains a deductible clause, the
Master Servicer will be required, in the event of a casualty covered by such
blanket policy, to deposit in the related Certificate Account all sums that
would have been deposited therein but for such deductible 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 covering the Mortgaged Properties 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, 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
risks.
The hazard insurance policies covering the Mortgaged
Properties will typically contain co-insurance clauses that in effect require an
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 clauses generally provide 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.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause
that entitles the lender to accelerate payment of the Mortgage Loan upon any
sale or other transfer of the related Mortgaged Property made without the
lender's consent. Certain of the Mortgage Loans may also contain a
due-on-encumbrance clause that entitles the lender to accelerate the maturity of
the Mortgage Loan upon the creation of any other lien or encumbrance upon the
Mortgaged Property. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will determine whether to exercise any right the
Trustee may have under any such provision in a manner consistent with the
Servicing Standard. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be entitled to retain as additional
servicing compensation any fee collected in connection with the permitted
transfer of a Mortgaged Property. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale and Due-on-Encumbrance".
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus
Supplement, a Master 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 payments on each Mortgage Loan in the related Trust Fund. Since
that compensation is generally based on a percentage of the principal balance of
each such Mortgage Loan outstanding from time to time, it will decrease in
accordance with the amortization of the Mortgage Loans. The Prospectus
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Supplement with respect to a series of Certificates may provide that, as
additional compensation, the Master Servicer may retain all or a portion of late
payment charges, Prepayment Premiums, modification fees and other fees collected
from borrowers and any interest or other income that may be earned on funds held
in the Certificate Account. Any Sub-Servicer will receive a portion of the
Master Servicer's compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, a Master
Servicer may be required, to the extent provided in the related Prospectus
Supplement, to pay from amounts that represent its servicing compensation
certain expenses incurred in connection with the administration of the related
Trust Fund, including, without limitation, payment of the fees and disbursements
of independent accountants and payment of expenses incurred in connection with
distributions and reports to Certificateholders. Certain other expenses,
including certain expenses related to Mortgage Loan defaults and liquidations
and, to the extent so provided in the related Prospectus Supplement, interest on
such expenses at the rate specified therein, and the fees of the Trustee and any
Special Servicer, may be required to 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 period to
Prepayment Interest Shortfalls. See "Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest".
EVIDENCE AS TO COMPLIANCE
Unless otherwise provided in the related Prospectus
Supplement, each Pooling Agreement will require that, on or before a specified
date in each year, the Master Servicer cause a firm of independent public
accountants to furnish a statement to the Trustee to the effect that, based on
an examination by such firm conducted substantially in compliance with either
the Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC, the servicing by or on behalf of the Master
Servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other (which may include the related Pooling Agreement) was
conducted through the preceding calendar year or other specified twelve-month
period in compliance with the terms of such agreements except for any
significant exceptions or errors in records that, in the opinion of such firm,
either the Audit Program for Mortgages serviced for FHLMC or paragraph 4 of the
Uniform Single Audit Program for Mortgage Bankers, as the case may be, requires
it to report. Each Pooling Agreement will also provide for delivery to the
Trustee, on or before a specified date in each year, of a statement signed by
one or more officers of the Master Servicer to the effect that the Master
Servicer has fulfilled its material obligations under the Pooling Agreement
throughout the preceding calendar year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus
Supplement, copies of the annual accountants' statement and the statement of
officers of a Master Servicer will be made available to Certificateholders
without charge upon written request to the Master Servicer.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under a Pooling Agreement may be an
affiliate of the Depositor and may have other normal business relationships with
the Depositor or the Depositor's affiliates. Unless otherwise specified in the
Prospectus Supplement for a series of Certificates, the related Pooling
Agreement will permit the Master Servicer to resign from its obligations
thereunder only upon a determination that such obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it at the date of the
Pooling 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 Pooling Agreement. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will also be required to maintain a
fidelity bond and errors and omissions policy that provides coverage against
losses that may be sustained as a result of an officer's or employee's
misappropriation of funds, errors and omissions or negligence, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions.
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Unless otherwise specified in the related Prospectus
Supplement, each Pooling Agreement will further provide that none of the Master
Servicer, the Depositor and any director, officer, employee or agent of either
of them will be under any liability to the related Trust Fund or
Certificateholders for any action taken, or not taken, in good faith pursuant to
the Pooling Agreement or for errors in judgment; provided, however, that none of
the Master Servicer, the Depositor and any such person will be protected against
any breach of a representation, warranty or covenant made in such Pooling
Agreement, or against any expense or liability that such person is specifically
required to bear pursuant to the terms of such Pooling Agreement, or against any
liability that 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 such obligations and duties. Unless
otherwise specified in the related Prospectus Supplement, each Pooling Agreement
will further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of either of them will be entitled to indemnification
by the related Trust Fund against any loss, liability or expense incurred in
connection with any legal action that relates to the Pooling Agreement or the
related series of Certificates; provided, however, that such indemnification
will not extend to any loss, liability or expense (i) that such person is
specifically required to bear pursuant to the terms of such agreement, or is
incidental to the performance of obligations and duties thereunder and is not
reimbursable pursuant to the Pooling Agreement; (ii) incurred in connection with
any breach of a representation, warranty or covenant made in the Pooling
Agreement; (iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties under the Pooling
Agreement, or by reason of reckless disregard of such obligations or duties; or
(iv) incurred in connection with any violation of any state or federal
securities law. In addition, each Pooling Agreement will provide that neither
the Master Servicer nor the Depositor will be under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its respective
responsibilities under the Pooling Agreement and that in its opinion may involve
it in any expense or liability. However, each of the Master Servicer and the
Depositor will be permitted, in the exercise of its discretion, to undertake any
such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the Certificateholders 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
Certificateholders, and the Master Servicer or the Depositor, as the case may
be, will be entitled to charge the related Certificate Account therefor.
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 Pooling Agreement.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a
series of Certificates, "Events of Default" under the related Pooling 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 for distribution
to Certificateholders in a timely manner, any amount required to be so
distributed or remitted, which failure continues unremedied for five 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 Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series); (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 Pooling Agreement which continues unremedied for sixty 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
Certificateholders entitled to not less than 25% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for such
series; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings in respect of or
relating to the Master Servicer 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 add
thereto or shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement.
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RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under a Pooling Agreement
remains unremedied, the Depositor or the Trustee will be authorized, and at the
direction of Certificateholders entitled to not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series, the Trustee will be required, to terminate all of the rights
and obligations of the Master Servicer as master servicer under the Pooling
Agreement, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under the Pooling Agreement
(except that if the Master Servicer is required to make advances in respect of
Mortgage Loan delinquencies, but the Trustee is prohibited by law from
obligating itself to do so, or if the related Prospectus Supplement so
specifies, 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, if the Trustee is unwilling or unable so to act,
it may (or, at the written request of Certificateholders entitled to at least
51% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series, it will be required to) appoint, or petition
a court of competent jurisdiction to appoint, a loan servicing institution that
(unless otherwise provided in the related Prospectus Supplement) is acceptable
to each Rating Agency that assigned ratings to the Offered Certificates of such
series to act as successor to the Master Servicer under the Pooling Agreement.
Pending such appointment, the Trustee will be obligated to act in such capacity.
No Certificateholder will have the right under any Pooling
Agreement to institute any proceeding with respect thereto unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders entitled to at least 25% (or such other percentage specified
in the related Prospectus Supplement) of the Voting Rights for the related
series shall have made written request upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and shall have offered to the
Trustee reasonable indemnity, and the Trustee for sixty days (or such other
period specified in the related Prospectus Supplement) shall have neglected or
refused to institute any such proceeding. The Trustee, however, will be under no
obligation to exercise any of the trusts or powers vested in it by any Pooling
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Certificates of the
related series, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto,
without the consent of any of the holders of the related Certificates, (i) to
cure any ambiguity, (ii) to correct a defective provision therein or to correct,
modify or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) to add any other provisions with respect to
matters or questions arising under the Pooling Agreement that are not
inconsistent with the provisions thereof, (iv) to comply with any requirements
imposed by the Code or (v) for any other purpose; provided that such amendment
(other than an amendment for the purpose specified in clause (iv) above) may not
(as evidenced by an opinion of counsel to such effect satisfactory to the
Trustee) adversely affect in any material respect the interests of any such
holder. Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may also be amended for any purpose by the parties, with the
consent of Certificateholders entitled to at least 51% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for the
related series allocated to the affected classes; 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 that are required to be distributed in
respect of any Certificate without the consent of the holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
holders of any class of Certificates, in a manner other than as described in
clause (i), without the consent of the holders of all Certificates of such class
or (iii) modify the provisions of the Pooling Agreement described in this
paragraph without the consent of the holders of all Certificates of the related
series. However, unless otherwise specified in the related Prospectus
Supplement, the Trustee will be prohibited from consenting to any amendment of a
Pooling Agreement pursuant to which a REMIC election is to be or has been made
unless the Trustee shall first have received an opinion of counsel to the effect
that
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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.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder of record made
for purposes of communicating with other holders of Certificates of the same
series with respect to their rights under the related Pooling Agreement, the
Trustee or other specified person will afford such Certificateholder access,
during normal business hours, to the most recent list of Certificateholders of
that series then maintained by such person.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company that serves as Trustee may
have typical banking relationships with the Depositor and its affiliates and
with any Master Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for a series of Certificates will make no
representation as to the validity or sufficiency of the related Pooling
Agreement, the Certificates or any Mortgage Loan or related document and will
not be accountable for the use or application by or on behalf of any Master
Servicer of any funds paid to the Master Servicer or any Special Servicer in
respect of the Certificates or the Mortgage Loans, or any funds deposited into
or withdrawn from the Certificate Account or any other account by or on behalf
of the Master Servicer or any Special Servicer. If no Event of Default has
occurred and is continuing, the Trustee will be required to perform only those
duties specifically required under the related Pooling Agreement. However, upon
receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the Pooling Agreement, the Trustee
will be required to examine such documents and to determine whether they conform
to the requirements of the Pooling Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus
Supplement, the Trustee for a series of Certificates will be entitled to
indemnification, from amounts held in the related Certificate Account, for any
loss, liability or expense incurred by the Trustee in connection with the
Trustee's acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to any
loss, liability or expense that constitutes a specific liability imposed on the
Trustee pursuant to the Pooling 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. As and to the extent described in the related Prospectus
Supplement, the fees and normal disbursements of any Trustee may be the expense
of the related Master Servicer or other specified person or may be required to
be borne by the related Trust Fund.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee for a series of Certificates will be permitted at
any time to resign from its obligations and duties under the related Pooling
Agreement by giving written notice thereof to the Depositor. Upon receiving such
notice of resignation, the Depositor (or such other person as may be specified
in the related Prospectus Supplement) will be required to use its best efforts
to promptly appoint a successor trustee. If no successor trustee shall have
accepted an appointment within a specified period after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction to appoint a successor trustee.
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If at any time the Trustee ceases to be eligible to continue
as such under the related Pooling Agreement, or if at any time the Trustee
becomes incapable of acting, or if certain events of (or proceedings in respect
of) bankruptcy or insolvency occur with respect to the Trustee, the Depositor
will be authorized to remove the Trustee and appoint a successor trustee. In
addition, holders of the Certificates 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 (with or without cause) remove the
Trustee and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee will not become effective until acceptance of appointment by
the successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit Support may be provided with respect to one or more
classes of the Certificates of any series, or with respect to the related
Mortgage Assets. Credit Support may be in the form of a letter of credit, the
subordination of one or more classes of Certificates, the use of a pool
insurance policy or guarantee insurance, 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 provide credit
enhancement for more than one series of Certificates to the extent described
therein.
Unless otherwise provided in the related Prospectus Supplement
for a series of Certificates, the Credit Support will not provide protection
against all risks of loss and will not guarantee payment to Certificateholders
of all amounts to which they are entitled under the related Pooling Agreement.
If losses or shortfalls occur that exceed the amount covered by the Credit
Support or that are not covered by the Credit Support, Certificateholders will
bear their allocable share of deficiencies. Moreover, if a form of Credit
Support covers more than one series of Certificates, holders of Certificates of
one series will be subject to the risk that such Credit Support will be
exhausted by the claims of the holders of Certificates of one or more other
series before the former receive their intended share of such coverage.
If Credit Support is provided with respect to one or more
classes of Certificates of a series, or with respect to the related Mortgage
Assets, the related Prospectus Supplement will include a description of (i) the
nature and amount of coverage under such Credit Support, (ii) any conditions to
payment thereunder not otherwise described herein, (iii) 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 (iv) 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, generally 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 the
regulatory agencies that exercise primary jurisdiction over the conduct of its
business and (iv) its total assets, and its stockholders' equity or
policyholders' surplus, if applicable, as of a date that will be specified in
the Prospectus Supplement. See "Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or
more classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the holders
of Subordinate Certificates to receive distributions from the Certificate
Account on any Distribution Date will be subordinated to the corresponding
rights of the holders of Senior Certificates. 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 provided by a class or classes of Subordinate Certificates
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in a series, the circumstances under which such subordination will be available
and the manner in which the amount of subordination will be made available.
CROSS-SUPPORT PROVISIONS
If the Mortgage Assets in any Trust Fund are divided into
separate groups, each supporting a separate class or classes of Certificates of
a series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
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 MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of
Certificates, Mortgage Loans included in the related Trust Fund will be covered
for certain default risks by insurance policies or guarantees. To the extent
material, a copy of each such instrument will accompany the Current Report on
Form 8-K to be filed with the Commission within 15 days of issuance of the
Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates 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 Mortgage Assets
on the related Cut-off Date or of the initial aggregate Certificate Balance of
one or more classes of Certificates. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws only in the event of 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 Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. A copy of
any such letter of credit will accompany the Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Certificates of the
related series.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates 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 Certificates 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. A copy of any such
instrument will accompany the Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Certificates of the related series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered (to the extent of available funds) by
one or more reserve funds in which cash, a letter of credit, Permitted
Investments, a demand note or a combination thereof will be deposited, in the
amounts specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of the collections received on the related Mortgage
Assets.
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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.
If so specified in the related Prospectus Supplement, reserve funds may be
established to provide protection only against 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.
