As filed with the Securities and Exchange Commission on December 11, 1997
Registration No. 333-39127
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
MERRILL LYNCH MORTGAGE INVESTORS, INC.
(Exact name of registrant as specified in its governing instruments)
Delaware 13-3416059
(State of incorporation) (I.R.S. Employer Identification No.)
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281-1310
(Address of principal executive offices)
Jeffrey W. Kronthal
Merrill Lynch Mortgage Investors, Inc.
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281-1310
(Name and address of agent for service)
With a copy to:
Renwick D. Martin
Brown & Wood LLP
One 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 the registration statement, as
determined by market conditions.
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, 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 offer. / / _______________.
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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered(1) Per Unit(2) Offering Price(2) Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities . . . . . . . $1,000,000 100% $1,000,000 $304(3)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This Registration Statement relates to the initial offering from time to
time of $1,000,000 aggregate principal amount of Asset Backed Securities
and to any resales thereof in market making transactions by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of the
Registrant, to the extent required.
(2) Estimated solely for purposes of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS 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 AND EXCHANGE COMMISSION'S RULES
AND REGULATIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE PROSPECTUS
AND PROSPECTUS SUPPLEMENT CONTAINED IN THIS REGISTRATION STATEMENT ALSO
RELATE TO THE REGISTRANT'S REGISTRATION STATEMENTS ON FORM S-11 (REGISTRATION
NO. 33-74332) (IN RESPECT OF WHICH THERE REMAINS $491,699,885 OF UNSOLD
SECURITIES AND $169,552 OF UNUSED REGISTRATION FEE), ON FORM S-3
(REGISTRATION NO. 333-7569) AND ON FORM S-3 (REGISTRATION NO. 333-24327)(IN
RESPECT OF WHERE THERE REMAINS $ 94,378,383 OF UNSOLD SECURITIES AND $2,859
OF UNUSED REGISTRATION FEE) AND ON FORM S-3 (REGISTRATION NO. 333-24327)(IN
RESPECT OF WHICH THERE REMAIN $1,000,000,000 OF UNSOLD SECURITIES AND
$303,031 OF UNUSED REGISTRATION FEE) AND THE UNSOLD SECURITIES REGISTERED
THEREUNDER AND THIS REGISTRATION STATEMENT CONSTITUTES A POST-EFFECTIVE
AMENDMENT THERETO.
EXPLANATORY NOTE
This Registration Statement includes three basic prospectuses and two
illustrative forms of prospectus supplements for use in an offering of Asset
Backed Securities. The descriptions in the forms of prospectus supplements
of the Asset Backed Securities, credit enhancement mechanisms or other
features are intended merely as illustrations of possible series of Asset
Backed Securities. The forms of prospectus supplement are forms that may be
used, among others, by the registrant to offer Asset Backed Securities under
this Registration Statement. A prospectus supplement may offer any type of
Asset Backed Security contemplated in the basic prospectuses. The features
applicable to any actual series of Asset Backed Securities may include some,
all or none of the features so illustrated, and may include any features
specified in the prospectuses.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus supplement and the prospectus to which it
relates 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 DECEMBER 11, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus ______________________1997)
$______________
Merrill Lynch Mortgage Investors Inc.
Depositor
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _______
The Series 199_-_ Mortgage Pass-Through Certificates (the
"Certificates") will consist of ____ classes of Certificates, designated as
the Class ( ) Certificates, Class ( ) Certificates and Class ( ) Certificates
(the Class ( ) Certificates, collectively, the "Subordinate Certificates").
As further described herein, losses on the Mortgage Loans will be allocated
to the Subordinate Certificates prior to allocation to the Class ( )
Certificates. See "Description of the Certificates -- Distributions --
Priority" herein.
The Certificates will represent in the aggregate the entire beneficial
interest in a trust fund (the "Trust Fund") to be established by Merrill
Lynch Mortgage Investors Inc. (the "Depositor"). The Trust Fund will consist
primarily of (a pool (the "Mortgage Pool") of (conventional), (fixed rate)
(adjustable rate) mortgage loans, with terms to maturity of not more than ___
years (the "Mortgage Loans"), secured by first (and/or junior) liens on one-
to four-family residential properties,) (mortgage participations in Mortgage
Loans,) mortgage pass-through certificates, mortgage-backed securities
evidencing interests therein or secured thereby (the "MBS"),) (and) (certain
direct obligations of the United States, agencies thereof or agencies created
thereby (the "Government Securities")). The Mortgage Loans were originated
or acquired by ___________ (the "Mortgage Asset Seller") and will be sold to
the Depositor on or prior to the date of initial issuance of the
Certificates.
The Class ( )(, Class ( ) and Class ( )) Certificates will evidence
approximately an initial ___% undivided interest in the Trust Fund and the
Subordinate Certificates, in the aggregate, will evidence approximately an
initial ___% undivided interest in the Trust Fund. Only the Class ( )
Certificates are being offered hereby.
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, CERTAIN _______ SET FORTH
UNDER THE CAPTION "RISK FACTORS" (HEREIN ON PAGE ___ AND) IN THE PROSPECTUS
ON PAGE ___.
(The MBS will (consist of) (include) the following series and classes of
securities: (identify title(s) and class(es) of MBS)(, including (title(s)
and class(es) of MBS).) (The (title(s) and class(es) of MBS) are
(subordinate) (interest-only) securities.) (See "Summary--The MBS."))
(The yield to investors in the (interest-only) Certificates will be
(extremely) sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) in the Mortgage Loans
which may fluctuate significantly over time. An (extremely) rapid rate of
principal payments on the Mortgage Loans could result in the failure of
investors in the interest-only Certificates to recover their initial
investments.)
------------------------
Merrill Lynch & Co.
The date of this Prospectus Supplement is _____________, 199_
The characteristics of the Mortgage Loans are more fully described herein
under "Description of the Mortgage Pool."
Distributions on the Class ( ) Certificates will be made, to the extent
of available funds, on the __th day of each (month) (__) or, if any such day
is not a business day, on the next succeeding business day, beginning in
__________ (each, a "Distribution Date"). (As more fully described herein,
distributions allocable to interest, if any, on the Class ( ) Certificates on
each Distribution Date will be based on the (applicable) (then-applicable
variable) pass-through rate (the "Pass-Through Rate") and the aggregate
(principal balance (the "Certificate Balance")) (notional balance (the
"Notional Balance")) of such class (or each component thereof) outstanding
immediately prior to such Distribution Date. (The Pass-Through Rate
applicable to the Class ( ) Certificates from time to time will equal the
(sum of __% and the Index (as defined herein) subject to certain limitations)
(weighted average of the Class ( ) Remittance Rates (as defined herein) on
the Mortgage Loans). The Pass-Through Rate for the Class ( ) Certificates on
the first Distribution Date will be _% per annum and is expected to change
thereafter (because the weighted average of the Class ( ) Remittance Rates is
expected to change for succeeding Distribution Dates.) Distributions in
respect of principal, if any, of the Class ( ) Certificates will be made as
described herein under "Description of the Certificates -- Distributions --
Priority" and "--Calculations of Principal".)
(_______________ will act as master servicer of the Mortgage Loans (the
"Master Servicer"). The obligations of the Master Servicer with respect to
the Certificates will be limited to its contractual servicing obligations and
the obligation under certain circumstances to make Advances to the
Certificateholders. See "Description of the Certificates -- Advances"
herein. (The only) obligation of the Depositor with respect to the
Certificates will be to obtain from the Mortgage Asset Seller certain
representations and warranties with respect to the Mortgage Loans and to
assign to the Trustee the obligation of the Mortgage Asset Seller to
repurchase or substitute for any Mortgage Loan as to which there exists an
uncured material breach of any such representation or warranty.)
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE CLASS ( ) CERTIFICATES. THE CLASS ( ) CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE
OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CLASS ( ) CERTIFICATES
NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR
ANY OF THEIR AFFILIATES.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.)
---------------------------
An election will (not) be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes.
(The Class ( ) Certificates will constitute "regular interests" in the
REMIC.) See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
There is currently no secondary market for the Class ( ) Certificates.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter")
currently expects to make a secondary market in the Class ( ) Certificates,
but has no obligation to do so. There can be no assurance that such a market
will develop or, if it does develop, that it will continue. See "Plan of
Distribution" herein.
The Class ( ) Certificates offered hereby will be purchased by the
Underwriter from the Depositor and will be offered by the Underwriter from
time to time to the public 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 Class ( ) Certificates will be $____________ plus accrued
interest from the Cut-off Date, before deducting expenses payable by the
Depositor estimated at $_____________.
The Class ( ) Certificates are offered subject to prior sale, when, as
and if accepted by the Underwriter, and subject to approval of certain legal
matters by counsel for the Underwriter and certain other conditions. It is
expected that delivery of the Class ( ) Certificates (in book-entry form) (in
registered form) will be made on or about ___________, 199_, (through the
facilities of The Depository Trust Company) (at the offices of the
Underwriter, New York, New York) against payment therefor in immediately
available funds.
(This Prospectus Supplement may be used by the Underwriter, an affiliate
of the Asset Seller and the Master Servicer, in connection with offers and
sales related to market making transactions in the Certificates.)