If so specified in the related Prospectus Supplement, amounts
deposited in any reserve fund will be invested in Permitted Investments. Unless
otherwise specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited 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
for its services. 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.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of
Certificates, any MBS included in the related Trust Fund and/or the related
underlying mortgage loans 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.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain
legal aspects of loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states in which the security for the Mortgage Loans (or mortgage loans
underlying any MBS) is situated. Accordingly, the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Funds--Mortgage Loans". For purposes of the following
discussion, "Mortgage Loan" includes a mortgage loan underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and
secured by an instrument granting a security interest in real property, which
may be a mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged Property
is located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgage instruments". A mortgage instrument
creates a lien upon, or grants a title interest in, the real property covered
thereby, and represents the security for the repayment of the indebtedness
customarily evidenced by a promissory note. The priority of the lien created or
interest granted will depend on the terms of the mortgage instrument and, in
some cases, on the terms of separate subordination agreements or intercreditor
agreements with others that hold interests in the real property, the knowledge
of the parties to the mortgage instrument as to the existence of prior liens
and, generally, the order of recordation of the mortgage instrument in the
appropriate public recording office. However, the lien of a recorded mortgage
instrument will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower
and usually the owner of the subject property) and a mortgagee (the lender). In
a mortgage, the mortgagor grants a lien on the subject property in favor of the
mortgagee. A deed of trust is a three-party instrument, among a trustor (the
equivalent
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of a borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a deed
of trust, the trustor grants the property to the trustee, in trust, irrevocably
until the debt is paid, and generally with a power of sale. A deed to secure
debt typically has two parties. The borrower, or grantor, conveys title to the
real property to the grantee, or lender, generally with a power of sale, until
such time as the debt is repaid. In a case where the borrower is a land trust,
there would be an additional party to a mortgage instrument because legal title
to the property is held by a land trustee under a land trust agreement for the
benefit of the borrower. At origination of a mortgage loan involving a land
trust, the borrower generally 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 related instrument,
the law of the state in which the real property is located, certain federal laws
and, in some deed of trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgage instruments that encumber income-producing property
often contain or are accompanied by an assignment of rents and leases, pursuant
to which the borrower assigns to the lender the borrower's right, title and
interest as landlord under each lease and the income derived therefrom, while
(unless rents are to be paid directly to the lender) retaining a revocable
license to collect the rents for so long as there is no default. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect the
rents.
In most states, hotel and motel room rates are considered
accounts receivable under the Uniform Commercial Code ("UCC"); in cases where
hotels or motels constitute loan security, the rates are generally pledged by
the borrower as additional security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the rates
and must file continuation statements, generally every five years, to maintain
perfection of such security interest. Even if the lender's security interest in
room rates is perfected under the UCC, it will generally be required to commence
a foreclosure action or otherwise take possession of the property in order to
collect the room rates following a default.
PERSONALTY
In the case of certain types of mortgaged properties, such as
hotels, motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection.
JUNIOR MORTGAGES; RIGHTS OF SENIOR LENDERS
Some of the Mortgage Loans included in a Trust Fund may be
secured by mortgage instruments that are subordinate to mortgage instruments
held by other lenders. The rights of the Trust Fund (and therefore the
Certificateholders), as holder of a junior mortgage instrument, are subordinate
to those of the senior lender, including the prior rights of the senior lender
to receive rents, hazard insurance and condemnation proceeds and to cause the
Mortgaged Property to be sold upon borrower's default and thereby extinguish the
Trust Fund's junior lien unless the Master Servicer or Special Servicer asserts
its subordinate interest in a property in a foreclosure litigation or satisfies
the defaulted senior loan. As discussed more fully below, in many states a
junior lender may satisfy a defaulted senior loan in full, adding the amounts
expended to the balance due on the junior loan. Absent a provision in the senior
mortgage instrument, no notice of default is required to be given to the junior
lender.
The form of the mortgage instrument used by many institutional
lenders confers on the lender on the right both to receive all proceeds
collected under any hazard insurance policy and all awards made in
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connection with any condemnation proceedings, and (subject to any limits imposed
by applicable state law) to apply such proceeds and awards to any indebtedness
secured by the mortgage instrument in such order as the lender may determine.
Thus, if improvements on a property are damaged or destroyed by fire or other
casualty, or if the property is taken by condemnation, the holder of the senior
mortgage instrument will have the prior right to collect any insurance proceeds
payable under a hazard insurance policy and any award of damages in connection
with the condemnation and to apply the same to the senior indebtedness.
Accordingly, only the proceeds in excess of the amount of senior indebtedness
will be available to be applied to the indebtedness secured by a junior mortgage
instrument.
The form of mortgage instrument used by many institutional
lenders typically contains a "future advance" clause, which provides, in
general, that additional amounts advanced to or on behalf of the mortgagor or
trustor by the mortgagee or beneficiary are to be secured by the mortgage
instrument. While such a clause is valid under the laws of most states, the
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or an "optional" advance. If the lender
is obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as the amounts advanced at origination,
notwithstanding that intervening junior liens may have been recorded between the
date of recording of the senior mortgage instrument and the date of the future
advance, and notwithstanding that the senior lender had actual knowledge of such
intervening junior liens at the time of the advance. Where the senior lender is
not obligated to advance the additional amounts and has actual knowledge of the
intervening junior liens, the advance may be subordinate to such intervening
junior liens. Priority of advances under a "future advance" clause rests, in
many other states, on state law giving priority to all advances made under the
loan agreement up to a "credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of mortgage
instrument used by many institutional lenders permits the lender to itself
perform certain obligations of the borrower (for example, the obligations to pay
when due all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that are senior to the lien of
the mortgage instrument, to maintain hazard insurance on the property, and to
maintain and repair the property) upon a failure of the borrower to do so, with
all sums so expended by the lender becoming part of the indebtednesss secured by
the mortgage instrument.
The form of mortgage instrument used by many institutional
lenders typically requires the borrower to obtain the consent of the lender in
respect of actions affecting the mortgaged property, including the execution of
new leases and the termination or modification of existing leases, the
performance of alterations to buildings forming a part of the mortgaged property
and the execution of managment and leasing agreements for the mortgaged
property. Tenants will often refuse to execute leases unless the lender executes
a written agreement with the tenant not to disturb the tenant's possession of
its premises in the event of a foreclosure. A senior lender may refuse to
consent to matters approved by a junior lender, with the result that the value
of the security for the junior mortgage instrument is diminished.
FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the
lender to recover the borrower's mortgage debt by enforcing its rights and
available legal remedies under the mortgage instrument. If the borrower defaults
in payment or performance of its obligations under the note or mortgage
instrument, the lender has the right to institute foreclosure proceedings to
sell the real property at public auction to satisfy the indebtedness.
FORECLOSURE PROCEDURES VARY FROM STATE TO STATE. Two primary
methods of foreclosing a mortgage instrument are judicial foreclosure, involving
court proceedings, and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. Other foreclosure procedures are available
in some states, but they are either infrequently used or available only in
limited circumstances. A foreclosure action is subject to most of the delays and
expenses of other lawsuits if defenses are raised or counterclaims are
interposed, and sometimes requires several years to complete.
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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 a subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
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.
NON-JUDICIAL FORECLOSURE/POWER OF SALE. Foreclosure of a deed
of trust is generally accomplished by a non-judicial trustee's sale pursuant to
a power of sale typically granted in the deed of trust. A power of sale may also
be contained in any other type of mortgage instrument (in particular, a deed to
secure debt) if applicable law so permits. A power of sale under a deed of trust
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 default by
the borrower and after notice of sale is given in accordance with the terms of
the deed of trust and applicable state law. In some states, prior to such sale,
the trustee under the deed of trust must record a notice of default and notice
of sale and send a copy to the borrower 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 borrower 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 regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower or
the junior lienholder 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, state law governs the procedure for public sale, the parties entitled
to notice, the method of giving notice and the applicable time periods.
LIMITATIONS ON THE RIGHTS OF MORTGAGE LENDERS. United States
courts have traditionally imposed general equitable principles to limit the
remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on 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 actions to determine the cause of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose in the
case of a non-monetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the mortgaged
property. Finally, some courts have addressed the issue of whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that a borrower receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage instrument providing for a power of sale does not involve
sufficient state action to trigger constitutional protections.
Also, a third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other things, redemption rights
that may exist) and because of the possibility that physical deterioration of
the property may have occurred during the foreclosure proceedings. Potential
buyers may also be reluctant to purchase property at a foreclosure sale as a
result of the 1980 decision of the United States Court of Appeals for the Fifth
Circuit in Durrett v. Washington National Insurance Company. The court in
Durrett held that even a non-collusive, regularly conducted foreclosure sale was
a fraudulent transfer under Section 67d of the former Bankruptcy Act (Section
548 of the Bankruptcy Code, Bankruptcy Reform Act of 1978, as amended, 11 U.S.C.
SSSS 101- 1330 (the "Bankruptcy Code")) and, therefore, could be rescinded in
favor of the bankrupt's estate, if (i)
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the foreclosure sale was held while the debtor was insolvent and not more than
one year prior to the filing of the bankruptcy petition and (ii) the price paid
for the foreclosed property did not represent "fair consideration" ("reasonably
equivalent value" under the Bankruptcy Code). Although the reasoning and result
of Durrett were rejected by the United States Supreme Court in May, 1994, the
case could nonetheless be persuasive to a court applying a state fraudulent
conveyance law with provisions similar to those construed in Durrett. For these
reasons, it is common for the lender to purchase the mortgaged property for an
amount equal to the secured indebtedness and accrued and unpaid interest plus
the expenses of foreclosure, in which event the borrower's debt will be
extinguished. Thereafter, subject to the borrower's right in some states to
remain in possession during a redemption period, the lender will become the
owner of the property and have both the benefits and burdens of ownership,
including the obligation to pay debt service on any senior mortgage loans, to
pay taxes, to obtain casualty insurance and to make such repairs as are
necessary to render the property suitable for sale. The costs of operating and
maintaining a commercial or multifamily residential property may be significant
and may be greater than the income derived from that property. The lender also
will commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale or lease of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged property
is sold at foreclosure, or resold after it is acquired through foreclosure, for
an amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged
property does so subject to senior mortgages and any other prior liens, and may
be obliged to keep senior mortgage loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are
to enable the lender to realize upon its security and to bar the borrower, and
all persons who have interests in the property that are subordinate to that of
the foreclosing lender, from the exercise of their "equity of redemption". The
doctrine of equity of redemption provides that, until the property encumbered by
a mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right
which should be distinguished from post-sale statutory rights of redemption. In
some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property. In some states, statutory redemption may
occur only upon payment of the foreclosure sale price. In other states,
redemption may be permitted if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property because the exercise of a
right of redemption would defeat the title of any purchaser through a
foreclosure. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. In general, it is expected that
some or all of the Mortgage Loans in a particular Trust Fund may be nonrecourse
loans, as to which recourse in the case of default will be limited to the
Mortgaged Property and such other assets, if any, that were pledged to secure
the Mortgage Loan. However, even if a Mortgage Loan by its terms provides for
recourse to the borrower's other assets, a lender's ability to realize upon
those assets may be limited by state law. For example, in some states a lender
cannot obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender.
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Other statutes may require the lender to exhaust the security afforded under a
mortgage before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of those states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and thus may be precluded from
foreclosing upon the security. Consequently, lenders in those states where such
an election of remedy provision exists will usually proceed first against the
security. Finally, other statutory provisions, designed to protect borrowers
from exposure to large deficiency judgments that might result from bidding at
below-market values at the foreclosure sale, limit any deficiency judgment to
the excess of the outstanding debt over the fair market value of the property at
the time of the sale.
LEASEHOLD CONSIDERATIONS. Mortgage loans may be secured by a
lien on the borrower's leasehold interest in a ground lease. Leasehold mortgage
loans are subject to certain risks not associated with mortgage loans secured by
a lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated (for example, as a result
of a lease default or the bankruptcy of the ground lessor or the borrower/ground
lessee), the leasehold mortgagee would be left without its security. This risk
may be substantially lessened if the ground lease contains provisions protective
of the leasehold mortgagee, such as a provision that requires the ground lessor
to give the leasehold mortgagee notices of lessee defaults and an opportunity to
cure them, a provision that permits the leasehold estate to be assigned to and
by the leasehold mortgagee or the purchaser at a foreclosure sale, a provision
that gives the leasehold mortgagee the right to enter into a new ground lease
with the ground lessor on the same terms and conditions as the old ground lease
or a provision that prohibits the ground lessee/borrower from treating the
ground lease as terminated in the event of the ground lessor's bankruptcy and
rejection of the ground lease by the trustee for the debtor/ground lessor.
Certain mortgage loans, however, may be secured by liens on ground leases that
do not contain these provisions.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may
interfere with or affect the ability of a lender to realize upon collateral
and/or to enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of the
bankruptcy petition and, often, no interest or principal payments are made
during the course of the bankruptcy case. The delay and the consequences thereof
caused by such automatic stay can be significant. Also, under the Bankruptcy
Code, the filing of a petition in bankruptcy by or on behalf of a junior lienor
may stay the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and
procedural safeguards protective of the lender are met, the amount and terms of
a mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan may
be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender a general
unsecured creditor for the difference between such value and the outstanding
balance of the loan. Other modifications may include the reduction in the amount
of each scheduled payment, by means of a reduction in the rate of interest
and/or an alteration of the repayment schedule (with or without affecting the
unpaid principal balance of the loan), and/or by an extension (or shortening) of
the term to maturity. Some bankruptcy courts have approved plans, based on the
particular facts of the reorganization case, that effected the cure of a
mortgage loan default by paying arrearages over a number of years. Also, a
bankruptcy court may permit a debtor, through its rehabilitative plan, to
reinstate a loan mortgage payment schedule even if the lender has obtained a
final judgment of foreclosure prior to the filing of the debtor's petition.
Federal bankruptcy law may also 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.
However, the Bankruptcy Code has recently been amended to provide that a
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lender's perfected pre-petition security interest in leases, rents and hotel
revenues continues in the post-petition leases, rents and hotel revenues, unless
a bankruptcy court orders to the contrary "based on the equities of the case."
Thus, unless a court orders otherwise, revenues from a mortgaged property
generated after the date the bankruptcy petition is filed will constitute "cash
collateral" under the Bankruptcy Code. Debtors may only use cash collateral upon
obtaining the lender's consent or a prior court order finding that the lender's
interest in the mortgaged properties and the cash collateral is "adequately
protected" as such term is defined and interpreted under the Bankruptcy Code.