-----------------------------------
THE CLASS ( ) CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES AND ARE BEING OFFERED
PURSUANT TO THE DEPOSITOR'S PROSPECTUS DATED _______________, 199_, OF WHICH
THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED
TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE
CLASS ( ) CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS
RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
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
are defined elsewhere in this Prospectus Supplement or in the Prospectus.
Title of Certificates Mortgage Pass-Through Certificates, Series
199_-_, (the "Certificates").
Depositor Merrill Lynch Mortgage Investors Inc., a
Delaware corporation and a wholly-owned,
limited purpose subsidiary of Merrill Lynch
Mortgage Capital Inc., which is a wholly-owned
indirect subsidiary of Merrill Lynch & Co.,
Inc. The Depositor is an affiliate of the
Underwriter. Neither Merrill Lynch & Co., Inc.
nor any of its affiliates, including the
Depositor and the Underwriter, has insured or
guaranteed the Certificates or the Mortgage
Loans or is otherwise obligated in respect
thereof. See "The Depositor" in the
Prospectus.
Issuer The trust fund (the "Trust Fund") to be formed
pursuant to the Pooling and Servicing
Agreement.
Master Servicer _______________, a ________________. See
"Pooling and Servicing Agreement -- The Master
Servicer" herein.
(Sub-Servicers _______________, a ________________)
Trustee _____________, a ____________________.
Cut-off Date ____________ 1, 199_.
Closing Date ______________ 1, 199_.
Distribution Dates Distributions on the Certificates will be made
by the Trustee, to the extent of available
funds, on the __ day of each (month) ( ) or, if
any such __ day is not a business day, then on
the next succeeding business day, beginning in
________ 19__ (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").
Denominations The Class ( ) Certificates will be issuable (on
the book-entry records of DTC and its
Participants) (in registered, certified form)
in denominations of $_______ and integral
multiples of $_____________ in excess thereof(,
with one Certificate of such class evidencing
an additional amount equal to the remainder of
the Certificate Balance thereof).
Risk Factors There are material risks to be considered in
investing the Certificates. See "Risk Factors"
(herein and) in the Prospectus.
(The Mortgage Pool The Mortgage Pool will consist of ((conven-
tional), (fixed rate) (adjustable rate)
Mortgage Loans secured by (first) (and/or)
(junior) liens on one- to four-family
residential properties (the "Mortgaged
Properties") located in __ different states,)
(mortgage participations,) (mortgage pass-
through certificates, mortgage-backed
securities evidencing interests therein or
secured thereby (the "MBS"),) (and) (certain
direct obligations of the United States,
agencies thereof or agencies created thereby
(the "Government Securities")). (The Mortgage
Loans will have an aggregate principal balance
as of the Cut-off Date of $_________ and
individual principal balances at origination of
at least $______________ but not more than
$__________, with an average principal balance
at origination of approximately $_________.
The Mortgage Loans will have terms to maturity
from the date of origination or modification of
not more than ____ years, and a weighted
average remaining term to maturity of
approximately _____ months as of the Cut-off
Date. The Mortgage Loans will bear interest at
Mortgage Rates of at least _____% per annum but
not more than _____% per annum, with a weighted
average Mortgage Rate of approximately ____%
per annum as of the Cut-off Date. The Mortgage
Loans will be acquired by the Depositor on or
before the Closing Date. In connection with
its acquisition of the Mortgage Loans, the
Depositor will be assigned (and will in turn
assign to the Trustee for the benefit of the
holders of the Certificates) certain rights in
respect of representations and warranties
described herein that were made by the Mortgage
Asset Seller.)
(_____ of the Mortgage Loans, representing
_____% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date,
provide for scheduled payments of principal
and/or interest ("Monthly Payments") to be due
on the _____ day of each month; the remainder
of the Mortgage Loans provide for Monthly
Payments to be due on (identify day or days) of
each month (the date in any month on which a
Monthly Payment on a Mortgage Loan is first
due, the "Due Date"). (The rate per annum at
which interest accrues on each Mortgage Loan is
subject to adjustment on specified Due Dates
(each such date, an "Interest Rate Adjustment
Date") by adding a fixed percentage amount (a
"Gross Margin") to the value of the
then-applicable Index (as described below)
subject, in the case of substantially all of
the Mortgage Loans, to limitations on the
periodic adjustment of the related Mortgage
Rate, and to maximum and minimum lifetime
Mortgage Rates, as described herein. ___ of
the Mortgage Loans, representing ___% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, provide for Interest
Rate Adjustment Dates to occur (monthly); the
remainder of the Mortgage Loans provide for
adjustments to the Mortgage Rate to occur
quarterly, semi-annually or annually. (Each of
the Mortgage Loans provides for an initial
fixed interest rate period;)________ of the
Mortgage Loans, representing _____% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, have not yet
experienced their first Interest Rate
Adjustment Date. The latest initial Interest
Rate Adjustment Date for any Mortgage Loan is
scheduled to occur on ________.))
(The amount of the Monthly Payment on each
Mortgage Loan is also subject to adjustment on
specified Due Dates (each such date, a "Payment
Adjustment Date") 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
applicable Mortgage Rate, subject, in the case
of (several) Mortgage Loans, to payment caps,
which limit the amount by which the Monthly
Payment may adjust on any Payment Adjustment
Date as described herein. _______ of the
Mortgage Loans, representing __% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, provide for Payment
Adjustment Dates to occur annually, while the
remainder of the Mortgage Loans provide for
adjustments of the Monthly Payment to occur
monthly, quarterly or semi-annually.)
(Only in the case of ________ Mortgage Loans,
representing ________% of the Mortgage Loans by
aggregate principal balance as of the Cut-off
Date, does a Payment Adjustment Date
immediately follow each Interest Rate
Adjustment Date. As a result, and because the
application of payment caps may limit the
amount by which the Monthly Payments may adjust
in respect of certain Mortgage Loans, the
amount of a Monthly Payment may be more or less
than the amount necessary to amortize the
remaining principal balance of the Mortgage
Loan over its then remaining amortization
schedule and pay interest at the
then-applicable Mortgage Rate. Accordingly,
Mortgage 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 then-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 then-applicable
Mortgage Rate and to reduce principal in
accordance with the applicable amortization
schedule).)
(__ Mortgage Loans, representing ____% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, permit negative
amortization. Substantially all of the
Mortgage Loans that permit negative
amortization contain provisions that limit the
extent to which the amount of their respective
original principal balances may be exceeded as
a result thereof.)
(__ Mortgage Loans, representing ____% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, provide for monthly
payments of principal based on amortization
schedules significantly longer than the
remaining term of such Mortgage Loans, thereby
leaving substantial outstanding principal
amounts due and payable (each such payment, a
"Balloon Payment") on their respective maturity
dates, unless prepaid prior thereto.)
For a further description of the Mortgage
Loans, see "Description of the Mortgage Pool"
herein.)
(The MBS (Title and issuer of MBS, amount deposited or
pledged, amount originally issued, maturity
date, interest rate, (redemption provisions),
description of other material terms.)
(The Index As of any Interest Rate Adjustment Date, the
Index used to determine the Mortgage Rate on
each Mortgage Loan will be the ____________.
See "Description of the Mortgage Pool -- The
Index" herein.)
(Conversion of Mortgage
Loans Approximately __% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off
Date) (the "Convertible Mortgage Loans")
provide that, at the option of the related
Mortgagors, the adjustable interest rate on
such Mortgage Loans may be converted to a fixed
interest rate, provided that certain conditions
have been satisfied. Upon notification from a
Mortgagor of such Mortgagor's intent to convert
from an adjustable interest rate to a fixed
interest rate, and prior to the conversion of
any such Mortgage Loan, the related Warrantying
Party (as defined herein) will be obligated to
purchase the Converting Mortgage Loan (as
defined herein) at the Conversion Price (as
defined herein). (In the event of a failure by
a Subservicer to purchase a "Converting
Mortgage Loan"), the Master Servicer is
required to use its best efforts to purchase
such Converted Mortgage Loan (as defined
herein) from the Mortgage Pool at the
Conversion Price during the one-month period
following the date of conversion.) In the
event that neither the related Warrantying
Party nor the Master Servicer purchases a
Converting or Converted Mortgage Loan, the
Mortgage Pool will thereafter include both
fixed-rate and adjustable-rate Mortgage Loans.
See "Certain Yield and Prepayment
Considerations" herein.)
Class ( ) Certificates The Class ( ), Class ( ) and Class ( )
Certificates (collectively, 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"). The Class ( )
Certificates have an initial Certificate
Balance of $_______ (the initial "Class ( )
Balance"), representing an initial interest of
approximately ___% in a trust fund (the "Trust
Fund"), which will consist primarily of the
Mortgage Pool. The Class ( ) Certificates will
have an initial Certificate Balance of
$________ (the initial "Class ( ) Balance"),
representing an initial interest of
approximately ____% in the Trust Fund. (The
Class ( ) Certificates have an initial
Certificate Balance of $_______ (the initial
"Class ( ) Balance"), representing an initial
interest of approximately ___% in the Trust
Fund.) (The Class ( ) Certificates will not
have a Certificate Balance.)
Distributions on the Certificates will be made
on each Distribution Date. Distributions will
be made by check or wire transfer of
immediately available funds, as provided in the
Pooling and Servicing Agreement, to the
Certificateholders of record as of the (last
business day of the month preceding the month)
of such Distribution Date (each, a "Record
Date"), except that the final distribution on
the Class ( ) Certificates will be made only
upon presentation and surrender of such
holders' Certificates at the office or agency
specified in the Pooling and Servicing
Agreement. (As more specifically described
herein, the Class ( ) Balance will be adjusted
from time to time on each Distribution Date to
reflect any additions thereto resulting from
allocations of Mortgage Loan negative
amortization to the Class ( ) Certificates and
any reductions thereof resulting from
distributions of principal of the Class ( )
Certificates. As further described herein,
interest shall accrue on the Class ( ) Balance
at a Pass-Through Rate thereon.
Pass-Through Rates on the
Class ( ), Class ( ) and
Class ( ) Certificates (The Pass-Through Rates on the Class ( ), Class
( ) and Class ( ) Certificates are fixed and
are set forth on the cover hereof.) (The Pass-
Through Rate on the Class ( ) Certificates
will be equal to the weighted average of the
Class ( ) Remittance Rates in effect from time
to time on the Mortgage Assets. The Class ( )
Remittance Rate in effect for any Mortgage
Assets as of any date of determination (is
equal to the excess of the Mortgage Rate
thereon over __% per annum) ((i) prior to its
first Interest Rate Adjustment Date is equal to
the related Mortgage Rate then in effect
minus __ basis points (the "Net Mortgage Rate")
and (ii) from and after its first Interest Rate
Adjustment Date is equal to the related
Mortgage Rate then in effect minus the excess
of the related Gross Margin over __ basis
points.)) (The Class ( ) Certificates (or a
component thereof) will not be entitled to
distributions of interest and will not have a
Pass-Through Rate.) (Describe any other method
used to calculate the Pass-Through Rate.)
(Interest on the Certificates will be
calculated on the basis of a 360-day year
consisting of twelve 30-day months. Interest
will accrue with respect to each Distribution
Date during the one-month period beginning on
the ___ day of the month preceding the month of
such Distribution Date and ending on the ___
day of the month of such Distribution Date
(each, an "Interest Accrual Period").)
Distributions on the
Certificates The Available Distribution Amount in respect of
a Distribution Date will be distributed in the
following amounts and order of priority:
(describe the application of Available
Distribution Amount to make distributions of
interest and principal among the Classes of
Certificates)
(Interest on the Class ( ) Certificates at the
then-applicable Pass-Through Rate will be
reduced by the Class ( ) Certificates'
allocable share (calculated as described
herein) of ((i) the aggregate amount of
negative amortization in respect of the
Mortgage Loans for their respective Due Dates
occurring during the related Due Period and
(ii)) the aggregate portion of Prepayment
Interest Shortfalls incurred during the related
Due Period that was not covered by the
application of the Master Servicer's servicing
compensation for the related Due Period. (The
amount, if any, by which the Class ( ) Interest
Distribution Amount for any Distribution Date
is reduced as a result of negative amortization
on the Mortgage Loans shall constitute the
"Class Negative Amortization" for such
Distribution Date in respect of the Class ( )
Certificates and shall be added to the Class (
) Balance on such Distribution Date.) (The
Class ( ) Notional Amount will equal the (sum
of the) Class ( ) Balance. The Class ( )
Notional Amount does not entitle the Class ( )
Certificates (or a component thereof) to any
distributions of principal.) If the Available
Distribution Amount for any Distribution Date
is less than the Class ( ) Interest
Distribution Amount for such Distribution Date,
the shortfall will be part of the Class ( )
Interest Distribution Amount distributable to
holders of Class ( ) Certificates on subsequent
Distribution Dates, to the extent of available
funds.
The Available Distribution Amount for any
Distribution Date generally includes: (i)
scheduled payments on the Mortgage Assets due
during or prior to the related Due Period and
collected as of the related Determination Date
(to the extent not distributed on previous
Distribution Dates) and certain unscheduled
payments and other collections on the Mortgage
Assets collected during the related Due Period,
net of amounts payable or reimbursable to the
Master Servicer therefrom; (ii) any Advances
made by the Master Servicer for the related
Distribution Date; and (iii) that portion of
the Master Servicer's servicing compensation
for the related Due Period applied to cover
Prepayment Interest Shortfalls incurred during
the related Due Period. See "Description of
the Certificates -- Distributions --
Calculations of Interest" herein.
Advances The Master Servicer is required to make
advances ("Advances") in respect of delinquent
Monthly Payments on the Mortgage Loans, subject
to the limitations described herein. (The
Trustee will be obligated to make any such
Advance if the Master Servicer fails in its
obligation to do so, to the extent provided in
the Pooling and Servicing Agreement.) See
"Description of the Certificates -- Advances"
herein and "Description of the Certificates --
Advances in Respect of Delinquencies" in the
Prospectus.
Subordination The rights of holders of the Subordinate
Certificates to receive distributions of
amounts collected on the Mortgage Loans will be
subordinate, to the extent described herein, to
the rights of holders of the Class ( )
Certificates. This subordination is intended
to enhance the likelihood of receipt by the
holders of the Class ( ) Certificates of the
full amount of the Class ( ) Interest
Distribution Amount and the (ultimate receipt
of principal equal to the initial Class ( )
Balance). The protection afforded to the
holders of the Class ( ) Certificates by means
of the subordination, to the extent provided
herein, will be accomplished by the application
of the Available Distribution Amount to the
Class ( ) Certificates prior to the application
thereof to the Subordinate Certificates (and by
reducing the Class ( ) Interest Distribution
Amount and the Class ( ) Balance by an amount
equal to the interest portion and the principal
portion, respectively, of Realized Losses
allocated to such class). See "Description of
the Certificates -- Subordination" herein.
(The Subordinate
Certificates The Class ( ) Certificates have an initial
Certificate Balance of $____________ (the
initial "Class ( ) Balance") and the Class ( )
Certificates have an initial Certificate
Balance of $________ (the initial "Class ( )
Balance"), representing ____% and _____%,
respectively, of the Mortgage Loans by
aggregate principal balance as of the Cut-off
Date. Interest shall accrue on the Class ( )
Balance and Class ( ) Balance at a Pass-Through
Rate equal to (____% per annum) (the weighted
average of the Net Mortgage Rates in effect
from time to time on the Mortgage Loans).
(The Class ( ) Certificates, which have no
Pass-Through Rate and initially have a
Certificate Balance of $______________ (the
initial "Class ( ) Balance"), represent the
right to receive on any Distribution Date the
balance, if any, of the Available Distribution
Amount remaining after the payment of all
interest and principal due on the other Classes
of Certificates. Subsequent to the first
Distribution Date, the Class ( ) Balance will
equal the excess, if any, of the aggregate
Stated Principal Balance of the Mortgage Loans
over the sum of the Class ( ) Balance, Class (
) Balance and Class ( ) Balance.)
(The Subordinate Certificates are not offered
hereby.))
(Special Prepayment
Considerations The rate of principal payments on the Class (
) Certificates collectively will depend on the
rate and timing of principal payments
(including prepayments, defaults and
liquidations) on the Mortgage Loans. As is the
case with mortgage-backed securities generally,
the Class ( ) Certificates are subject to
substantial inherent cash-flow uncertainties
because the Mortgage Loans may be prepaid at
any time. Generally, when prevailing interest
rates are increasing, prepayment rates on
mortgage loans tend to decrease, resulting in a
reduced return of principal to investors at a
time when reinvestment at such higher
prevailing rates would be desirable.
Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans
tend to increase, resulting in a greater return
of principal to investors at a time when
reinvestment at comparable yields may not be
possible.
(The multiple class structure of the Class
( ) Certificates results in the allocation of
prepayments among certain classes as follows
(to be included as appropriate):
(Sequentially paying classes: (All) classes of
the Class ( ) Certificates are subject to
various priorities for payment of principal as
described herein. Distributions on classes
having an earlier priority of payment will be
immediately affected by the prepayment speed of
the Mortgage Loans early in the life of the
Mortgage Pool. Distributions on classes with a
later priority of payment will not be directly
affected by the prepayment speed until such
time as principal is distributable on such
classes; however, the timing of commencement of
principal distributions and the weighted
average lives of such classes will be affected
by the prepayment speed experienced both before
and after the commencement of principal
distributions on such classes.)
((Scheduled) Certificates: Principal
distributions on the (Scheduled) Certificates
will be payable in amounts determined based on
schedules as described herein, provided that
the prepayment speed of the Mortgage Loans each
month remains (at a constant level of) (between
approximately ___% (SPA)(CPR) (as defined
herein) and) ___% (SPA)(CPR). (However, as
discussed herein, actual principal
distributions are likely to deviate from the
described amounts, because it is highly
unlikely that the actual prepayment speed of
the Mortgage Loans each month will remain at or
near ___% (SPA)(CPR).) If the prepayment speed
of the Mortgage Loans is consistently higher
than ___% of (SPA)(CPR), then the (Companion)
Certificates will be retired before all of the
(Scheduled) Certificates are retired, and the
rate of principal distributions and the
weighted average lives of the remaining
(Scheduled) Certificates will become
significantly more sensitive to changes in the
prepayment speed of the Mortgage Loans and
principal distributions thereon will be more
likely to deviate from the described amounts.)