If a borrower's ability to make payment on a mortgage loan is
dependent on its receipt of rent payments under a lease of the related property,
that ability may be impaired by the commencement of a bankruptcy proceeding
relating to a lessee under such lease. Under the Bankruptcy Code, the filing of
a petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a summary
eviction order with respect to a default under the lease that occurred prior to
the filing of the lessee's petition. In addition, the Bankruptcy Code generally
provides that a trustee or debtor-in-possession may, subject to approval of the
court, (i) assume the lease and retain it or assign it to a third party or (ii)
reject the lease. If the lease is assumed, the trustee or debtor-in-possession
(or assignee, if applicable) must cure any defaults under the lease, compensate
the lessor for its losses and provide the lessor with "adequate assurance" of
future performance. Such remedies may be insufficient, and any assurances
provided to the lessor may, in fact, be inadequate. If the lease is rejected,
the lessor will be treated as an unsecured creditor with respect to its claim
for damages for termination of the lease. The Bankruptcy Code also limits a
lessor's damages for lease rejection to the rent reserved under the lease
(without regard to acceleration) for the greater of one year, or 15%, not to
exceed three years, of the remaining term of the lease.
ENVIRONMENTAL CONSIDERATIONS
GENERAL. A lender may be subject to environmental risks when
taking a security interest in real property. Of particular concern may be
properties that are or have been used for industrial, manufacturing, military or
disposal activity. Such environmental risks include the possible diminution of
the value of a contaminated property or, as discussed below, potential liability
for clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In certain circumstances, a lender
may decide to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclose and risk liability for clean-up costs.
SUPERLIEN LAWS. Under the laws of many states, contamination
on a property may give rise to a lien on the property for clean-up costs. In
several states, such a lien has priority over all existing liens, including
those of existing mortgages. In these states, the lien of a mortgage may lose
its priority to such a "superlien".
CERCLA. The federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), imposes strict
liability on present and past "owners" and "operators" of contaminated real
property for the costs of clean-up. A secured lender may be liable as an "owner"
or "operator" of a contaminated mortgaged property if agents or employees of the
lender have participated in the management of such mortgaged property or the
operations of the borrower. Such liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. Moreover, such liability is not limited to
the original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator", however, is a person "who without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest".
In general, what constitutes sufficient management of a
mortgaged property or the business of a borrower to render the secured creditor
exemption unavailable to a lender is based upon judicial interpretation of the
statutory language, and court decisions have been inconsistent in this matter.
In United States v. Fleet Factors, 901 F.2d 1550 (11th Cir. 1990), cert. den.
498 U.S. 1046 (1991), the Court of
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Appeals for the Eleventh Circuit suggested that the mere capacity of the lender
to influence a borrower's disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the secured
creditor exemption to the lender. However, in In re:Bergsoe, 910 F.2d 668 (9th
Cir. 1990), the Court of Appeals for the Ninth Circuit disagreed with the Fleet
Factors decision and held that there must be some degree of "actual management"
of a facility on the part of a lender in order to bar its reliance on the
secured creditor exemption. In addition, certain cases decided in the First
Circuit and the Fourth Circuit have held that lenders were entitled to the
secured creditor exemption, notwithstanding a lender's taking title to a
mortgaged property through foreclosure or deed in lieu of foreclosure.
CERCLA's "innocent landowner" defense may be available to a
lender that has taken title to a mortgaged property and has performed an
appropriate environmental site assessment that does not disclose existing
contamination and that meets other requirements of the defense. However, it is
unclear whether the environmental site assessment must be conducted upon loan
origination, prior to foreclosure, or both, and uncertainty exists as to what
kind of environmental site assessment must be performed in order to qualify for
the defense.
CERTAIN OTHER FEDERAL AND STATE LAWS. Many states have
statutes similar to CERCLA, and not all of those statutes provide for a secured
creditor exemption. In addition, lenders may face potential liability for
remediation of releases or petroleum or hazardous substances from underground
storage tanks under Subtitle I of the federal Resource Conservation and Recovery
Act ("RCRA"), if they are deemed to be the "owners" or "operators" of facilities
in which they have a security interest or upon which they have foreclosed. On
September 7, 1995, the United States Environmental Protection Agency ("EPA")
promulgated regulations that limit, in certain circumstances, such liability for
lenders who hold a security interest in, or foreclose upon, facilities with
underground tanks containing petroleum. At this time, it is not known whether
those regulations will be the subject of a lawsuit seeking to overturn them. The
regulations do not apply to facilities with underground tanks that contain
regulated substances other than petroleum.
In a few states, transfers of some types of properties are
conditioned upon cleanup of contamination prior to transfer. In these cases, a
lender that becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination before
selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist
common law causes of action (for example, actions based on nuisance or on toxic
tort resulting in death, personal injury, or damage to property) related to
hazardous environmental conditions on a property. While it may be more difficult
to hold a lender liable in such cases, unanticipated or uninsured liabilities of
the borrower may jeopardize the borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS. The cost of remediating hazardous
substance contamination at a property can be substantial. If a lender becomes
liable, it can bring an action for contribution against the owner or operator
who created the environmental hazard, but that individual or entity may be
without substantial assets. Accordingly, it is possible that such costs could
become a liability of the Trust Fund and occasion a loss to the
Certificateholders.
To reduce the likelihood of such a loss, unless otherwise
specified in the related Prospectus Supplement, the Pooling and Servicing
Agreement will provide that the Master Servicer, acting on behalf of the
Trustee, may not acquire title to a Mortgaged Property or take over its
operation unless the Master Servicer, based solely (as to environmental matters)
on a report prepared by a person who regularly conducts environmental audits,
has made the determination that it is appropriate to do so, as described under
"The Pooling and Servicing Agreements--Realization Upon Defaulted Mortgage
Loans".
If a lender forecloses on a mortgage secured by a property,
the operations on which are subject to environmental laws and regulations, the
lender will be required to operate the property in accordance with those laws
and regulations. Such compliance may entail substantial expense, especially in
the case of industrial or manufacturing properties.
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In addition, a lender may be obligated to disclose
environmental conditions on a property to government entities and/or to
prospective buyers (including prospective buyers at a foreclosure sale or
following foreclosure). Such disclosure may decrease the amount that prospective
buyers are willing to pay for the affected property, sometimes substantially,
and thereby decrease the ability of the lender to recoup its investment in a
loan upon foreclosure.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. By virtue, however, of the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn Act"), effective October 15, 1982 (which
purports to preempt state laws that prohibit the enforcement of due-on-sale
clauses by providing, among other matters, that "due-on-sale" clauses in certain
loans made after the effective date of the Garn Act are enforceable, within
certain limitations as set forth in the Garn Act and the regulations promulgated
thereunder), a Master Servicer may nevertheless have the right to accelerate the
maturity of a Mortgage Loan that contains a "due-on-sale" provision upon
transfer of an interest in the property, regardless of the Master Servicer's
ability to demonstrate that a sale threatens its legitimate security interest.
SUBORDINATE FINANCING
Certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans. Where a borrower encumbers a mortgaged property with one or
more junior liens, the senior lender is subjected to additional risk. First, the
borrower may have difficulty servicing and repaying multiple loans. Moreover, if
the subordinate financing permits recourse to the borrower (as is frequently the
case) and the senior loan does not, a borrower may have more incentive to repay
sums due on the subordinate loan. 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 borrower 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 borrower is
additionally burdened. Third, if the borrower defaults on the senior loan and/or
any junior loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the
borrower to pay a late charge or additional interest if payments are not timely
made, and in some circumstances, may prohibit prepayments for a specified period
and/or condition prepayments upon the borrower's payment of prepayment fees or
yield maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("Title V") provides that state usury limitations
shall not apply to certain types of residential (including multifamily) first
mortgage loans originated by certain lenders after March 31, 1980. Title V
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
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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.
No Mortgage Loan originated in any state in which application
of Title V has been expressly rejected or a provision limiting discount points
or other charges has been adopted, will (if originated after that rejection or
adoption) 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 are to 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 borrower's counsel has rendered an opinion that such choice of law provision
would be given effect.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower who
was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to individuals who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of 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 borrower's period of active
duty status, and, under certain circumstances, during an additional three-month
period thereafter.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990
and rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable". In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. The requirements of the ADA may also
be imposed on a foreclosing lender who succeeds to the interest of the borrower
as owner or landlord. Since the "readily achievable" standard may vary depending
on the financial condition of the owner or landlord, a foreclosing lender who is
financially more capable than the borrower of complying with the requirements of
the ADA may be subject to more stringent requirements than those to which the
borrower is subject.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of Offered Certificates. This discussion is directed
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solely to Certificateholders that hold the Certificates as capital assets within
the meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code")
and it does not purport to discuss all federal income tax consequences that may
be applicable to particular categories of investors, some of which (such as
banks, insurance companies and foreign investors) may be subject to special
rules. Further, the authorities on which this discussion, and the opinion
referred to below, are based are subject to change or differing interpretations,
which could apply retroactively. Taxpayers and preparers of tax returns
(including those filed by any REMIC or other issuer) should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice (i) is given
with respect to events that have occurred at the time the advice is rendered and
is not given with respect to the consequences of contemplated actions, and (ii)
is directly relevant to the determination of an entry on a tax return.
Accordingly, taxpayers should consult their own tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of Offered Certificates. See "State and Other Tax Consequences".
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of Offered Certificates.
The following discussion addresses securities of two general
types: (i) certificates ("REMIC Certificates") representing interests in a Trust
Fund, or a portion thereof, that the Master Servicer or the Trustee will elect
to have treated as a real estate mortgage investment conduit ("REMIC") under
Sections 860A through 860G (the "REMIC Provisions") of the Code, and (ii)
certificates ("Grantor Trust Certificates") representing interests in a Trust
Fund ("Grantor Trust Fund") as to which no such election will be made. The
Prospectus Supplement for each series of Certificates will indicate whether a
REMIC election (or elections) will be made for the related Trust Fund and, if
such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this tax discussion,
references to a "Certificateholder" or a "holder" are to the beneficial owner of
a Certificate.
The following discussion is limited in applicability to
Offered Certificates. Moreover, this discussion applies only to the extent that
Mortgage Assets held by a Trust Fund consist solely of Mortgage Loans. To the
extent that other Mortgage Assets, including REMIC certificates and mortgage
pass-through certificates, are to be held by a Trust Fund, the tax consequences
associated with the inclusion of such assets will be disclosed in the related
Prospectus Supplement. In addition, if Cash Flow Agreements, other than
guaranteed investment contracts, are included in a Trust Fund, the tax
consequences associated with such Cash Flow Agreements also will be disclosed in
the related Prospectus Supplement. See "Description of the Trust Funds--Cash
Flow Agreements".
Furthermore, the following discussion is based in part upon
the rules governing original issue discount that are set forth in Sections
1271-1273 and 1275 of the Code and in the Treasury regulations issued thereunder
(the "OID Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS. Upon the issuance of each series of
REMIC Certificates, counsel to the Depositor will deliver its opinion generally
to the effect that, assuming compliance with all provisions of the related
Pooling Agreement, the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply
with one or more of the ongoing requirements of the Code for such status during
any taxable year, the Code provides that the entity will not be treated as a
REMIC for such year and thereafter. In that event, such entity may be taxable as
a
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corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status are
not satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. In
general, unless otherwise provided in the related Prospectus Supplement, the
REMIC Certificates will be "qualifying real property loans" within the meaning
of Section 593(d) of the Code, "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code and assets described in Section 7701(a)(19)(C)
of the Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. However, to the extent that the REMIC assets
constitute mortgages on property not used for residential or certain other
prescribed purposes, the REMIC Certificates will not be treated as assets
qualifying under Section 7701(a)(19)(C)(v). Moreover, if 95% or more of the
assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The Master Servicer
or the Trustee will report those determinations to Certificateholders in the
manner and at the times required by the applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage
Loans, payments on Mortgage Loans held pending distribution on the REMIC
Certificates and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans may not be
treated entirely as assets described in the foregoing sections. If so, the
related Prospectus Supplement will describe those Mortgage Loans that may not be
so treated. The REMIC Regulations do provide, however, that payments on Mortgage
Loans held pending distribution are considered part of the Mortgage Loans for
purposes of Sections 593(d) and 856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES. For certain series of REMIC
Certificates, two or more separate elections may be made to treat designated
portions of the related Trust Fund as REMICs ("Tiered REMICs") for federal
income tax purposes. Upon the issuance of any such series of REMIC Certificates,
counsel to the Depositor will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the related Pooling Agreement, the
Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued by
the Tiered REMICs, respectively, will be considered to evidence ownership of
REMIC Regular Certificates or REMIC Residual Certificates in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC
Certificates will be "qualifying real property loans" under Section 593(d) of
the Code, "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code, and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
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TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL. Except as otherwise stated in this discussion, REMIC
Regular Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of REMIC Regular Certificates that otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. Certain REMIC Regular Certificates
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Any holders of REMIC Regular Certificates issued with
original issue discount generally will be required to include original issue
discount in income as it accrues, in accordance with the method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Code requires that a prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular
Certificate will be the excess of its stated redemption price at maturity over
its issue price. The issue price of a particular class of REMIC Regular
Certificates will be the first cash price at which a substantial amount of REMIC
Regular Certificates of that class is sold (excluding sales to bond houses,
brokers and underwriters). If less than a substantial amount of a particular
class of REMIC Regular Certificates is sold for cash on or prior to the date of
their initial issuance (the "Closing Date"), the issue price for such class will
be the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is equal
to the total of all payments to be made on such Certificate other than
"qualified stated interest". "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate", or at an "objective rate", a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate", or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such REMIC
Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable
interest rates, the determination of the total amount of original issue discount
and the timing of the inclusion thereof will vary according to the
characteristics of such REMIC Regular Certificates. If the original issue
discount rules apply to such Certificates, the related Prospectus Supplement
will describe the manner in which such rules will be applied with respect to
those Certificates in preparing information returns to the Certificateholders
and the Internal Revenue Service (the "IRS").
Certain classes of the REMIC Regular Certificates may provide
for the first interest payment with respect to such Certificates to be made more
than one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some
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cases, as a consequence of this "long first accrual period", some or all
interest payments may be required to be included in the stated redemption price
of the REMIC Regular Certificate and accounted for as original issue discount.