((Companion) Certificates: Because of the
application of amounts available for principal
distributions among the Class ( ), Class (
) and Class ( ) Certificates in any given
month, first to the (Scheduled) Certificates up
to the described amounts and then to the
(Companion) Certificates, the rate of principal
distributions and the weighted average lives of
the (Companion) Certificates will be extremely
sensitive to changes in the prepayment speed of
the Mortgage Loans. The weighted average lives
of the (Companion) Certificates will be
significantly more sensitive to changes in the
prepayment speed than that of the (Scheduled)
Certificates or a fractional undivided interest
in the Mortgage Loans.))
(Special Yield
Considerations (The multiple class structure of the Senior
Certificates causes the yields of certain
classes to be particularly sensitive to changes
in the prepayment speed of the Mortgage Loans
and other factors, as follows (to be included
as appropriate):)
(Interest strip and inverse floater classes:
The yield to investors on the (identify
classes) will be extremely sensitive to the
rate and timing of principal payments on the
Mortgage Loans (including prepayments, defaults
and liquidations), which may fluctuate
significantly over time. A rapid rate of
principal payments on the Mortgage Loans could
result in the failure of investors in the
(identify interest strip and inverse floater
strip classes) to recover their initial
investments, and a slower than anticipated rate
of principal payments on the Mortgage Loans
could adversely affect the yield to investors
on the (identify non-strip inverse floater
classes).)
((Variable Strip) Certificates. In addition to
the foregoing, the yield on the (Variable
Strip) Certificates will be materially
adversely affected to a greater extent than the
yields on the other Class ( ) Certificates if
the Mortgage Loans with higher Mortgage Rates
prepay faster than the Mortgage Loans with
lower Mortgage Rates, because holders of the
(Variable Strip) Certificates generally have
rights to relatively larger portions of
interest payments on the Mortgage Loans with
higher Mortgage Rates than on Mortgage Loans
with lower Mortgage Rates.)
(Adjustable rate (including inverse floater)
CLASSES: The yield on the (identify floating
rate classes) will be sensitive, and the yield
on the (identify inverse floater classes) will
be extremely sensitive, to fluctuations in the
level of (the index). The Pass-Through Rate on
the (identify inverse floater classes) will
vary inversely with, and at a multiple of, (the
index).)
(Inverse floater companion classes: In
addition to the foregoing, in the event of
relatively low prevailing interest rates
(including (the index)) and relatively high
rates of principal prepayments over an extended
period, while investors in the (identify
inverse floater companion classes) may then be
experiencing a high current yield on such
Certificates, such yield may be realized only
over a relatively short period, and it is
unlikely that such investors would be able to
reinvest such principal prepayments on such
Certificates at a comparable yield.)
(Residual Certificates: Holders of the
Residual Certificates are entitled to receive
distributions of principal and interest as
described herein; however, holders of such
Certificates may have tax liabilities with
respect to their Certificates during the early
years of their term that substantially exceed
the principal and interest payable thereon
during such periods. (In addition, such
distributions will be reduced to the extent
that they are subject to United States federal
income tax withholding.)))
Optional Termination At its option, the Master Servicer may purchase
all of the Mortgage Assets, and thereby effect
termination of the Trust Fund and early
retirement of the then outstanding
Certificates, on any Distribution Date on which
the aggregate Stated Principal Balance of the
Mortgage Loans remaining in the Trust Fund is
less than __% of the aggregate principal
balance of such Mortgage Loans as of the
Cut-off Date. (At its option, the Master
Servicer may also purchase any Class ( )
Certificates on any Distribution Date on which
the Class ( ) Balance is less than ___% of the
original balance thereof.) See "Pooling and
Servicing Agreement -- Termination" herein and
"Description of the Certificates --
Termination" in the Prospectus.
Certain Federal Income Tax
Consequences (An election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit ("REMIC") for federal income tax
purposes. Upon the issuance of the Class ( )
Certificates, Brown & Wood LLP, 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, as amended (the "Code").
For federal income tax purposes, the Class ( )
Certificates will be the sole class of
"residual interests" in the REMIC and the Class
( ), Class ( ) and Class ( ) Certificates will
be the "regular interests" in the REMIC and
will be treated as debt instruments of the
REMIC.
For further information regarding the federal
income tax consequences of investing in the
Class ( ) 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 ("ERlSA"), or Section 4975 of
the Code should review carefully with its legal
advisors whether the purchase or holding of
Class ( ) Certificates could give rise to a
transaction that is prohibited or is not
otherwise permitted either under ERISA or
Section 4975 of the Code or whether there
exists any statutory or administrative
exemption applicable to an investment therein.)
(The U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction
Exemption 90-29, to the Underwriter that
generally exempts from the application of
certain of the prohibited transaction
provisions of Section 406 of ERISA, and the
excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of the
Code and Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding of
pass-through certificates underwritten by the
Underwriter such as the Class ( ) Certificates
and the servicing and operation of asset pools,
provided that certain conditions are satisfied.
A fiduciary of any employee benefit plan
subject to ERISA or the Code should consult
with its legal advisors regarding the
requirements of ERISA and the Code.) See
"ERISA Considerations" herein and in the
Prospectus.
Rating It is a condition to the issuance of the Class
( ) Certificates that they be rated (not lower
than) "___" by __________. 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 (whether voluntary or involuntary)
of Mortgage Loans, or the corresponding effect
on yield to investors. (The rating of the
Class ( ) Certificates does not address the
possibility that the holders of such
Certificates may fail to fully recover their
initial investments.) See "Special
Considerations" and "Rating" herein and "Yield
Considerations" in the Prospectus.
Legal Investment The appropriate characterization of the Class (
) Certificates under various legal investment
restrictions, and thus the ability of investors
subject to these restrictions to purchase the
Class ( ) Certificates, may be subject to
significant interpretative uncertainties. The
Class ( ) Certificates (will) (will not) be
"mortgage related securities" within the
meaning of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") (so long as
they are rated in at least the second highest
rating category by the Rating Agency, and, as
such, are legal investments for certain
entities to the extent provided in SMMEA).
Accordingly, investors should consult their own
legal advisors to determine whether and to what
extent the Class ( ) Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the Prospectus.
(Registration of the Class
( ) Certificates The Class ( ) 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 ( )
Certificates (any such person, a "Class ( )
Certificate Owner") will be entitled to receive
a Certificate of such class in fully
registered, certificated form (a "Definitive
Class ( ) Certificate"), except under the
limited circumstances described in the
Prospectus under "Description of the
Certificates-Book-entry Registration and
Definitive Certificates". See "Description of
the Certificates-General" herein and
"Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in
the Prospectus.)
DESCRIPTION OF THE (MORTGAGE POOL) (MBS)
GENERAL
The Trust Fund will consist primarily of (___ (conventional), (fixed
interest) (adjustable interest) rate Mortgage Loans with an aggregate
principal balance as of the Cut-off Date, after deducting payments of
principal due on such date, of $____________,) (mortgage participations),
mortgage pass-through certificates and mortgage-backed securities evidencing
interests therein or secured thereby (the "MBS"),) (and) (certain direct
obligations of the United States, agencies thereof or agencies created
thereby (the "Government Securities")). 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" creating a first (first or
junior) lien on a one- to four- family residential property (a "Mortgaged
Property"). The Mortgaged Properties consist of (description of one- to
four-family residential properties). (Because no evaluation of any
mortgagor's financial condition has been conducted, investors should consider
all of the Mortgage Loans to be non-recourse loans so that, in the event of
mortgagor default, recourse may be had only against the specific property and
such limited other assets as have been pledged to secure a Mortgage Loan, and
not against the mortgagor's other assets.) All percentages of the Mortgage
Loans described herein are approximate percentages (except as otherwise
indicated) by aggregate principal balance as of the Cut-off Date.)
(The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by ________________ (the "Mortgage Asset Seller").
The Depositor will purchase the Mortgage Loans to be included in the Mortgage
Pool on or before the Closing Date from the Mortgage Asset Seller pursuant to
a seller's agreement (the "Seller's Agreement"), to be dated as of
____________, 199_ between the Mortgage Asset Seller and the Depositor. The
Depositor will cause the Mortgage Loans in the Mortgage Pool to be assigned
to _______________, as Trustee, pursuant to the Pooling and Servicing
Agreement. _____________, in its capacity as Master Servicer, will service
the Mortgage Loans pursuant to the Pooling and Servicing Agreement.
Under the Seller's Agreement, _______________, as seller of the
Mortgage Loans to the Depositor, will make certain representations,
warranties and covenants to the Depositor relating to, among other things,
the due execution and enforceability of the Seller's Agreement and certain
characteristics of the Mortgage Loans, and will be obligated to repurchase or
substitute for any Mortgage Loans as to which there exists deficient
documentation or an uncured material breach of any such representation,
warranty or covenant. Under the Pooling and Servicing Agreement the
Depositor will assign all its right, title and interest in such
representations, warranties and covenants (including Mortgage Asset Seller's
repurchase or substitution obligation) to the Trustee for the Trust Fund.
The Depositor will make (no) representations or warranties with respect to
the Mortgage Loans and will have no obligation to repurchase or substitute
for Mortgage Loans with deficient documentation (or which are otherwise
defective). _____________, as seller of the Mortgage Loans to the Depositor,
is selling such Mortgage Loans without recourse and, accordingly, in such
capacity, will have no obligations with respect to the Certificates other
than pursuant to such representations, warranties, covenants and repurchase
obligations in respect of the Mortgage Loans. See "Description of the
Agreements -- Representations and Warranties; Repurchases" in the
Prospectus.)
(The MBS
(Title and issuer of underlying securities, amount deposited or
pledged, amount originally issued, maturity date, interest rate, (redemption
provisions), together with description of other material terms.)
(Description of principal and interest distributions on the MBS.)
(Description of advances by the servicer of the mortgage loans
underlying the MBS.)
(Description of effect on the MBS of allocation of losses on the
underlying mortgage loans.)
As to each series of MBS included in the Trust Fund, the various
classes of certificates from such series ((including classes not in the Trust
Fund but from the same series as classes that are in the Trust Fund) are
listed, together with the related pass-through rates and certain other
information applicable thereto, in Annex B hereto.)
(Convertible Mortgage Loans
____% of the Mortgage Loans ("Convertible Mortgage Loans") provide
that, at the option of the related Mortgagors, the adjustable interest rate
on such Mortgage Loans may be converted to a fixed interest rate. The first
month in which any of the Mortgage Loans may convert is ____________, and the
last month in which any of the Mortgage Loans may convert is _____________.
Upon conversion, the Mortgage Rate will be converted to a fixed interest rate
determined in accordance with the formula set forth in the related Mortgage
Note which formula is intended to result in a Mortgage Rate which is not less
than the then current market interest rate (subject to applicable usury
laws). After such conversion, the monthly payments of principal and interest
will be adjusted to provide for full amortization over the remaining term to
scheduled maturity. Upon notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable interest rate to a fixed interest rate
and prior to the conversion of any such Mortgage Loan (a "Converting Mortgage
Loan"), the related Warrantying Party will be obligated to purchase the
Converting Mortgage Loan at a price equal to the outstanding principal
balance thereof plus accrued interest thereon net of any subservicing fees
(the "Conversion Price"). In the event of a failure by a Warrantying Party
to purchase a converting Mortgage Loan, the Master Servicer is required to
use its best efforts to purchase such Mortgage Loan following its conversion
(a "Converted Mortgage Loan") during the one-month period following the date
of conversion at the Conversion Price.
In the event that the related Warrantying Party fails to purchase a
Converting Mortgage Loan and the Master Servicer does not purchase a
Converted Mortgage Loan, neither the Depositor nor any of its affiliates nor
any other entity is obligated to purchase or arrange for the purchase of any
Converted Mortgage Loan. Any such Converted Mortgage Loan will remain in the
Mortgage Pool as a fixed-rate Mortgage Loan and will result in the Mortgage
Pool's having both fixed rate and adjustable rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the
Trustee of such Mortgage Loan and the purchaser will thereafter own such
Mortgage Loan free of any further obligation to the Trustee or the
Certificateholders with respect thereto.)
(The Index
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Mortgage Rate will be a per annum rate equal to
______________, as most recently available as of the date days prior to
----
the Payment Adjustment Date (the "Index"). Such average yields reflect the
yields for the week prior to that week in which the information is reported.
In the event that the Index is no longer available, an index reasonably
acceptable to the Trustee that is based on comparable information will be
selected by the Master Servicer. The Index is currently calculated based on
information reported in ___________.)
Certain Characteristics of the Mortgage Loans
(Approximately ___% of the Mortgage Loans have Due Dates that occur on
the ___ day of each month; approximately ___% of the Mortgage Loans have Due
Dates that occur on the ___ day of each month; approximately _____% of the
Mortgage Loans have Due Dates that occur on the ___ day of each month; and
the remainder of the Mortgage Loans have Due Dates that occur on the
fifteenth day of each month.)
(As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (i) Mortgage Rates ranging from _____% per annum to _______%
per annum; (ii) a weighted average Mortgage Rate of ______% per annum; (iii)
Gross Margins ranging from ____ basis points to ______ basis points; (iv) a
weighted average Gross Margin of ____ basis points; (v) principal balances
ranging from $_______ to $______; (vi) an average principal balance of
$_________; (vii) original terms to scheduled maturity ranging from _____
months to _________ months; (viii) a weighted average original term to
scheduled maturity of _____ months; (ix) remaining terms to scheduled
maturity ranging from ____ months to _____ months; (x) a weighted average
remaining term to scheduled maturity of ________ months; (xi) Cut-off Date
Loan-to-Value ("LTV") Ratios ranging from ______% to ________%; (xii) a
weighted average Cut-off Date LTV Ratio of _____%; (xiii) as to the _______%
of the Mortgage Loans to which such characteristic applies, (A) minimum
lifetime Mortgage Rates ranging from ____% per annum to ______ % per annum
and (B) a weighted average minimum lifetime Mortgage Rate of _______% per
annum; and (xiv) as to the__________% of Mortgage Loans to which such
characteristic applies and for which it may be currently calculated, (A)
maximum lifetime Mortgage Rate ranging from _______% per annum to ________%
per annum and (B) a weighted average maximum lifetime Mortgage Rate of
_________% per annum.)
(___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Special
Considerations -- Balloon Payments" in the Prospectus.)
(The Mortgage Rate on each Mortgage Loan is subject to adjustment on
each Interest Rate Adjustment Date by adding the related Gross Margin to the
value of the Index (described below) as most recently announced a specified
number of days prior to such Interest Rate Adjustment Date, subject, in the
case of substantially all of the Mortgage Loans, to minimum and maximum
lifetime Mortgage Rates, with ranges specified below. The Mortgage Rates on
the Mortgage Loans generally are adjusted monthly; however, certain of the
Mortgage Loans provide for Interest Rate Adjustment Dates to occur quarterly
(___% of the Mortgage Loans), semi-annually (___% of the Mortgage Loans) or
annually (____% of the Mortgage Loans). Each of the Mortgage Loans provided
for an initial fixed interest rate period; _________ Mortgage Loans,
representing ___% of the Mortgage Loans, have not experienced their first
Interest Rate Adjustment Dates. The latest initial Interest Rate Adjustment
Date for any Mortgage Loan is to occur in ___________________________________
_____________________________________________________________________.)
(Subject to the Payment Caps described below, the amount of the Monthly
Payment on each Mortgage Loan adjusts periodically on each Payment Adjustment
Date to an amount that would fully amortize 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. Approximately __% of the Mortgage Loans provide
that an adjustment of the amount of the Monthly Payment on a Payment
Adjustment Date may not result in a Monthly Payment that increases by more
than ___% (nor, in some cases, decreases by more than ____%) of the amount of
the Monthly Payment in effect immediately prior to such Payment Adjustment
Date (each such provision, a "Payment Cap"); however, certain of those
Mortgage Loans also provide that the Payment Cap will not apply on certain
Payment Adjustment Dates or if the application thereof would result in the
principal balance of the Mortgage Loan exceeding (through negative
amortization) by a specified percentage the original principal balance
thereof. Generally, the related Mortgage Note provides that if, as a result
of negative amortization, the respective principal balance of the Mortgage
Loan reaches an amount specified therein (which as to most Mortgage Loans is
not greater than _% of the Mortgage Loan principal balance as of the
origination date thereof), the amount of the Monthly Payments due thereunder
will be increased as necessary to prevent further negative amortization.
(Only in the case of _____% of the Mortgage Loans does a Payment
Adjustment Date immediately follow each Interest Rate Adjustment Date. As a
result, and because application of Payment Caps may limit the amount by which
the Monthly Payments due on certain of the Mortgage Loans may adjust, the
amount of a Monthly Payment may be more or less than the amount necessary to
amortize the Mortgage Loan principal balance over the then remaining
amortization schedule at the applicable Mortgage Rate. Accordingly, Mortgage
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).)
(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. Although
Prepayment Premiums are payable to the Master Servicer as additional
servicing compensation, the Master Servicer may waive the payment of any
Prepayment Premium only in connection with a principal prepayment that is
proposed to be made during the three month period prior to the scheduled
maturity of the related Mortgage Loan, or under certain other limited
circumstances.)
The following table sets forth the range of Mortgage Rates on the
Mortgage Loans as of the Cut-off Date:
Mortgage Rates as of the Cut-off Date
-------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
- ------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- ------------ -------
</TABLE>
Weighted Average
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
The following table sets forth the types of Mortgaged Properties
securing the Mortgage Loans:
Property Type
-------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Type Loans Number the Cut-off Date the Cut-off Date
- ---- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Note: Percentage totals may not add due to rounding.
(The following table sets forth the range of Gross Margins for the
Mortgage Loans:)
(Gross Margins)
---------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
- ------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Gross Margin:
Note: Percentage totals may not add due to rounding.