Because interest on REMIC Regular Certificates must in any event be accounted
for under an accrual method, applying this analysis would result in only a
slight difference in the timing of the inclusion in income of the yield on the
REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns provided to the Certificateholders and the IRS will be based on the
position that the portion of the purchase price paid for the interest accrued
with respect to periods prior to the Closing Date is treated as part of the
overall cost of such REMIC Regular Certificate (and not as a separate asset the
cost of which is recovered entirely out of interest received on the next
Distribution Date) and that portion of the interest paid on the first
Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
REMIC Regular Certificate. However, the OID Regulations state that all or some
portion of such accrued interest may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first Distribution Date.
It is unclear how an election to do so would be made under the OID Regulations
and whether such an election could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue
discount, original issue discount on a REMIC Regular Certificate will be
considered to be de minimis if it is less than 0.25% of the stated redemption
price of the REMIC Regular Certificate multiplied by its weighted average life.
For this purpose, the weighted average life of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is
in excess of a de minimis amount, the holder of such Certificate must include in
ordinary gross income the sum of the "daily portions" of original issue discount
for each day during its taxable year on which it held such REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated
in the related Prospectus Supplement, each period that ends on a date that
corresponds to a Distribution Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (b) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods
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based on the Mortgage Loans being prepaid at a rate equal to the Prepayment
Assumption and (ii) using a discount rate equal to the original yield to
maturity of the Certificate. For these purposes, the original yield to maturity
of the Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that
purchases such Certificate at a cost (excluding any portion of such cost
attributable to accrued qualified stated interest) less than its remaining
stated redemption price will also be required to include in gross income the
daily portions of any original issue discount with respect to such Certificate.
However, each such daily portion will be reduced, if such cost is in excess of
its "adjusted issue price", in proportion to the ratio such excess bears to the
aggregate original issue discount remaining to be accrued on such REMIC Regular
Certificate. The adjusted issue price of a REMIC Regular Certificate on any
given day equals the sum of (i) the adjusted issue price (or, in the case of the
first accrual period, the issue price) of such Certificate at the beginning of
the accrual period which includes such day and (ii) the daily portions of
original issue discount for all days during such accrual period prior to such
day.
MARKET DISCOUNT. A Certificateholder that purchases a REMIC
Regular Certificate at a market discount, that is, in the case of a REMIC
Regular Certificate issued without original issue discount, at a purchase price
less than its remaining stated principal amount, or in the case of a REMIC
Regular Certificate issued with original issue discount, at a purchase price
less than its adjusted issue price will recognize gain upon receipt of each
distribution representing stated redemption price. In particular, under Section
1276 of the Code such a Certificateholder generally will be required to allocate
the portion of each such distribution representing stated redemption price first
to accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A Certificateholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, such election will
apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies. In
addition, the OID Regulations permit a Certificateholder to elect to accrue all
interest, discount (including de minimis market or original issue discount) and
premium in income as interest, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--Taxation of Owners of REMIC Regular Certificates-- Premium". Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular
Certificate will be considered to be de minimis for purposes of Section 1276 of
the Code if such market discount is less than 0.25% of the remaining stated
redemption price of such REMIC Regular Certificate multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, presumably taking into account the
Prepayment Assumption. If market discount is treated as de minimis under this
rule, it appears that the actual discount would be treated in a manner similar
to original issue discount of a de minimis amount. See "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount".
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Such treatment would result in discount being included in income at a slower
rate than discount would be required to be included in income using the method
described above.
Section 1276(b)(3) of the Code specifically authorizes the
Treasury Department to issue regulations providing for the method for accruing
market discount on debt instruments, the principal of which is payable in more
than one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC Regular Certificate
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be paid
on the REMIC Regular Certificate as of the beginning of the accrual period, or
(iii) in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining on the REMIC Regular Certificate at
the beginning of the accrual period. Moreover, the Prepayment Assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC Regular Certificate
purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for
monthly or other periodic distributions throughout their term, the effect of
these rules may be to require market discount to be includible in income at a
rate that is not significantly slower than the rate at which such discount would
accrue if it were original issue discount. Moreover, in any event a holder of a
REMIC Regular Certificate generally will be required to treat a portion of any
gain on the sale or exchange of such Certificate as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC
Regular Certificate may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a REMIC Regular Certificate purchased with market
discount. For these purposes, the de minimis rule referred to above applies. Any
such deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost
(excluding any portion of such cost attributable to accrued qualified stated
interest) greater than its remaining stated redemption price will be considered
to be purchased at a premium. The holder of such a REMIC Regular Certificate may
elect under Section 171 of the Code to amortize such premium under the constant
yield method over the life of the Certificate. If made, such an election will
apply to all debt instruments having amortizable bond premium that the holder
owns or subsequently acquires. Amortizable premium will be treated as an offset
to interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount". The Committee Report states that the same rules
that apply to accrual of market discount (which rules will require use of a
Prepayment Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES. Under Section 166 of the Code, both corporate
holders of the REMIC Regular Certificates and noncorporate holders of the REMIC
Regular Certificates that acquire such Certificates in connection with a trade
or business should be allowed to deduct, as ordinary losses, any losses
sustained
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during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Residential Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to
accrue interest and original issue discount with respect to such Certificate,
without giving effect to any reductions in distributions attributable to
defaults or delinquencies on the Residential Loans or the underlying
Certificates until it can be established that any such reduction ultimately will
not be recoverable. As a result, the amount of taxable income reported in any
period by the holder of a REMIC Regular Certificate could exceed the amount of
economic income actually realized by the holder in such period. Although the
holder of a REMIC Regular Certificate eventually will recognize a loss or
reduction in income attributable to previously accrued and included income that
as the result of a realized loss ultimately will not be realized, the law is
unclear with respect to the timing and character of such loss or reduction in
income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL. As residual interests, the REMIC Residual
Certificates will be subject to tax rules that differ significantly from those
that would apply if the REMIC Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the Mortgage Loans or as
debt instruments issued by the REMIC.
An original holder of a REMIC Residual Certificate generally
will be required to report its daily portion of the taxable income or, subject
to the limitations noted in this discussion, the net loss of the REMIC for each
day during a calendar quarter that such holder owned such REMIC Residual
Certificate. For this purpose, the taxable income or net loss of the REMIC will
be allocated to each day in the calendar quarter ratably using a "30 days per
month/90 days per quarter/360 days per year" convention unless otherwise
disclosed in the related Prospectus Supplement. The daily amounts so allocated
will then be allocated among the REMIC Residual Certificateholders in proportion
to their respective ownership interests on such day. Any amount included in the
gross income or allowed as a loss of any REMIC Residual Certificateholder by
virtue of this paragraph will be treated as ordinary income or loss. The taxable
income of the REMIC will be determined under the rules described below in
"--Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses".
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder of such Certificate also will be required to
report on its federal income tax return amounts representing its daily share of
the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. Those daily amounts generally will equal the amounts
of taxable income or net loss determined as described above. The Committee
Report indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise to reduce (or increase) the income of a
REMIC Residual Certificateholder that purchased such REMIC Residual Certificate
from a prior holder of such Certificate at a price greater than (or less than)
the adjusted basis (as defined below) such REMIC Residual Certificate would have
had in the hands of an original holder of such Certificate. The REMIC
Regulations, however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual
Certificate in connection with the acquisition of such REMIC Residual
Certificate will be taken into account in determining the income of such holder
for federal income tax purposes. Although it appears likely that any such
payment would be includible in income immediately upon its receipt, the IRS
might assert that such payment should be included in income over time according
to an amortization schedule or according to some other method. Because of the
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uncertainty concerning the treatment of such payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of such
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be
required to report (or the tax liability associated with such income) may exceed
the amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions", residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders" after-tax rate of return.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC
will equal the income from the Mortgage Loans and other assets of the REMIC plus
any cancellation of indebtedness income due to the allocation of realized losses
to REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will
have an initial aggregate basis in its assets equal to the sum of the issue
prices of all REMIC Certificates (or, if a class of REMIC Certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the Mortgage Loans and the other assets of the REMIC in
proportion to their respective fair market values. The issue price of any REMIC
Certificates offered hereby will be determined in the manner described above
under "--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount". The issue price of a REMIC Certificate received in exchange for an
interest in the Mortgage Loans or other property will equal the fair market
value of such interests in the Mortgage Loans or other property. Accordingly, if
one or more classes of REMIC Certificates are retained initially rather than
sold, the Master Servicer or the Trustee may be required to estimate the fair
market value of such interests in order to determine the basis of the REMIC in
the Mortgage Loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the
method of accrual by the REMIC of original issue discount income and market
discount income with respect to Mortgage Loans that it holds will be equivalent
to the method for accruing original issue discount income for holders of REMIC
Regular Certificates (that is, under the constant yield method taking into
account the Prepayment Assumption). However, a REMIC that acquires loans at a
market discount must include such market discount in income currently, as it
accrues, on a constant interest basis. See "--Taxation of Owners of REMIC
Regular Certificates" above, which describes a method for accruing such discount
income that is analogous to that required to be used by a REMIC as to Mortgage
Loans with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with
discount (or premium) to the extent that the REMIC's basis therein, determined
as described in the preceding paragraph, is less than (or greater than) its
stated redemption price. Any such discount will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any premium
on the Mortgage Loans. Premium on any Mortgage Loan to which such election
applies may be amortized under a constant yield method, presumably taking into
account a Prepayment Assumption. Further, such an election would not apply to
any Mortgage Loan originated on or before September 27, 1985. Instead, premium
on such a Mortgage Loan should be allocated among the principal payments thereon
and be deductible by the REMIC as those payments become due or upon the
prepayment of such Mortgage Loan.
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A REMIC will be allowed deductions for interest (including
original issue discount) on the REMIC Regular Certificates (including any other
class of REMIC Certificates constituting "regular interests" in the REMIC not
offered hereby) equal to the deductions that would be allowed if the REMIC
Regular Certificates (including any other class of REMIC Certificates
constituting "regular interests" in the REMIC not offered hereby) were
indebtedness of the REMIC. Original issue discount will be considered to accrue
for this purpose as described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount", except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price
in excess of the stated redemption price of such class (such excess "Issue
Premium"), the net amount of interest deductions that are allowed the REMIC in
each taxable year with respect to the REMIC Regular Certificates of such class
will be reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount".
As a general rule, the taxable income of a REMIC will be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See "--Prohibited Transactions Tax and
Other Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions". If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis
of a REMIC Residual Certificate will be equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the REMIC
Residual Certificateholder and decreased (but not below zero) by distributions
made, and by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into
account any net loss for any calendar quarter to the extent such net loss
exceeds such REMIC Residual Certificateholder's adjusted basis in its REMIC
Residual Certificate as of the close of such calendar quarter (determined
without regard to such net loss). Any loss that is not currently deductible by
reason of this limitation may be carried forward indefinitely to future calendar
quarters and, subject to the same limitation, may be used only to offset income
from the REMIC Residual Certificate. The ability of REMIC Residual
Certificateholders to deduct net losses may be subject to additional limitations
under the Code, as to which REMIC Residual Certificateholders should consult
their tax advisors.
Any distribution on a REMIC Residual Certificate will be
treated as a non-taxable return of capital to the extent it does not exceed the
holder's adjusted basis in such REMIC Residual Certificate. To the extent a
distribution on a REMIC Residual Certificate exceeds such adjusted basis, it
will be treated as gain from the sale of such REMIC Residual Certificate.
Holders of certain REMIC Residual Certificates may be entitled to distributions
early in the term of the related REMIC under circumstances in which their bases
in such REMIC Residual Certificates will not be sufficiently large that such
distributions will be treated as nontaxable returns of capital. Their bases in
such REMIC Residual Certificates will initially equal the amount paid for such
REMIC Residual Certificates and will be increased by their allocable shares of
taxable income of the Trust Fund. However, such bases increases may not occur
until the end of the calendar quarter, or
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perhaps the end of the calendar year, with respect to which such REMIC taxable
income is allocated to the REMIC Residual Certificateholders. To the extent such
REMIC Residual Certificateholders' initial bases are less than the distributions
to such REMIC Residual Certificateholders, and increases in such initial bases
either occur after such distributions or (together with their initial bases) are
less than the amount of such distributions, gain will be recognized to such
REMIC Residual Certificateholders on such distributions and will be treated as
gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual
Certificateholder may not amortize its basis in a REMIC Residual Certificate,
but may only recover its basis through distributions, through the deduction of
any net losses of the REMIC or upon the sale of its REMIC Residual Certificate.
See "--Sales of REMIC Certificates". For a discussion of possible modifications
of these rules that may require adjustments to income of a holder of a REMIC
Residual Certificate other than an original holder in order to reflect any
difference between the cost of such REMIC Residual Certificate to such REMIC
Residual Certificateholder and the adjusted basis such REMIC Residual
Certificate would have in the hands of an original holder, see " --Taxation of
Owners of REMIC Residual Certificates--General".
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a
REMIC Residual Certificate will, with an exception discussed below for certain
REMIC Residual Certificates held by thrift institutions, be subject to federal
income tax in all events.
In general, the "excess inclusions" with respect to a REMIC
Residual Certificate for any calendar quarter will be the excess, if any, of (i)
the sum of the daily portions of REMIC taxable income allocable to such REMIC
Residual Certificate over (ii) the sum of the "daily accruals" (as defined
below) for each day during such quarter that such REMIC Residual Certificate was
held by such REMIC Residual Certificateholder. The daily accruals of a REMIC
Residual Certificateholder will be determined by allocating to each day during a
calendar quarter its ratable portion of the product of the "adjusted issue
price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120% of the "long-term Federal rate" in effect on the Closing Date.
For this purpose, the adjusted issue price of a REMIC Residual Certificate as of
the beginning of any calendar quarter will be equal to the issue price of the
REMIC Residual Certificate, increased by the sum of the daily accruals for all
prior quarters and decreased (but not below zero) by any distributions made with
respect to such REMIC Residual Certificate before the beginning of such quarter.