(The following table sets forth the frequency of adjustments to the
Mortgage Rates on the Mortgage Loans as of the Cut-off Date:)
(Frequency of Adjustments to Mortgage Rates)
--------------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Frequency(A) Loans Number the Cut-off Date the Cut-off Date
- ------------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- ---------- -------
</TABLE>
Weighted Average
Frequency of
Adjustments to
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) _______ or ___% of Mortgage Loans have not experienced their first
Interest Rate Adjustment Date.
(The following table sets forth the frequency of adjustments to the
Monthly Payments on the Mortgage Loans as of the Cut-off Date:)
(Frequency of Adjustments to Monthly Payments)
----------------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Frequency (A) Loans Number the Cut-off Date the Cut-off Date
- ------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
------ ------- ---------- -------
</TABLE>
Weighted Average
Frequency of
Adjustments to
Monthly Payments:
Note: Percentage totals may not add due to rounding.
(The following table sets forth the range of maximum lifetime Mortgage
Rates for the Mortgage Loans:)
(Maximum Lifetime Mortgage Rates)
---------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Maximum Number of Percent Principal Principal
Lifetime Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- -------- -------
</TABLE>
Weighted Average
Maximum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Mortgage Loans without a lifetime rate cap.
(B) The lifetime rate caps for these Mortgage Loans are based upon the
Index as determined at a future point in time plus a fixed percentage.
Therefore, the rate is not determinable as of the Cut-off Date.
(C) This calculation does not include the ____ Mortgage Loans without a
lifetime rate cap or the ____ Mortgage Loans with lifetime rate caps
which are currently not determinable.
(The following table sets forth the range of minimum lifetime Mortgage
Rates on the Mortgage Loans:)
(Minimum Lifetime Mortgage Rates)
---------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Minimum Number of Percent Principal Principal
Lifetime Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- -------- -------
</TABLE>
Weighted Average
Minimum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Mortgage Loans without interest rate floors.
(B) This calculation does not include the ____ Mortgage Loans without
interest rate floors.
The following table sets forth the range of principal balances of the
Mortgage Loans as of the Cut-off Date:
Principal Balances as of the Cut-off Date
-----------------------------------------
<TABLE>
<CAPTION>
Percent by
Principal Aggregate Aggregate
Balance Number of Percent Principal Principal
as of the Mortgage by Balance as of Balance as of
Cut-off Date Loans Number the Cut-off Date the Cut-off Date
------------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Average Principal Balance
as of the
Cut-off Date:
Note: Percentage totals may not add due to rounding.
The following tables set forth the original and remaining terms to
maturity (in months) of the Mortgage Loans:
Original Term to Maturity in Months
-----------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Original Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
------ ------- ---------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
The following tables set forth the purpose for which the Mortgage Loan
was originated, (the type of program under which it was originated and the
occupancy type).
Mortgage Loan Purpose
---------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- ------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
(Mortgage Loan Documentation Program)
-------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- -------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
Mortgage Loan Occupancy Type
----------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- ----------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
Remaining Term to Maturity in Months
------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average Remaining
Term to Maturity:
Note: Percentage totals may not add due to rounding.
The following tables set forth the respective years in which the
Mortgage Loans were originated and are scheduled to mature:
Mortgage Loan Year of Scheduled Maturity
----------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Year Loans Number the Cut-off Date the Cut-off Date
---- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Note: Percentage totals may not add due to rounding.
The following table sets forth the range of Original LTV Ratios of the
Mortgage Loans. An "Original LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the principal balance of a Mortgage
Loan on the date of its origination, and the denominator of which is (in
general) the lesser of (i) the appraised value of the related Mortgaged
Property as determined by an appraisal thereof obtained in connection with
the origination of such Mortgage Loan and (ii) the sale price of such
Mortgaged Property at the time of such origination. There can be no
assurance that the value (determined through an appraisal or otherwise) of a
Mortgaged Property determined after origination of the related Mortgage Loan
will be equal to or greater than the value thereof (determined through an
appraisal or otherwise) obtained in connection with the origination. As a
result, there can be no assurance that the loan-to-value ratio for any
Mortgage Loan determined at any time following origination thereof will be
lower than the Original LTV Ratio, notwithstanding any positive amortization
of such Mortgage Loan.
Original LTV Ratios
-------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Original Mortgage by Balance as of Balance as of
LTV Ratio Loans Number the Cut-off Date the Cut-off Date
--------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- ---------- -------
</TABLE>
Weighted Average Original
LTV Ratio:
Note: Percentage totals may not add due to rounding.
The Mortgage Loans are secured by Mortgaged Properties in _________
different states. The table below sets forth the states in which the
Mortgaged Properties are located:
Geographic Distribution
-----------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
State Loans Number the Cut-off Date the Cut-off Date
----- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Note: Percentage totals may not add due to rounding.
(regional breakdown to be provided as appropriate)
No more than ___% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code.
Underwriting Standards
All of the Mortgage Loans were originated or acquired by _______,
generally in accordance with the underwriting criteria described herein.
(Description of underwriting standards.)
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the
issuance of the Class ( ) Certificates, a Mortgage Loan may be removed from
the Mortgage Pool as a result of incomplete documentation or otherwise, if
the Depositor deems such removal necessary or appropriate and may be prepaid
at any time. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Class ( ) 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 Class ( )
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.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Class ( ) Certificates 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 Class ( ) 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.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of ____ classes to be designated as the Class ( )
Certificates, the Class ( ) Certificates, the Class ( ) Certificates and the
Class ( ) Certificates. The Class ( ), Class ( ) and Class ( ) Certificates
(the "Subordinate Certificates") will be subordinate to the Class ( )
Certificates, as described herein. The Certificates 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 or deed in
lieu of foreclosure (upon acquisition, an "REO Property"); (iii) such funds
or assets as from time to time are deposited in the Certificate Account and
any account established in connection with REO Properties (the "REO
Account"); and (iv) the rights of the mortgagee under all insurance policies
with respect to the Mortgage Loans. Only (the Class ( ) (, Class ( ) and
Class ( )) Certificates are offered hereby.
The Class ( ) Certificates will have an initial (Certificate Balance)
(Notional Balance) of $__________. The Class ( ) Certificates represent ___%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date. The Class ( ) Certificates will have an initial Certificate Balance of
$__________, representing ___% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. The Class ( ) Certificates will have
an initial Certificate Balance of $__________, representing ___% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The initial Certificate Balance of the Class ( ) Certificates will be (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. The respective
Certificate Balances of the Class ( ), Class ( ) and Class ( ) Certificates
(respectively, the "Class ( ) Balance", "Class ( ) Balance" and "Class ( )
Balance") will in each case be (i) reduced by amounts actually distributed on
such class of Certificates that are allocable to principal and ((ii)
increased by amounts allocated to such class of Certificates in respect of
negative amortization on the Mortgage Loans (Describe Notional Balance.))
(The Certificate Balance of the Class ( ) Certificates (the "Class ( )
Balance") will at any time equal the aggregate Stated Principal Balance of
the Mortgage Loans minus the sum of the Class ( ) Balance, Class ( ) Balance
and Class ( ) Balance.) The Stated Principal Balance of any Mortgage Loan at
any date of determination will equal (a) the Cut-off Date Balance of such
Mortgage Loan, plus ((b) any negative amortization added to the principal
balance of such Mortgage Loan on any Due Date after the Cut-off Date to and
including the Due Date in the Due Period for the most recently preceding
Distribution Date), minus (c) the sum of (i) the principal portion of each
Monthly Payment due on such Mortgage Loan after the Cut-off Date, to the
extent received from the mortgagor or advanced by the Master Servicer and
distributed to holders of the Certificates before such date of determination,
(ii) all principal prepayments and other unscheduled collections of principal
received with respect to such Mortgage Loan, to the extent distributed to
holders of the Certificates before such date of determination, and (iii) any
reduction in the outstanding principal balance of such Mortgage Loan
resulting out of a bankruptcy proceeding for the related mortgagor.
(The Class ( ) Certificates are offered hereby.)
Distributions
Method, Timing and Amount. Distributions on the Certificates will be
made on the ____ day of each month or, if such ____ day is not a business
day, then on the next succeeding business day, commencing in
____________________ 199_ (each, a "Distribution Date") . All distributions
(other than the final distribution on any Certificate) will be made by the
Master Servicer 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. Such distributions 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 and is the registered owner of Certificates the aggregate initial
principal amount of which is at least $ , or otherwise by check mailed to
such Certificateholder. The final distribution on any Certificate will be
made in like manner, but only upon presentment or surrender of such
Certificate at the location specified in the notice to the holder thereof of
such final distribution. All distributions made with respect to a class of
Certificates on each Distribution Date will be allocated pro rata among the
outstanding Certificates of such class based on their respective Percentage
Interests. The Percentage Interest evidenced by any Class ( ) Certificate is
equal to the initial denomination thereof as of the Closing Date, divided by
the initial Certificate Balance for such class. The aggregate distribution
to be made on the Certificates on any Distribution Date shall equal the
Available Distribution Amount.
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Certificate
Account as of the close of business on the related Determination Date, (ii)
the aggregate amount of any Advances made by the Master Servicer in respect
of such Distribution Date and (iii) the aggregate amount deposited by the
Master Servicer in the Certificate Account in respect of such Distribution
Date in connection with Prepayment Interest Shortfalls incurred during the
related Due Period, net of (b) the portion of the amount described in clause
(a)(i) hereof that represents (i) Monthly Payments due on a Due Date
subsequent to the end of the related Due Period, (ii) any voluntary principal
prepayments and other unscheduled recoveries on the Mortgage Loans received
after the end of the related Due Period or (iii) any amounts payable or
reimbursable therefrom to any person.
Calculations of Interest. The "Distributable Certificate Interest" in
respect of the Class ( ) Certificates for any 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 of (i) the aggregate portion of any Prepayment Interest Shortfalls
resulting from voluntary principal prepayments on the Mortgage Loans during
the related Due Period (that are not covered by the application of servicing
compensation of the Master Servicer for the related Due Period (such
uncovered aggregate portion, 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 the Class ( )
Certificates for any Distribution Date is equal to thirty days' interest
accrued during the related Interest Accrual Period at the Pass-Through Rate
applicable to such class of Certificates for such Distribution Date accrued
on the related (Certificate Balance) (Classes ( ) Notional Amount)
outstanding immediately prior to such Distribution Date. The Pass-Through
Rate applicable to the Class ( ) Certificates for any Distribution Date (is
fixed and is set forth on the cover hereof) (will equal the weighted average
of the Class ( ) Remittance Rates in effect for the Mortgage Assets as of the
commencement of the related Due Period (as to such Distribution Date, the
"Weighted Average Class ( ) Remittance Rate"). The "Class ( ) Remittance
Rate" in effect for any Mortgage Loan as of any date of determination (a)
prior to its first Interest Rate Adjustment Date, is equal to the related
Mortgage Rate then in effect minus ____ basis points and (b) from and after
its first Interest Rate Adjustment Date, is equal to the related Mortgage
Rate then in effect minus the excess of the related Gross Margin over _______
basis points (is equal to the excess of the Mortgage Rate thereon over ____%
per annum.) The "Interest Accrual Period" for the Certificates is the
calendar month preceding the month in which the Distribution Date occurs.)
(The Class ( ) Notional Amount will equal the (sum of the Class ( ) Balance.
The Class ( ) Notional Amount does not entitle the Class ( ) Certificate (or
a component thereof) to any distribution of principal.) (Interest will be
calculated on the basis of a 360-day year of twelve 30-day months.)
(The portion of Net Aggregate Prepayment Interest Shortfall (and the
Aggregate Mortgage Loan Negative Amortization) for any Distribution Date that
will be allocated to the Class ( ) Certificates on such Distribution Date
will be equal to the then applicable Class ( ) Interest Allocation
Percentage. The "Class ( ) Interest Allocation Percentage" for any
Distribution Date will equal a fraction, expressed as a percentage, the
numerator of which is equal to the product of (a) the Class ( ) Balance ((net
of any Uncovered Portion thereof)) outstanding immediately prior to such
Distribution Date, multiplied by (b) the Pass-Through Rate for the Class ( )
Certificates for such Distribution Date, and the denominator of which is the
product of (x) the aggregate Stated Principal Balance of the Mortgage Loans
outstanding immediately prior to such Distribution Date, multiplied by (y)
the Weighted Average Net Mortgage Rate for such Distribution Date. The "Net
Mortgage Rate" in effect for any Mortgage Loan as of any date of
determination is equal to the related Mortgage Rate then in effect minus ____
basis points. (The "Uncovered Portion" of the Class ( ) Balance, as of any
date of determination, is the portion thereof representing the excess, if
any, of (a) the Class ( ) Balance then outstanding, over (b) the aggregate
Stated Principal Balance of the Mortgage Loans then outstanding.))
(The Class ( ) Certificates (or a component thereof) will not be
entitled to distributions of interest and will not have a Pass-Through Rate.)
Calculations of Principal. (Holders of the Class ( ) Certificates will
be entitled to receive on each Distribution Date, to the extent of the
balance of the Available Distribution Amount remaining after the payment of
the Class ( ) Interest Distribution Amount for such Distribution Date an
amount equal to the Class ( ) Principal Distribution Amount. The "Class ( )
Principal Distribution Amount" for any Distribution Date will equal the sum
of (i) the product of the Scheduled Principal Distribution Amount and the
Class ( ) Scheduled Principal Distribution Percentage, (ii) the product of
the Senior Accelerated Percentage and all principal prepayments received
during the related Due Period, and (iii) to the extent not previously
advanced, (the lesser of the Class ( ) Scheduled Principal Distribution
Percentage of the Stated Principal Balance of the Mortgage Loans and the
Senior Accelerated Percentage of the Unscheduled Principal Distribution
Amount net of any prepayment amounts described in clause (ii) above. The
"Scheduled Principal Distribution Amount" for any Distribution Date is equal
to 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 mortgagor or advanced by the Master Servicer and included in the
Available Distribution Amount for such Distribution Date. The principal
portion of any Advances in respect of a Mortgage Loan delinquent as to its
Balloon Payment will constitute advances in respect of the principal portion
of such Balloon Payment.
(The portion of the Class ( ) Principal Distribution Amount payable on
any Distribution Date shall be allocated to the Class ( ) Certificates as
follows: (Describe distributions which may be concurrent or sequential and
among different classes and may be based on a schedule of payments sometimes
referred to as a Schedule of PAC, TAC or Scheduled Balances for some and not
other classes.))
(The Class ( ) Scheduled Principal Distribution Percentage for any
Distribution Date represents the portion of the Scheduled Principal
Distribution Amount for such Distribution Date payable (subject to the
payment priorities described herein) on the Class ( ) Certificates. The
"Class ( ) Scheduled Principal Distribution Percentage" for any Distribution
Date will equal the lesser of (a) 100% and (b) a fraction, expressed as a
percentage, the numerator of which is the Class ( ) Balance outstanding
immediately prior to such Distribution Date, and the denominator of which is
the lesser of (i) the sum of the Class ( ) Balance, the Class ( ) Balance and
the Class ( ) Balance and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans, in either case outstanding immediately prior to such
Distribution Date.)
The "Unscheduled Principal Distribution Amount" for any Distribution
Date is equal to the sum of: (a) all voluntary principal prepayments
received on the Mortgage Loans during the related Due Period; and (b) the
excess, if any, of (i) all unscheduled recoveries received on the Mortgage
Loans during the related Due Period, whether in the form of liquidation
proceeds, condemnation proceeds, insurance proceeds or amounts paid in
connection with the purchase of a Mortgage Loan out of the Trust Fund,
exclusive in each case of any portion thereof payable or reimbursable to the
Master Servicer in connection with the related Mortgage Loan, over (ii) the
respective portions of the net amounts described in the immediately preceding
clause (i) needed to cover interest (at the applicable Net Mortgage Rate in
effect from time to time) on the related Mortgage Loan from the date to which
interest was previously paid or advanced through the Due Date for such
Mortgage Loan in the related Due Period ((exclusive of any portion of such
interest added to the principal balance of such Mortgage Loan as negative
amortization).)
(The "Class Negative Amortization" in respect of any class of
Certificates for any Distribution Date is equal to such class' allocable
share of the Aggregate Mortgage Loan Negative Amortization for such
Distribution Date.)
Distributions on Certificates. The Available Distribution Amount in
respect of a Distribution Date will be distributed in the following amounts
and order of priority:
(describe the application of Available Distribution Amount to make
distributions of interest and principal among the Classes of Certificates)
Subordination
In order to increase the likelihood of distribution in full of the
interest and principal due to be distributed to the Class ( )
Certificateholders on each Distribution Date, holders of the Class ( )
Certificates have a right to distributions of the Available Distribution
Amount that is prior to the rights of the holders of the Subordinate
Certificates, to the extent necessary to satisfy such amounts of interest and
principal.
(The entitlement to the Class ( ) Certificates of the (entire) (a
larger percentage under certain circumstances of) Unscheduled Principal
Distribution Amount will accelerate the amortization of the Class ( )
Certificates relative to the actual amortization of the Mortgage Loans.)
(To the extent that the Class ( ) Certificates are amortized faster
than the Mortgage Loans, without taking into account losses on the Mortgage
Loans, the percentage interest evidenced by the Class ( ) 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 ( ) Certificates by the Subordinate
Certificates.)
(The principal portion of any Realized Losses will be allocated first
in reduction of the Subordinate Certificates (in the order specified here)
and then to the Class ( ) Certificates (in the order specified here). Any
loss realized on a Mortgage Loan that is finally liquidated equal to the
excess of the Stated Principal Balance of such Mortgage Loan remaining, if
any, plus interest thereon through the last day of the month in which such
Mortgage Loan was finally liquidated, after application of all amounts
received (net of amounts reimbursable to the Master Servicer or any Sub-
Servicer for Advances and expenses, including attorneys' fees) towards
interest and principal owing on the Mortgage Loan is referred to herein as a
"Realized Loss.")