The issue price of a REMIC Residual Certificate is the initial offering price to
the public (excluding bond houses and brokers) at which a substantial amount of
the REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i)
will not be permitted to be offset by deductions, losses or loss carryovers from
other activities, (ii) will be treated as "unrelated business taxable income" to
an otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
As an exception to the general rules described above, thrift
institutions are allowed to offset their excess inclusions with unrelated
deductions, losses or loss carryovers, but only if the REMIC Residual
Certificates are considered to have "significant value". The REMIC Regulations
provide that in order to be treated as having significant value, the REMIC
Residual Certificates must have an aggregate issue price, at least equal to two
percent of the aggregate issue prices of all of the related REMIC's Regular and
Residual Certificates. In addition, based on the Prepayment Assumption, the
anticipated weighted average life of the REMIC Residual Certificates must equal
or exceed 20 percent of the anticipated weighted average life of the REMIC,
based on the Prepayment Assumption and on any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents. Although it has not done so, the Treasury also has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value". The related Prospectus
Supplement will disclose whether offered REMIC Residual
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Certificates may be considered to have "significant value" under the REMIC
Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will have "significant value" will be based upon certain
assumptions, and the Depositor will make no representation that a REMIC Residual
Certificate will have "significant value" for purposes of the above-described
rules. The above-described exception for thrift institutions applies only to
those residual interests held directly by, and deductions, losses and loss
carryovers incurred by, such institutions (and not by other members of an
affiliated group of corporations filing a consolidated income tax return) or by
certain wholly-owned direct subsidiaries of such institutions formed or operated
exclusively in connection with the organization and operation of one or more
REMICs.
In the case of any REMIC Residual Certificates held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC
Regulations, transfers of "noneconomic" REMIC Residual Certificates will be
disregarded for all federal income tax purposes if "a significant purpose of the
transfer was to enable the transferor to impede the assessment or collection of
tax". If such transfer is disregarded, the purported transferor will continue to
remain liable for any taxes due with respect to the income on such "noneconomic"
REMIC Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered "noneconomic" residual
interests under the REMIC Regulations; provided, however, that any disclosure
that a REMIC Residual Certificate will not be considered "noneconomic" will be
based upon certain assumptions, and the Depositor will make no representation
that a REMIC Residual Certificate will not be considered "noneconomic" for
purposes of the above-described rules. See " --Foreign Investors in REMIC
Certificates--REMIC Residual Certificates" below for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
MARK-TO-MARKET RULES. Prospective purchasers of a REMIC
Residual Certificate should be aware that on December 28, 1993, the IRS released
temporary regulations under Code Section 475 (the "Temporary Mark-to-Market
Regulations") relating to the requirement that a securities dealer mark to
market
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securities held for sale to customers. This mark-to-market requirement applies
to all securities owned by a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Temporary
Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" REMIC Residual Certificate is not treated as a
security and thus may not be marked to market. In general, a REMIC Residual
Certificate has negative value if, as of the date a taxpayer acquires the REMIC
Residual Certificate, the present value of the tax liabilities associated with
holding the REMIC Residual Certificate exceeds the sum of (i) the present value
of the expected future distributions on the REMIC Residual Certificate, and (ii)
the present value of the anticipated tax savings associated with holding the
REMIC Residual Certificate as the REMIC generates losses. The amounts and
present values of the anticipated tax liabilities, expected future distributions
and anticipated tax savings are all to be determined using (i) the prepayment
and reinvestment assumptions adopted under Section 1272(a)(6) of the Code, or
that would have been adopted had the REMIC's regular interests been issued with
original issue discount, (ii) any required or permitted clean up calls, or
required qualified liquidation, provided for in the REMIC's organizational
documents and (iii) a discount rate equal to the "applicable Federal rate" (as
specified in Section 1274(d)(1) of the Code) that would apply to a debt
instrument issued on the date of acquisition of the REMIC Residual Certificate.
The Temporary Mark-to-Market Regulations apply to taxable years ending on or
after December 31, 1993. Furthermore, the Temporary Mark-to-Market Regulations
provide the IRS with the authority to treat any REMIC Residual Certificate
having substantially the same economic effect as a "negative value" residual
interest. On January 3, 1995, the IRS released proposed regulations under
Section 475 of the Code (the "Proposed Mark-to-Market Regulations"). The
Proposed Mark-to-Market Regulations provide that any residual interest
(regardless of whether it has negative value) that is acquired on or after
January 4, 1995 is not a "security" for the purposes of Section 475 of the Code,
and thus is not subject to the mark-to-market rules. Prospective purchasers of a
REMIC Residual Certificate should consult their tax advisors regarding the
possible application of the Temporary Mark-to-Market Regulations and the
Proposed Mark-to-Market Regulations.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS.
Fees and expenses of a REMIC generally will be allocated to the holders of the
related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to the gross income of such holder and (ii) such individual's, estate's or
trust's share of such fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the limitation of Section 67 of the
Code, which permits such deductions only to the extent they exceed in the
aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount will be reduced by the lesser of (i) 3% of the excess of the individual's
adjusted gross income over such amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Such prospective investors should carefully consult with their own tax
advisors prior to making an investment in such Certificates.
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SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold,
the selling Certificateholder will recognize gain or loss equal to the
difference between the amount realized on the sale and its adjusted basis in the
REMIC Certificate. The adjusted basis of a REMIC Regular Certificate generally
will equal the cost of such REMIC Regular Certificate to such Certificateholder,
increased by income reported by such Certificateholder with respect to such
REMIC Regular Certificate (including original issue discount and market discount
income) and reduced (but not below zero) by distributions on such REMIC Regular
Certificate received by such Certificateholder and by any amortized premium. The
adjusted basis of a REMIC Residual Certificate will be determined as described
under "--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net
Losses and Distributions". Except as provided in the following two paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code. The Code as of the date of this
Prospectus provides for a top marginal tax rate of 39.6% for individuals and a
maximum marginal rate for long-term capital gains of individuals of 28%. No such
rate differential exists for corporations. In addition, the distinction between
a capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent such
gain does not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to such REMIC Regular Certificate
assuming that income had accrued thereon at a rate equal to 110% of the
"applicable Federal rate" (generally, a rate based on an average of current
yields on Treasury securities having a maturity comparable to that of the
Certificate based on the application of the Prepayment Assumption to such
Certificate, which rate is computed and published monthly by the IRS),
determined as of the date of purchase of such REMIC Regular Certificate, over
(ii) the amount of ordinary income actually includible in the seller's income
prior to such sale. In addition, gain recognized on the sale of a REMIC Regular
Certificate by a seller who purchased such REMIC Regular Certificate at a market
discount will be taxable as ordinary income in an amount not exceeding the
portion of such discount that accrued during the period such REMIC Certificate
was held by such holder, reduced by any market discount included in income under
the rules described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium".
REMIC Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from the sale of a REMIC Certificate by a bank or thrift institution to which
such section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular
Certificate that might otherwise be capital gain may be treated as ordinary
income to the extent that such Certificate is held as part of a "conversion
transaction" within the meaning of Section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in the same or similar property that reduce or eliminate market risk,
if substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in such transaction. The amount of gain so
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed
at ordinary income rates rather than capital gains rates in order to include
such net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be
issued, if the seller of a REMIC Residual Certificate reacquires a REMIC
Residual Certificate, or acquires any other residual interest in a REMIC or any
similar interest in a "taxable mortgage pool" (as defined in Section 7701(i) of
the Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
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Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES. The Code imposes
a tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to certain
specified exceptions a prohibited transaction means the disposition of a
Mortgage Loan, the receipt of income from a source other than a Mortgage Loan or
certain other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that the REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the
day on which the REMIC issues all of its interests could result in the
imposition of a tax on the REMIC equal to 100% of the value of the contributed
property (a "Contributions Tax"). Each Pooling Agreement will include provisions
designed to prevent the acceptance of any contributions that would be subject to
such tax.
REMICs also are subject to federal income tax at the highest
corporate rate on "net income from foreclosure property", determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means gain from the sale of a foreclosure
property that is inventory property and gross income from foreclosure property
other than qualifying rents and other qualifying income for a real estate
investment trust. Unless otherwise disclosed in the related Prospectus
Supplement, it is not anticipated that any REMIC will recognize "net income from
foreclosure property" subject to federal income tax.
Unless otherwise disclosed in the related Prospectus
Supplement, it is not anticipated that any material state or local income or
franchise tax will be imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement,
and to the extent permitted by then applicable laws, any Prohibited Transactions
Tax, Contributions Tax, tax on "net income from foreclosure property" or state
or local income or franchise tax that may be imposed on the REMIC will be borne
by the related Master Servicer, Special Servicer or Trustee in any case out of
its own funds, provided that such person has sufficient assets to do so, and
provided further that such tax arises out of a breach of such person's
obligations under the related Pooling Agreement and in respect of compliance
with applicable laws and regulations. Any such tax not borne by a Master
Servicer, Special Servicer or Trustee will be charged against the related Trust
Fund resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL
CERTIFICATES TO CERTAIN ORGANIZATIONS. If a REMIC Residual Certificate is
transferred to a "disqualified organization" (as defined below), a tax would be
imposed in an amount (determined under the REMIC Regulations) equal to the
product of (i) the present value (discounted using the "applicable Federal rate"
for obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) of the
total anticipated excess inclusions with respect to such REMIC Residual
Certificate for periods after the transfer and (ii) the highest marginal federal
income tax rate applicable to corporations. The anticipated excess inclusions
must be determined as of the date that the REMIC Residual Certificate is
transferred and must be based on events that have occurred up to the time of
such transfer, the Prepayment Assumption and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents. Such a tax generally would be imposed on the transferor of the REMIC
Residual Certificate, except that where such transfer is through an agent for a
disqualified organization, the tax would instead be imposed on such agent.
However, a transferor of a REMIC Residual Certificate would in no event be
liable for such tax with respect to a transfer if the transferee furnishes to
the transferor an affidavit that the transferee is not a disqualified
organization and, as of the time of the transfer, the transferor does not have
actual knowledge that such affidavit is false. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that (i) residual
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interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the Pooling Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below)
includes in income excess inclusions with respect to a REMIC Residual
Certificate, and a disqualified organization is the record holder of an interest
in such entity, then a tax will be imposed on such entity equal to the product
of (i) the amount of excess inclusions on the REMIC Residual Certificate that
are allocable to the interest in the pass-through entity held by such
disqualified organization and (ii) the highest marginal federal income tax rate
imposed on corporations. A pass-through entity will not be subject to this tax
for any period, however, if each record holder of an interest in such
pass-through entity furnishes to such pass-through entity (i) such holder's
social security number and a statement under penalty of perjury that such social
security number is that of the record holder or (ii) a statement under penalty
of perjury that such record holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i)
the United States, any State or political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality of
the foregoing (but would not include instrumentalities described in Section
168(h)(2)(D) of the Code or the Federal Home Loan Mortgage Corporation), (ii)
any organization (other than a cooperative described in Section 521 of the Code)
that is exempt from federal income tax, unless it is subject to the tax imposed
by Section 511 of the Code or (iii) any organization described in Section
1381(a)(2)(C) of the Code. For these purposes, a "pass-through entity" means any
regulated investment company, real estate investment trust, trust, partnership
or certain other entities described in Section 860E(e)(6) of the Code. In
addition, a person holding an interest in a pass-through entity as a nominee for
another person will, with respect to such interest, be treated as a pass-through
entity.
TERMINATION. A REMIC will terminate immediately after the
Distribution Date following receipt by the REMIC of the final payment in respect
of the Mortgage Loans or upon a sale of the REMIC's assets following the
adoption by the REMIC of a plan of complete liquidation. The last distribution
on a REMIC Regular Certificate will be treated as a payment in retirement of a
debt instrument. In the case of a REMIC Residual Certificate, if the last
distribution on such REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in such REMIC Residual Certificate, such
REMIC Residual Certificateholder should (but may not) be treated as realizing a
loss equal to the amount of such difference, and such loss may be treated as a
capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for
purposes of the administrative provisions of the Code, the REMIC will be treated
as a partnership and REMIC Residual Certificateholders will be treated as
partners. Unless otherwise stated in the related Prospectus Supplement, either
the Trustee or the Master Servicer, generally will hold at least a nominal
amount of REMIC Residual Certificates, will file REMIC federal income tax
returns on behalf of the related REMIC, and will be designated as and will act
as the "tax matters person" with respect to the REMIC in all respects.
As the tax matters person, the Trustee or the Master Servicer,
as the case may be, will, subject to certain notice requirements and various
restrictions and limitations, generally have the authority to act on behalf of
the REMIC and the REMIC Residual Certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC Residual
Certificateholders will generally be required to report such REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the Trustee or the
Master Servicer, as the case may be, as tax matters person, and the IRS
concerning any such REMIC item. Adjustments made to the REMIC tax return may
require a REMIC Residual Certificateholder to make corresponding adjustments on
its return, and an audit of the REMIC's tax return, or the adjustments resulting
from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. No REMIC will be registered as a tax shelter
pursuant to Section 6111 of the Code because it is not anticipated that any
REMIC will have a net loss for any of the first five
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taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish to the
related REMIC, in a manner to be provided in Treasury regulations, the name and
address of such person and other information.
Reporting of interest income, including any original issue
discount, with respect to REMIC Regular Certificates is required annually, and
may be required more frequently under Treasury regulations. These information
reports generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information
reports will include a statement of the adjusted issue price of the REMIC
Regular Certificate at the beginning of each accrual period. In addition, the
reports will include information required by regulations with respect to
computing the accrual of any market discount. Because exact computation of the
accrual of market discount on a constant yield method would require information
relating to the holder's purchase price that the REMIC may not have, such
regulations only require that information pertaining to the appropriate
proportionate method of accruing market discount be provided. See "--Taxation of
Owners of REMIC Regular Certificates--Market Discount".
The responsibility for complying with the foregoing reporting
rules will be borne by either the Trustee or the Master Servicer, unless
otherwise stated in the related Prospectus Supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES.
Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax" under
Section 3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a "United States person" (as defined below) and is
not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not, unless otherwise disclosed in the related Prospectus
Supplement, be subject to United States federal income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that the
holder complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such Certificateholder). For
these purposes, "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision thereof, or an
estate or trust whose income from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
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In addition, the foregoing rules will not apply to exempt a
United States shareholder of a controlled foreign corporation from taxation on
such United States shareholder's allocable portion of the interest income
received by such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not
be included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
Unless otherwise stated in the related Prospectus Supplement,
transfers of REMIC Residual Certificates to investors that are not United States
persons will be prohibited under the related Pooling Agreement.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each
series of Grantor Trust Certificates, counsel to the Depositor will deliver its
opinion to the effect that, assuming compliance with all provisions of the
related Pooling Agreement, the related Grantor Trust Fund will be classified as
a grantor trust under subpart E, part I of subchapter J of the Code and not as a
partnership or an association taxable as a corporation. Accordingly, each holder
of a Grantor Trust Certificate generally will be treated as the owner of an
interest in the Mortgage Loans included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust
Certificate representing an undivided equitable ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund,
together with interest thereon at a pass-through rate, will be referred to as a
"Grantor Trust Fractional Interest Certificate". A Grantor Trust Certificate
representing ownership of all or a portion of the difference between interest
paid on the Mortgage Loans constituting the related Grantor Trust Fund (net of
normal administration fees and any spread) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to such
Grantor Trust Fund will be referred to as a "Grantor Trust Strip Certificate". A
Grantor Trust Strip Certificate may also evidence a nominal ownership interest
in the principal of the Mortgage Loans constituting the related Grantor Trust
Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of
Grantor Trust Fractional Interest Certificates, unless otherwise disclosed in
the related Prospectus Supplement, counsel to the Depositor will deliver an
opinion that, in general, Grantor Trust Fractional Interest Certificates will
represent interests in (i) "qualifying real property loans" within the meaning
of Section 593(d) of the Code; (ii) assets described in Section 7701(a)(19)(C)
of the Code; (iii) "obligation[s] (including any participation or certificate of
beneficial ownership therein) which . . . [are] principally secured by an
interest in real property" within the meaning of Section 860G(a)(3)(A) of the
Code; and (iv) "real estate assets" within the meaning of Section 856(c)(5)(A)
of the Code. In addition, counsel to the Depositor will deliver an opinion that
interest on Grantor Trust Fractional Interest Certificates will to the same
extent be considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of Mortgage
Loans that are assets described in Section 7701(a)(19)(C) of the Code,
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, and "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code, and the interest on which is "interest on obligations secured by mortgages
on real property" within the meaning of Section 856(c)(3)(B) of the Code, it is
unclear whether the Grantor Trust Strip Certificates, and the income therefrom,
will be so characterized. However, the policies underlying such sections
(namely, to encourage or require investments in mortgage loans by thrift
institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers
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to which such characterization of an investment in Grantor Trust Strip
Certificates is material should consult their tax advisors regarding whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized.
The Grantor Trust Strip Certificates will be "obligation[s]
(including any participation or certificate of beneficial ownership therein)
which . . . [are] principally secured by an interest in real property" within
the meaning of Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
GENERAL. Holders of a particular series of Grantor Trust
Fractional Interest Certificates generally will be required to report on their
federal income tax returns their shares of the entire income from the Mortgage
Loans (including amounts used to pay reasonable servicing fees and other
expenses) and will be entitled to deduct their shares of any such reasonable
servicing fees and other expenses. Because of stripped interests, market or
original issue discount, or premium, the amount includible in income on account
of a Grantor Trust Fractional Interest Certificate may differ significantly from
the amount distributable thereon representing interest on the Mortgage Loans.
Under Section 67 of the Code, an individual, estate or trust holding a Grantor
Trust Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional
Interest Certificates of any series will depend on whether they are subject to
the "stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors". The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to a Master Servicer, a
Special Servicer, any Sub-Servicer or their respective affiliates necessary to
determine whether the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules
apply, each Grantor Trust Fractional Interest Certificate will be treated as
having been issued with "original issue discount" within the meaning of Section
1273(a) of the Code, subject, however, to the discussion below regarding the
treatment of certain stripped bonds as market discount bonds and the discussion
regarding DE MINIMIS market discount. See "--Taxation of Grantor Trust
Fractional Interest Certificates--Market Discount". Under the stripped bond
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rules, the holder of a Grantor Trust Fractional Interest Certificate (whether a
cash or accrual method taxpayer) will be required to report interest income from
its Grantor Trust Fractional Interest Certificate for each month in an amount
equal to the income that accrues on such Certificate in that month calculated
under a constant yield method, in accordance with the rules of the Code relating
to original issue discount.
The original issue discount on a Grantor Trust Fractional
Interest Certificate will be the excess of such Certificate's stated redemption
price over its issue price. The issue price of a Grantor Trust Fractional
Interest Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "--Sales of Grantor Trust Certificates") and the yield of such Grantor
Trust Fractional Interest Certificate to such holder. Such yield would be
computed at the rate (compounded based on the regular interval between payment
dates) that, if used to discount the holder's share of future payments on the
Mortgage Loans, would cause the present value of those future payments to equal
the price at which the holder purchased such Certificate. In computing yield
under the stripped bond rules, a Certificateholder's share of future payments on
the Mortgage Loans will not include any payments made in respect of any spread
or any other ownership interest in the Mortgage Loans retained by the Depositor,
a Master Servicer, a Special Servicer, any Sub-Servicer or their respective
affiliates, but will include such Certificateholder's share of any reasonable
servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a
reasonable prepayment assumption in accruing original issue discount and (ii)
adjustments in the accrual of original issue discount when prepayments do not
conform to the prepayment assumption, with respect to certain categories of debt
instruments, and regulations could be adopted applying those provisions to the
Grantor Trust Fractional Interest Certificates. It is unclear whether those
provisions would be applicable to the Grantor Trust Fractional Interest
Certificates or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount in general and, in particular,
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate
acquired at a price equal to the principal amount of the Mortgage Loans
allocable to such Certificate, the use of a prepayment assumption generally
would not have any significant effect on the yield used in calculating accruals
of interest income. In the case, however, of a Grantor Trust Fractional Interest
Certificate acquired at a discount or premium (that is, at a price less than or
greater than such principal amount, respectively), the use of a reasonable
prepayment assumption would increase or decrease such yield, and thus accelerate
or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage
Loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a discount or a premium generally will recognize
ordinary income or loss equal to the difference between the portion of the
prepaid principal amount of the Mortgage Loan that is allocable to such
Certificate and the portion of the adjusted basis of such Certificate that is
allocable to such Certificateholder's interest in the Mortgage Loan. If a
prepayment assumption is used, it appears that no separate item of income or
loss should be recognized upon a prepayment. Instead, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of
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Owners of REMIC Regular Certificates--Original Issue Discount". It is unclear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification,
it is currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped
bonds are to be treated as market discount bonds and, accordingly, any purchaser
of such a bond is to account for any discount on the bond as market discount
rather than original issue discount. This treatment only applies, however, if
immediately after the most recent disposition of the bond by a person stripping
one or more coupons from the bond and disposing of the bond or coupon (i) there
is no original issue discount (or only a DE MINIMIS amount of original issue
discount) or (ii) the annual stated rate of interest payable on the original
bond is no more than one percentage point lower than the gross interest rate
payable on the original mortgage loan (before subtracting any servicing fee or
any stripped coupon). If interest payable on a Grantor Trust Fractional Interest
Certificate is more than one percentage point lower than the gross interest rate
payable on the Mortgage Loans, the related Prospectus Supplement will disclose
that fact. If the original issue discount or market discount on a Grantor Trust
Fractional Interest Certificate determined under the stripped bond rules is less
than 0.25% of the stated redemption price multiplied by the weighted average
maturity of the Mortgage Loans, then such original issue discount or market
discount will be considered to be DE MINIMIS. Original issue discount or market
discount of only a DE MINIMIS amount will be included in income in the same
manner as DE MINIMIS original issue and market discount described in "--Taxation
of Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond
Rules Do Not Apply" and "--Market Discount".
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion
below on original issue discount, if the stripped bond rules do not apply to a
Grantor Trust Fractional Interest Certificate, the Certificateholder will be
required to report its share of the interest income on the Mortgage Loans in
accordance with such Certificateholder's normal method of accounting. The
original issue discount rules will apply to a Grantor Trust Fractional Interest
Certificate to the extent it evidences an interest in Mortgage Loans issued with
original issue discount.
The original issue discount, if any, on the Mortgage Loans
will equal the difference between the stated redemption price of such Mortgage
Loans and their issue price. Under the OID Regulations, the stated redemption
price is equal to the total of all payments to be made on such Mortgage Loan
other than "qualified stated interest". "Qualified stated interest" includes
interest that is unconditionally payable at least annually at a single fixed
rate, at a "qualified floating rate", or at an "objective rate", a combination
of a single fixed rate and one or more "qualified floating rates" or one
"qualified inverse floating rate", or a combination of "qualified floating
rates" that does not operate in a manner that accelerates or defers interest
payments on such Mortgage Loan. In general, the issue price of a Mortgage Loan
will be the amount received by the borrower from the lender under the terms of
the Mortgage Loan, less any "points" paid by the borrower, and the stated
redemption price of a Mortgage Loan will equal its principal amount, unless the
Mortgage Loan provides for an initial below-market rate of interest or the
acceleration or the deferral of interest payments.
In the case of Mortgage Loans bearing adjustable or variable
interest rates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Mortgage Loans in
preparing information returns to the Certificateholders and the IRS.
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Notwithstanding the general definition of original issue
discount, original issue discount will be considered to be DE MINIMIS if such
original issue discount is less than 0.25% of the stated redemption price
multiplied by the weighted average maturity of the Mortgage Loan. For this
purpose, the weighted average maturity of the Mortgage Loan will be computed as
the sum of the amounts determined, as to each payment included in the stated
redemption price of such Mortgage Loan, by multiplying (i) the number of
complete years (rounding down for partial years) from the issue date until such
payment is expected to be made by (ii) a fraction, the numerator of which is the
amount of the payment and the denominator of which is the stated redemption
price of the Mortgage Loan. Under the OID Regulations, original issue discount
of only a DE MINIMIS amount (other than DE MINIMIS original issue discount
attributable to a so-called "teaser" rate or initial interest holiday) will be
included in income as each payment of stated principal price is made, based on
the product of the total amount of such DE MINIMIS original issue discount and a
fraction, the numerator of which is the amount of each such payment and the
denominator of which is the outstanding stated principal amount of the Mortgage
Loan. The OID Regulations also permit a Certificateholder to elect to accrue DE
MINIMIS original issue discount into income currently based on a constant yield
method. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" below.
If original issue discount is in excess of a DE MINIMIS
amount, all original issue discount with respect to a Mortgage Loan will be
required to be accrued and reported in income each month, based on a constant
yield. The OID Regulations suggest that no prepayment assumption is appropriate
in computing the yield on prepayable obligations issued with original issue
discount. In the absence of statutory or administrative clarification, it
currently is not intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate
that purchases such Grantor Trust Fractional Interest Certificate at a cost less
than such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
Unless otherwise provided in the related Prospectus
Supplement, the Trustee or Master Servicer, as applicable, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
such holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"--Grantor Trust Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to
the Grantor Trust Fractional Interest Certificate, a Certificateholder may be
subject to the market discount rules of Sections 1276 through 1278 of the Code
to the extent an interest in a Mortgage Loan is considered to have been
purchased at a "market discount", that is, in the case of a Mortgage Loan issued
without original issue discount, at a purchase
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price less than its remaining stated redemption price (as defined above), or in
the case of a Mortgage Loan issued with original issue discount, at a purchase
price less than its adjusted issue price (as defined above). If market discount
is in excess of a DE MINIMIS amount (as described below), the holder generally
will be required to include in income in each month the amount of such discount
that has accrued (under the rules described in the next paragraph) through such
month that has not previously been included in income, but limited, in the case
of the portion of such discount that is allocable to any Mortgage Loan, to the
payment of stated redemption price on such Mortgage Loan that is received by
(or, in the case of accrual basis Certificateholders, due to) the Trust Fund in
that month. A Certificateholder may elect to include market discount in income
currently as it accrues (under a constant yield method based on the yield of the
Certificate to such holder) rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder during or after the first
taxable year to which such election applies. In addition, the OID Regulations
would 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 made
with respect to a Mortgage Loan with market discount, the Certificateholder
would be deemed to have made an election to include currently market discount in
income with respect to all other debt instruments having market discount that
such Certificateholder acquires during the taxable year of the election and
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate acquired at a
premium would be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Premium". Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Committee Report apply. Under those
rules, in each accrual period market discount on the Mortgage Loans should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a Mortgage Loan issued without original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the stated interest paid in the accrual period bears to the total
stated interest remaining to be paid on the Mortgage Loan as of the beginning of
the accrual period, or (iii) in the case of a Mortgage Loan issued with original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual period
bears to the total original issue discount remaining at the beginning of the
accrual period. The prepayment assumption, if any, used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. The effect of using a prepayment assumption could be to
accelerate the reporting of such discount income. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a
Mortgage Loan purchased at a discount in the secondary market.
Because the Mortgage Loans will provide for periodic payments
of stated redemption price, such discount may be required to be included in
income at a rate that is not significantly slower than the rate at which such
discount would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will
be considered to be DE MINIMIS if it is less than 0.25% of the stated redemption
price of the Mortgage Loans multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption used,
if any. The effect of using a prepayment assumption could be to accelerate the
reporting of such discount income. If market discount is treated as DE MINIMIS
under the foregoing rule, it appears that actual discount would be treated in a
manner similar to original issue discount of a DE MINIMIS amount. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply".
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Further, under the rules described in "--REMICs--Taxation of
Owners of REMIC Regular Certificates--Market Discount", any discount that is not
original issue discount and exceeds a DE MINIMIS amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
PREMIUM. If a Certificateholder is treated as acquiring the
underlying Mortgage Loans at a premium, that is, at a price in excess of their
remaining stated redemption price, such Certificateholder may elect under
Section 171 of the Code to amortize using a constant yield method the portion of
such premium allocable to Mortgage Loans originated after September 27, 1985.
Amortizable premium is treated as an offset to interest income on the related
debt instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used
in computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
Mortgage Loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loan. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount". It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, if any, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The
"stripped coupon" rules of Section 1286 of the Code will apply to the Grantor
Trust Strip Certificates. Except as described above in "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules Apply",
no regulations or published rulings under Section 1286 of the Code have been
issued and some uncertainty exists as to how it will be applied to securities
such as the Grantor Trust Strip Certificates. Accordingly, holders of Grantor
Trust Strip Certificates should consult their own tax advisors concerning the
method to be used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons",
although they provide general guidance as to how the original issue discount
sections of the Code will be applied. In addition, the discussion below is
subject to the discussion under "--Possible Application of Proposed Contingent
Payment Rules" below and assumes that the holder of a Grantor Trust Strip
Certificate will not own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original
issue discount will be required to be accrued in each month on the Grantor Trust
Strip Certificates based on a constant yield method. In effect, each holder of
Grantor Trust Strip Certificates would include as interest income in each month
an amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
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As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. Regulations could be
adopted applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust Strip
Certificates or whether use of a prepayment assumption may be required or
permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates
will be significantly slower if a prepayment assumption is permitted to be made
than if yield is computed assuming no prepayments. In the absence of statutory
or administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their own tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment
of a Mortgage Loan will give rise to a loss to the holder of a Grantor Trust
Strip Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES. The
coupon stripping rules' general treatment of stripped coupons is to regard them
as newly issued debt instruments in the hands of each purchaser. To the extent
that payments on the Grantor Trust Strip Certificates would cease if the
Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates could
be considered to be debt instruments providing for contingent payments. Under
the OID Regulations, debt instruments providing for contingent payments are not
subject to the same rules as debt instruments providing for noncontingent
payments, but no final regulations have been promulgated with respect to
contingent payment debt instruments. Proposed regulations were promulgated in
1994 regarding contingent payment debt instruments, but have not been made final
and are likely to be substantially revised before being made final. Moreover,
like the OID Regulations, such proposed regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss, equal
to the difference between the amount realized on the sale or exchange of a
Grantor Trust Certificate and its adjusted basis, recognized on such sale or
exchange of a Grantor Trust Certificate by an investor who holds such Grantor
Trust Certificate as a capital asset, will be capital gain or loss, except to
the extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate
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generally will equal its cost, increased by any income reported by the seller
(including original issue discount and market discount income) and reduced (but
not below zero) by any previously reported losses, any amortized premium and by
any distributions with respect to such Grantor Trust Certificate. The Code as of
the date of this Prospectus provides a top marginal tax rate of 39.6% for
individuals and a maximum marginal rate for long-term capital gains of
individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may
be partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
GRANTOR TRUST REPORTING. Unless otherwise provided in the
related Prospectus Supplement, the Trustee or Master Servicer, as applicable,
will furnish to each holder of a Grantor Trust Certificate with each
distribution a statement setting forth the amount of such distribution allocable
to principal on the underlying Mortgage Loans and to interest thereon at the
related Pass-Through Rate. In addition, within a reasonable time after the end
of each calendar year, the Trustee or Master Servicer, as applicable, will
furnish to each Certificateholder during such year such customary factual
information as the Depositor or the reporting party deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trustee's or Master Servicer's, as the
case may be, information reports of such items of income and expense. Moreover,
such information reports, even if otherwise accepted as accurate by the IRS,
will in any event be accurate only as to the initial Certificateholders that
bought their Certificates at the representative initial offering price used in
preparing such reports.
BACKUP WITHHOLDING. In general, the rules described in
"--REMICs--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to
REMIC Regular Certificates in "--REMICs--Foreign Investors in REMIC
Certificates" applies to Grantor Trust Certificates except that Grantor Trust
Certificates will, unless otherwise disclosed in the related Prospectus
Supplement, be eligible for exemption from United States withholding tax,
subject to the conditions described in such discussion, only to the extent the
related Mortgage Loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate
would be exempt under Sections 871(h)(1) and 881(c) of the Code from United
States withholding tax, and the Grantor Trust Certificate is not held in
connection with a Certificateholder's trade or business in the United States,
such Grantor Trust Certificate will not be subject to United States estate taxes
in the estate of a non-resident alien individual.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described
in "Certain Federal Income Tax Consequences", potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ substantially
from the corresponding federal tax law, and the discussion above does not
purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Offered Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Code impose certain requirements on employee benefit
plans, and on certain 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 are subject to the fiduciary responsibility
provisions of ERISA and Section 4975 of the Code (all of which are hereinafter
referred to as "Plans"), and on persons who are fiduciaries with respect to
Plans, in connection with the investment of Plan assets. Certain employee
benefit plans, such as governmental plans (as defined in ERISA Section 3(32)),
and, if no election has been made under Section 410(d) of the Code, church plans
(as defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Offered Certificates
without regard to the ERISA considerations described below, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
ERISA generally imposes on Plan fiduciaries certain general
fiduciary requirements, including those of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. In addition, ERISA and the
Code prohibit a broad range of transactions involving assets of a Plan and
persons ("Parties in Interest") who have certain specified relationships to the
Plan, unless a statutory or administrative exemption is available. Certain
Parties in Interest that participate in a prohibited transaction may be subject
to an excise tax imposed pursuant to Section 4975 of the Code, unless a
statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Certificates may cause the Trust Assets
to be deemed Plan assets. Section 2510.3-101 of the regulations of the United
States Department of Labor ("DOL") provides that when a Plan acquires an equity
interest in an entity, the Plan's assets include both such equity interest and
an undivided interest in each of the underlying assets of the entity, unless
certain exceptions not applicable to this discussion apply, or unless the equity
participation in the entity by "benefit plan investors" (that is, Plans and
certain employee benefit plans not subject to ERISA) is not "significant". For
this purpose, in general, equity participation in a Trust Fund will be
"significant" on any date if, immediately after the most recent acquisition of
any Certificate, 25% or more of any class of Certificates is held by benefit
plan investors.
Any person who has discretionary authority or control
respecting the management or disposition of Plan assets, and any person who
provides investment advice with respect to such assets for a fee, is a fiduciary
of the investing Plan. If the Trust Assets constitute Plan assets, then any
party exercising management or discretionary control regarding those assets,
such as a Master Servicer, a Special Servicer or any Sub-Servicer, may be deemed
to be a Plan "fiduciary" with respect to the investing Plan, and thus subject to
the fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code. In
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addition, if the Trust Assets constitute Plan assets, the purchase of
Certificates by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA and the Code.
PROHIBITED TRANSACTION EXEMPTIONS
The DOL issued an individual administrative exemption,
Prohibited Transaction Exemption 90-29 (the "Exemption"), to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to Section
4975(a) and (b) of the Code and Section 502(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" includes (i) Merrill Lynch, Pierce,
Fenner & Smith Incorporated, (ii) 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 (iii) any member of the
underwriting syndicate or selling group of which Merrill Lynch, Pierce, Fenner &
Smith Incorporated or a person described in (ii) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of Certificates by 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 Exemption only applies to Certificates evidencing
rights and interests not subordinated to the rights and interests evidenced by
the other Certificates of the same series. Third, the 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 ("Standard & Poor's"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps, Inc. ("Duff &
Phelps") or Fitch Investors Service, Inc. ("Fitch"). Fourth, the Trustee cannot
be an affiliate of any member of the "Restricted Group", which consists of any
Underwriter, the Depositor, the Trustee, the Master Servicer, any Sub-Servicer,
the provider of any Credit Support and any obligor with respect to Mortgage
Assets (including mortgage loans underlying an MBS not issued by FNMA, FHLMC or
GNMA) constituting more than 5% of the aggregate unamortized principal balance
of the Mortgage Assets in the related Trust Fund as of the date of initial
issuance of the Certificates. Fifth, the sum of all payments made to and
retained by the Underwriter(s) must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to
and retained by the Depositor pursuant to the assignment of the Mortgage Assets
to the related Trust Fund must represent not more than the fair market value of
such obligations; and the sum of all payments made to and retained by the Master
Servicer and any Sub-Servicer must represent not more than reasonable
compensation for such person's services under the related Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the 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.
The Exemption also requires that each Trust Fund meet the
following requirements: (i) the Trust Fund must consist solely of assets of the
type that have been included in other investment pools; (ii) certificates in
such other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least
one year prior to the Plan's acquisition of Certificates; and (iii) certificates
in such other investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of Certificates.
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of
the Code) in connection with (i) the direct or indirect sale, exchange or
transfer of Offered Certificates acquired by a Plan upon issuance from the
Depositor or Underwriter when the Depositor, Master Servicer, Special Servicer,
Sub-Servicer, Trustee, provider of Credit Support, Underwriter or obligor with
respect to Mortgage Assets is a Party in Interest with respect to the investing
Plan, (ii) the direct or indirect acquisition or
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disposition in the secondary market of fuel Certificates by a Plan and (iii) the
holding of Offered Certificates by a Plan. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Certificate on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes hereof, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section
4975(c)(1)(E) of the Code in connection with (i) the direct or indirect sale,
exchange or transfer of Offered Certificates in the initial issuance of Offered
Certificates between the Depositor or an Underwriter and a Plan when the person
who has discretionary authority or renders investment advice with respect to the
investment of Plan assets in such Certificates is (a) an obligor with respect to
5% or less of the fair market value of the Mortgage Assets (including mortgage
loans underlying an MBS not issued by FNMA, FHLMC or GNMA) in the related Trust
Fund or (b) an affiliate of such a person, (ii) the direct or indirect
acquisition or disposition in the secondary market of Offered Certificates by a
Plan and (iii) the holding of Offered Certificates by a Plan.
Further, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust Assets.
The Exemption also may provide an exemption from the
restrictions imposed by Sections 406(a) and 407(a) of ERISA, and the taxes
imposed by Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)
(a) through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a Party in Interest with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
the Plan's ownership of Offered Certificates.
Before purchasing a Certificate, a fiduciary of a Plan should
itself confirm (i) that the Offered Certificates constitute "certificates" for
purposes of the Exemption and (ii) that the specific and general conditions set
forth in 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 its general fiduciary obligations under ERISA in
determining whether to purchase any Offered Certificates on behalf of a Plan.
Any fiduciary of a Plan that proposes to cause the Plan to
purchase Offered Certificates should consult with its counsel with respect to
the potential applicability of ERISA and the Code to such investment and the
availability of (and scope of relief provided by) the Exemption or any other
prohibited transaction exemption in connection therewith. The Prospectus
Supplement with respect to a series of Certificates may contain additional
information regarding the application of the Exemption or any other exemption,
with respect to the Certificates offered thereby. In addition, any Plan
fiduciary that proposes to cause a Plan to purchase Stripped Interest
Certificates should consider the federal income tax consequences of such
investment.
LEGAL INVESTMENT
The Offered Certificates of any series will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") only if so specified in the related Prospectus
Supplement. Accordingly, investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to determine whether
and to what extent the Offered Certificates constitute legal investments for
them.
Generally, only classes of Offered Certificates that (i) are
rated in one of the two highest rating categories by one or more Rating Agencies
and (ii) are part of a series evidencing interests in a Trust
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Fund consisting of loans secured by a single parcel of real estate upon which is
located a dwelling or mixed residential and commercial structure, such as
certain Multifamily Loans, and originated by types of Originators specified in
SMMEA, will be "mortgage related securities" for purposes of SMMEA. "Mortgage
related securities" are legal investments to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions,
insurance companies and pension funds created pursuant to or existing under the
laws of the United States or of any state, the authorized investments of which
are subject to state regulation). Under SMMEA, if a state enacted legislation
prior to October 3, 1991 that specifically limits the legal investment authority
of any such entities with respect to "mortgage related securities", Offered
Certificates would constitute legal investments for entities subject to such
legislation only to the extent provided in 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.
Upon the issuance of final implementing regulations under the
Riegle Community Development and Regulatory Improvement Act of 1994 and subject
to any limitations those regulations may impose, a modification of the
definition of "mortgage related securities" will become effective to include
among the types of loans to which such securities may relate loans secured by
"one or more parcels of real estate upon which is located one or more commercial
structures". In addition, the related legislative history states that this
expanded definition includes multifamily loans secured by more than one parcel
of real estate upon which is located more than one structure. Until September
23, 2001 any state may enact legislation limiting the extent to which "mortgage
related securities" under this expanded definition would constitute legal
investments under that state's laws.
All depository institutions considering an investment in the
Offered Certificates of any series should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the Selection
of Securities Dealers and Unsuitable Investment Practices (to the extent adopted
by their respective regulatory authorities), setting forth, in relevant part,
certain investment practices deemed to be unsuitable for an institution's
investment portfolio, as well as guidelines for investing in certain types of
mortgage related 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
Certificates or to purchase Offered Certificates representing more than a
specified percentage of the investor's assets. Investors should consult their
own legal advisors in determining whether and to what extent the Offered
Certificates constitute legal investments for such investors.
METHOD OF DISTRIBUTION
The Offered Certificates offered hereby and by the Prospectus
Supplements hereto will be offered in series. The distribution of the Offered
Certificates 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. The Prospectus Supplement for the Offered Certificates of each series
will, as to each class of such Certificates, set forth the method of the
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offering, either the initial public offering price or the method by which the
price at which the Certificates of such class will be sold to the public can be
determined, the amount of any underwriting discounts, concessions and
commissions to underwriters, any discounts or commissions to be allowed to
dealers and the proceeds of the offering to the Depositor.
If so specified in the related Prospectus Supplement, the
Offered Certificates of a series 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. Alternatively,
the Prospectus Supplement may specify that Offered Certificates will be
distributed by Merrill Lynch acting as agent. If Merrill Lynch acts as agent in
the sale of Offered Certificates, Merrill Lynch will receive a selling
commission with respect to such Offered Certificates, depending on market
conditions, expressed as a percentage of the aggregate Certificate Balance or
Notional Amount of such Offered Certificates as of the date of issuance. The
exact percentage for each series of Certificates will be disclosed in the
related Prospectus Supplement. To the extent that Merrill Lynch elects to
purchase Offered Certificates 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 Certificates of such series.
The Depositor will agree to indemnify Merrill Lynch and any
underwriters and their respective controlling persons against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments that any such person 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 mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Certificates.
The Depositor anticipates that the Offered Certificates will
be sold primarily to institutional investors. Purchasers of Offered
Certificates, including dealers, may, depending on the facts and circumstances
of 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
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
As to each series of Certificates, only those classes rated in
an investment grade rating category by any Rating Agency will be offered hereby.
Any class of Certificates not offered hereby may be initially retained by the
Depositor, and may be sold by the Depositor at any time to one or more
institutional investors.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus
Supplement, certain legal matters in connection with the Certificates of each
series, including certain federal income tax consequences, will be passed upon
for the Depositor and for Merrill Lynch, Pierce, Fenner & Smith Incorporated by
Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, 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
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
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RATING
It is a condition to the issuance of any class of Offered
Certificates that they shall have been rated not lower than investment grade,
that is, in one of the four highest rating categories, by at least one Rating
Agency.
Ratings on mortgage pass-through certificates address the
likelihood of receipt by the holders thereof of all collections on the
underlying mortgage assets to which such holders are entitled. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on mortgage pass-through certificates
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, certificateholders 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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<TABLE>
<CAPTION>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
<S> <C>
Accrual Certificates.........................................................................................12, 35
Accrued Certificate Interest.....................................................................................35
ADA ...............................................................................................66
ARM Loans ...............................................................................................26
Available Distribution Amount....................................................................................34
Bankruptcy Code ...............................................................................................60
Book-Entry Certificates......................................................................................14, 34
Cash Flow Agreement.......................................................................................1, 11, 28
CERCLA ...........................................................................................22, 63
Certificate .........................................................................................1, 8, 42
Certificate Account......................................................................................10, 27, 44
Certificate Balance.......................................................................................2, 12, 36
Certificate Owner ...........................................................................................14, 41
Certificateholder ............................................................................................1, 41
Closing Date ...............................................................................................69
Code ...........................................................................................14, 67
Commercial Properties.........................................................................................8, 24
Commission ................................................................................................2
Committee Report ...............................................................................................69
Companion Class ...........................................................................................13, 36
Controlled Amortization Class................................................................................13, 36
Cooperatives ...............................................................................................24
CPR ...............................................................................................31
Credit Support ........................................................................................1, 10, 28
Cut-off Date ...............................................................................................13
Debt Service Coverage Ratio......................................................................................25
Definitive Certificate...................................................................................14, 34, 41
Depositor ............................................................................................8, 24
Determination Date...............................................................................................34
Direct Participants..............................................................................................40
Distribution Date ...............................................................................................12
Distribution Date Statement......................................................................................37
DOL ...............................................................................................92
DTC ....................................................................................2, 14, 34, 40
Due Dates ...............................................................................................26
Due Period ...............................................................................................37
Duff & Phelps ...............................................................................................93
Equity Participation.............................................................................................26
ERISA ...........................................................................................17, 92
Excess Funds ...............................................................................................33
Exchange Act ................................................................................................3
Exemption ...............................................................................................93
FAMC ................................................................................................9
FHLMC ................................................................................................9
FNMA ................................................................................................9
GNMA ................................................................................................9
Grantor Trust Certificates...................................................................................14, 67
Grantor Trust Fractional Interest Certificates...................................................................16
Grantor Trust Fund...............................................................................................67
Grantor Trust Strip Certificate..................................................................................83
Indirect Participants............................................................................................41
Insurance Proceeds...............................................................................................44
IRS ...............................................................................................69
Issue Premium ...............................................................................................75
L/C Bank ...............................................................................................56
Liquidation Proceeds.........................................................................................44, 45
Loan-to-Value Ratio..............................................................................................25
Lock-out Expiration Date.........................................................................................26
Lock-out Period ...............................................................................................26
Master Servicer .............................................................................................2, 8
MBS .........................................................................................1, 9, 24
MBS Agreement ...............................................................................................27
MBS Issuer ...............................................................................................27
MBS Servicer ...............................................................................................27
MBS Trustee ...............................................................................................27
Merrill Lynch ...............................................................................................96
Mortgage Asset Seller........................................................................................10, 24
Mortgage Assets ............................................................................................1, 24
Mortgage Loan .....................................................................................1, 8, 24, 57
Mortgage Notes ...............................................................................................24
Mortgage Rate ............................................................................................9, 26
Mortgaged Properties.............................................................................................24
Mortgages ...............................................................................................24
Multifamily Properties........................................................................................8, 24
Net Leases ...............................................................................................25
Net Operating Income.............................................................................................25
Nonrecoverable Advance...........................................................................................37
Notional Amount ...........................................................................................12, 35
Offered Certificates..............................................................................................1
OID Regulations ...............................................................................................67
Originator ...............................................................................................24
PAC ...............................................................................................31
Participants ...........................................................................................23, 40
Parties in Interest..............................................................................................92
Pass-Through Rate ............................................................................................2, 12
Permitted Investments............................................................................................44
Plans ...............................................................................................92
Pooling Agreement ...........................................................................................11, 42
Prepayment Assumption........................................................................................69, 86
Prepayment Interest Shortfall....................................................................................29
Prepayment Premium...............................................................................................26
Prohibited Transactions Tax......................................................................................80
Prospectus Supplement.............................................................................................1
Rating Agency ...............................................................................................17
Record Date ...............................................................................................34
Related Proceeds ...............................................................................................37
Relief Act ...............................................................................................66
REMIC ...............................................................................................67
REMIC Certificates...............................................................................................67
REMIC Provisions ...............................................................................................67
REMIC Regular Certificates...................................................................................14, 67
REMIC Regulations ...............................................................................................67
</TABLE>
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<TABLE>
<S> <C>
REMIC Residual Certificates..................................................................................14, 67
REO Property ...........................................................................................38, 47
Senior Certificates..........................................................................................11, 34
Servicing Standard...............................................................................................47
SMMEA ...............................................................................................94
SPA ...............................................................................................31
Special Servicer .........................................................................................2, 8, 48
Stripped Interest Certificates...............................................................................11, 34
Stripped Principal Certificates..............................................................................11, 34
Sub-Servicer ...............................................................................................47
Sub-Servicing Agreement..........................................................................................47
Subordinate Certificates.....................................................................................11, 34
TAC ...............................................................................................31
Temporary Mark-to-Market Regulations.............................................................................77
Tiered REMICs ...............................................................................................68
Title V ...............................................................................................65
Trust Assets ................................................................................................2
Trust Fund ................................................................................................1
Trustee .............................................................................................2, 8
UCC ...............................................................................................58
Value ...............................................................................................25
Voting Rights ...............................................................................................40
Warranting Party ...............................................................................................43
</TABLE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH MERRILL LYNCH MORTGAGE
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED INVESTORS, INC.
BY THE DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE (DEPOSITOR)
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION 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 ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS.
------------------------
$-----------
TABLE OF CONTENTS (APPROXIMATE)
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES _____
PAGE
PROSPECTUS SUPPLEMENT
Summary......................................................................S-5
Risk Factors................................................................S-21
Description of the Mortgage Pool............................................S-24
Servicing of the Mortgage Loans.............................................S-40
Description of the Certificates.............................................S-46
Yield and Maturity Considerations...........................................S-57
Use of Proceeds.............................................................S-66
Certain Federal Income Tax Consequences.....................................S-66
ERISA Considerations........................................................S-67
Legal Investment............................................................S-69 PROSPECTUS SUPPLEMENT
Method of Distribution......................................................S-69
Legal Matters...............................................................S-70
Rating......................................................................S-70
Index of Principal Definitions..............................................S-71
Annex A......................................................................A-1
PROSPECTUS
Prospectus Supplement..........................................................2
Available Information..........................................................2
Incorporation of Certain Information by
Reference.............................................................3
Summary of Prospectus..........................................................8
Risk Factors..................................................................16
Description of the Trust Funds................................................22 Merrill Lynch & Co.
Yield and Maturity Considerations.............................................26 [LOGO]
The Depositor.................................................................31
Use of Proceeds...............................................................31
Description of the Certificates...............................................32
Description of the Pooling Agreements.........................................39
Description of Credit Support.................................................52
Certain Legal Aspects of Mortgage Loans.......................................54
Certain Federal Income Tax Consequences.......................................64
State and Other Tax Considerations............................................89
ERISA Considerations..........................................................89
Legal Investment..............................................................92
Method of Distribution........................................................93
Legal Matters.................................................................94
Financial Information.........................................................94
Rating........................................................................94
Index of Principal Definitions................................................95
__________, 1995
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance
and distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the SEC
registration fee, are estimated.
SEC Registration Fee..................................$1,034,482.76
* Legal Fees and Expenses............................... 150,000.00
* Accounting Fees and Expenses.......................... 50,000.00
* Trustee's Fees and Expenses
(including counsel fees)..................... 50,000.00
* Printing and Engraving Fees........................... 20,000.00
* Rating Agency Fees.................................... 75,000.00
* Miscellaneous 15,000.00
-----------
Total $1,394,482.76
=============
* Estimates based on the offering of a single series of Certificates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The proposed form of Underwriting Agreement provides that the
Underwriters are obligated under certain circumstances to indemnify the
Registrant's directors, each of the Registrant's officers who signed this
Registration Statement, and each person, if any, who controls the Registrant
within the meaning of Section 15 of the Securities Act of 1933, as amended (the
"Act"), against certain liabilities, including liabilities arising under the
Act.
The Registrant's By-laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are or
were such directors, officers, employees or agents, against expenses incurred in
any such action, suit or proceeding.
The Pooling and Servicing Agreement pursuant to which each series of
Certificates will be issued (the "Pooling Agreement") will provide that no
director, officer, employee or agent of the Registrant will be under any
liability to the trust fund created thereunder (the "Trust Fund") or the holders
of the Certificates issued thereunder, except for such individual's own wilful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder, or by reason of reckless disregard of such obligations or duties.
The Pooling Agreement will provide further that, with the exceptions stated
above, a director, officer, employee or agent of the
II-1
<PAGE>
Registrant will be entitled to indemnification by the Trust Fund against any
loss, liability or expense incurred in connection with any legal action relating
to the Pooling Agreement or the Certificates issued thereunder.
ITEM 16. EXHIBITS.
Exhibits--
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Pooling and Servicing Agreement.*
5.1 -- Opinion of Thacher Proffitt & Wood with respect to
legality.
8.1 -- Opinion of Thacher Proffitt & Wood with respect to
certain tax matters (included with Exhibit 5.1).
24.1 -- Consent of Thacher Proffitt & Wood (included as part
of Exhibit 5.1 and Exhibit 8.1).
25.1 -- Power of Attorney (included on Page II-4).
* Incorporated by reference from Registration Statement on Form S-3 (File No.
33-97652).
ITEM 17. UNDERTAKINGS.
A. UNDERTAKINGS IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant as described in Item 15
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
B. UNDERTAKINGS PURSUANT TO RULE 415. The undersigned Registrant hereby
undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof)
II-2
<PAGE>
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material changes of such information in the
Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the information
required to be included in the post-effective amendment is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
C. UNDERTAKINGS IN CONNECTION WITH INCORPORATION BY REFERENCE OF CERTAIN
FILINGS UNDER THE SECURITIES EXCHANGE ACT OF 1934.
The Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Merrill
Lynch Mortgage Investors, Inc. certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 21st day of February, 1996.
MERRILL LYNCH MORTGAGE INVESTORS, INC.
By /s/ Michael M. McGovern
Name: Michael M. McGovern
Title: Secretary and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Richard M. Fuscone, John
C. Qua and Donald J. Puglisi constitutes and appoints Michael M. McGovern his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of Merrill Lynch
Mortgage Investors, Inc.) to sign any or all amendments to this Registration
Statement (including post-effective amendments), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in their
capacities as directors and officers of Merrill Lynch Mortgage Investors, Inc.
in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Richard M. Fuscone President (Principal Executive February 27, 1996
Richard M. Fuscone Officer) and Director
/s/ John C. Qua Treasurer (Principal Financial February 27, 1996
John C. Qua and Accounting Officer) and
Director
/s/ Michael M. McGovern Secretary and Director February 27, 1996
Michael M. McGovern
/s/ Donald J. Puglisi Director and Vice President February 27, 1996
Donald J. Puglisi
</TABLE>
EXHIBIT 5.1
<PAGE>
February 28, 1996
Merrill Lynch Mortgage Investors, Inc.
World Financial Center, North Tower
250 Vesey Street, 15th Floor
New York, New York 10281-1315
Re: Merrill Lynch Mortgage Investors, Inc.
Mortgage Pass-Through Certificates
REGISTRATION STATEMENT ON FORM S-3
Dear Sir or Madam:
We are counsel to Merrill Lynch Mortgage Investors, Inc., a
Delaware corporation (the "Registrant"), in connection with the registration
under the Securities Act of 1933, as amended (the "Act"), of Mortgage
Pass-Through Certificates (the "Certificates") and the related preparation and
filing of a Registration Statement on Form S-3 (the "Registration Statement").
The Certificates are issuable in series, in each case (i) under a pooling and
servicing agreement (each such agreement, a "Pooling and Servicing Agreement"),
among the Registrant, a master servicer to be identified in the prospectus
supplement for such series of Certificates and a trustee also to be identified
in that prospectus supplement or (ii) under a trust agreement between the
Registrant and a trustee to be identified in the prospectus supplement for such
series of Certificates. Each Pooling and Servicing Agreement will be
substantially in the form filed as an Exhibit to the Registration Statement.
In connection with rendering this opinion letter, we have
examined the form of the Pooling and Servicing Agreement contained as an Exhibit
to the Registration Statement, the Registration Statement and such records and
other documents as we have deemed necessary. We have assumed the authenticity of
all documents submitted to us as originals, the genuineness of all signatures,
the legal capacity of natural persons and the conformity to the originals of all
documents submitted to us as copies. We have assumed that all parties had the
corporate power and authority to enter into and perform all obligations
thereunder and, as to such parties, except as expressly addressed below, we also
have assumed the enforceability of such documents.
<PAGE>
Merrill Lynch Mortgage Investors, Inc.
February 28, 1996 Page 2.
In rendering this opinion letter, we express no opinion as to
the laws of any jurisdiction other than the laws of the State of New York and
the corporate laws of the State of Delaware, nor do we express any opinion,
either implicitly or otherwise, on any issue not expressly addressed below. In
rendering this opinion letter, we have not passed upon and do not pass upon the
application of "doing business" or the securities laws of any jurisdiction. This
opinion letter is further subject to the qualification that enforceability may
be limited by (i) bankruptcy, insolvency, liquidation, receivership, moratorium,
reorganization or other laws affecting the enforcement of the rights of
creditors generally and (ii) general principles of equity, whether enforcement
is sought in a proceeding in equity or at law.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary organizational action and
duly executed and delivered by the parties thereto, such Pooling and Servicing
Agreement will be a legal and valid obligation of the Registrant.
2. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary organizational action and
duly executed and delivered by the parties thereto, and when the Certificates of
such series have been duly executed and authenticated in accordance with the
provisions of that Pooling and Servicing Agreement, and issued and sold as
contemplated in the Registration Statement and the prospectus and prospectus
supplement delivered in connection with such issuance and sale, such
Certificates will be legally and validly issued and outstanding, fully paid and
non-assessable, and the holders of such Certificates will be entitled to the
benefits of that Pooling and Servicing Agreement.
3. The description of federal income tax consequences
appearing under the heading "Certain Federal Income Tax Consequences" in the
prospectus contained in the Registration Statement, while not purporting to
discuss all possible federal income tax consequences of an investment in
Certificates, is accurate with respect to those tax consequences that are
discussed.
<PAGE>
Merrill Lynch Mortgage Investors, Inc.
February 28, 1996 Page 3.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus included in the Registration Statement under the heading "Legal
Matters" and in the prospectus supplement for any series of Certificates in
which our name appears under the heading "Legal Matters" and/or "Certain Federal
Income Tax Consequences", without admitting that we are "experts" within the
meaning of the Act, and the rules and regulations thereunder, with respect to
any part of the Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/ William J. Cullen