Advances
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated to make advances (each, an "Advance") out
of its own funds, or 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 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 (and (ii) in the case of each Mortgage
Loan delinquent in respect of its Balloon Payment as of the related
Determination Date, an amount sufficient to amortize fully the principal
portion of such Balloon Payment over the remaining amortization term of such
Mortgage Loan and to pay interest at the Net Mortgage Rate in effect for such
Mortgage Loan for the one month period preceding its Due Date in the related
Due Period (but only to the extent that the related mortgagor has not made a
payment sufficient to cover such amount under any forbearance arrangement
that has been included in the Available Distribution Amount for such
Distribution Date)). The Master Servicer's obligations to make Advances in
respect of any Mortgage Loan will continue through liquidation of such
Mortgage Loan and out of its own funds from any amounts collected in respect
of the Mortgage Loan as to which such Advance was made, whether in the form
of late payments, insurance proceeds, liquidation proceeds, condemnation
proceeds or amounts paid in connection with the purchase of such Mortgage
Loan. Notwithstanding the foregoing, the Master Servicer will be obligated
to make any Advance only to the extent that it determines in its reasonable
good faith judgment that, if made, would be recoverable out of general funds
on deposit in the Certificate Account. Any failure by the Master Servicer to
make an Advance as required under the Pooling and Servicing Agreement will
constitute an event of default thereunder(, in which case the Trustee will be
obligated to make any such Advance, in accordance with the terms of the
Pooling and Servicing Agreement).
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Class ( ) Certificates will be affected
by the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
liquidation due to default, repurchase, condemnation or insurance. The yield
to maturity on the Class ( ) Certificates will also be affected by the level
of the Index. The rate of principal payments on the Class ( ) Certificates
will correspond to the rate of principal payments (including prepayments) on
the related Mortgage Loans.
(Description of factors affecting yield, prepayment and maturity of the
Mortgage Loans and Class ( ) Certificates depending upon characteristics of
the Mortgage Loans.)
Weighted Average Life of the Class ( ) Certificates
Weighted average life refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Class ( ) Certificates will be influenced by the rate at which principal
payments (including scheduled payments and principal prepayments) on the
Mortgage Loans are made. Principal payments on the Mortgage Loans may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments and liquidations due to a default or other
dispositions of the Mortgage Loans).
The table entitled "Percent of Initial Certificate Balance Outstanding
for the Class ( ) Certificates at the respective percentages of (CPR) (SPA)"
set forth below indicates the weighted average life of such Certificates and
sets forth the percentage of the initial principal amount of such
Certificates that would be outstanding after each of the dates shown at the
indicated percentages of (CPR)(SPA). The table has been prepared on the
basis of the following assumptions regarding the characteristics of the
Mortgage Loans: (i) an outstanding principal balance of $_________, a
remaining amortization term of ___ months and a term to balloon of ____
months: (ii) an interest rate equal to _____% per annum until the _____ Due
Date and thereafter an interest rate equal to ____% per annum (at an assumed
Index of ____%) and Monthly Payments that would fully amortize the remaining
balance of the Mortgage Loan over its remaining amortization term; (iii) the
Mortgage Loans prepay at the indicated percentage of (CPR)(SPA); (iv) the
maturity date of each of the Balloon Mortgage Loans is not extended; (v)
distributions on the Class ( ) Certificates are received in cash, on the
( )th day of each month, commencing in_____________; (vi) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the mortgagors of principal and interest on the Mortgage Loans
occur; (vii) the initial Certificate Balance of the Class ( ) Certificates is
$________; (viii) prepayments represent payment in full of individual
Mortgage Loans and are received on the respective Due Dates and include 30
days' interest thereon; (ix) there are no repurchases of Mortgage Loans due
to breaches of any representation and warranty or otherwise; (x) the Class (
) Certificates are purchased on ________; (xi) the Servicing Fee is ____% per
annum; and (xii) the Index on each Interest Rate Adjustment Date is ________%
per annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Class ( ) Certificates and sets forth the percentages of
the initial Certificate Balance of the Class ( ) Certificates that would be
outstanding after the Distribution Date in ___________ of each of the years
indicated, at various percentages of (CPR)(SPA). Neither (CPR)(SPA) nor any
other prepayment model or assumption purports to be a historical description
of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans
included in the Mortgage Pool. Variations in the actual prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease the percentage of initial Certificate Balance (and weighted average
life) shown in the following table. Such variations may occur even if the
average prepayment experience of all such Mortgage Loans is the same as any
of the specified assumptions.
Percent of Initial Class ( ) Certificate Balance Outstanding
at the Following Percentages of (CPR)(SPA)
<TABLE>
<CAPTION>
Distribution Date
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percent . . . . . . . . . ___% ___% ___% ___% ___% ___%
____________ __, 1997 . . . . . .
____________ __, 1998 . . . . . .
____________ __, 1999 . . . . . .
____________ __, 2000 . . . . . .
____________ __, 2001 . . . . . .
____________ __, 2002 . . . . . .
____________ __, 2003 . . . . . .
____________ __, 2004 . . . . . .
____________ __, 2005 . . . . . .
____________ __, 2006 . . . . . .
____________ __, 2007 . . . . . .
</TABLE>
Weighted Average Life
(Years) (+) . . . . . . . . . . . .
+ The weighted average life of the Class ( ) Certificates is determined
by (i) multiplying the amount of each distribution of principal by the
number of years from the date of issuance to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the total
principal distributions on such class of Certificates.
(Class ( ) Yield Consideration)
(Will describe assumption for various scenarios showing sensitivity of
certain classes to prepayment and default risks and set forth resulting
yield.)
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ____________ 1, 199_ (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer and the Trustee.
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class ( ) Certificates. The
Depositor will provide to a prospective or actual Class ( ) Certificateholder
without charge, upon written request, a copy (without exhibits) of the
Pooling and Servicing Agreement.
Assignment of the Mortgage Loans
On or prior to the Closing Date, the Depositor will assign or cause to
be assigned the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. Prior to the Closing Date, the Depositor
will, as to each Mortgage Loan, deliver to the Trustee (or the custodian
hereinafter referred to), among other things, the following documents
(collectively, as to such Mortgage Loan, the "Mortgage File"): (i) the
original or, if accompanied by a "lost note" affidavit, a copy of the
Mortgage Note, endorsed by ____________________ which transferred such
Mortgage Loan, without recourse, in blank or to the order of Trustee; (ii)
the original Mortgage or a certified copy thereof, and any intervening
assignments thereof, or certified copies of such intervening assignments, in
each case with evidence of recording thereon; (iii) an assignment of the
Mortgage, executed by the ____________________ which transferred such
Mortgage Loan, in blank or to the order of the Trustee, in recordable form;
(iv) assignments of any related assignment of leases, rents and profits and
any related security agreement (if, in either case, such item is a document
separate from the Mortgage), executed by ____________________ which
transferred such Mortgage Loan, in blank or to the order of the Trustee; (v)
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; and (vi) the originals or certificates of a lender's
title insurance policy issued on the date of the origination of such Mortgage
Loan 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. (The Pooling and Servicing Agreement will require the Depositor
promptly (and in any event within _____ days of the Closing Date) to cause
each assignment of the Mortgage described in clause (iii) above to be
submitted for recording in the real property records of the jurisdiction in
which the related Mortgaged Property is located. Any such assignment
delivered in blank will be completed to the order of the Trustee prior to
recording. The Pooling and Servicing Agreement will also require the
Depositor to cause the endorsements on the Mortgage Notes delivered in blank
to be completed to the order of the Trustee.)
The Master Servicer
General. ____________________, a __________________ corporation, will
act as Master Servicer (in such capacity, the "Master Servicer") for the
Mortgage Loans pursuant to the Pooling and Servicing Agreement. The Master
Servicer(, a wholly-owned subsidiary of __________,) (is engaged in the
mortgage banking business and, as such, originates, purchases, sells and
services mortgage loans. _________________ primarily originates mortgage
loans through a branch system consisting of _______________________ offices
in __________ states, and through mortgage loan brokers.)
The executive offices of the Master Servicer are located at
_______________, telephone number (__)__________.
(Include description of Servicing Standard.)
Delinquency and Foreclosure Experience. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on one- to four- family residential mortgage loans included in
the Master Servicer's servicing portfolio (which includes mortgage loans that
are subserviced by others). 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 31 days past due on a
contractual basis.
<TABLE>
<CAPTION>
As of December 31, 19 As of December 31, 19 As of , 19
----------------------- ----------------------- -----------------------
By Dollar By Dollar By Dollar
By No. of Amount of By No. of Amount of By No. of Amount of
Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- -----
(Dollar Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio _____ $____ _____ $____ _____ $____
Period of
Delinquency
31 to 59 days
60 to 89 days
90 days or more _____ _____ _____ _____ _____ _____
Total Delinquent _____ $____ _____ $____ _____ $____
Loans
Percent of Portfolio % % % % % %
Foreclosures
pending(1)
Percent of Portfolio % % % % % %
Foreclosures
Percent of Portfolio % % % % % %
</TABLE>
____________________
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond
to the delinquency and foreclosure experience of the Master Servicer's
mortgage portfolio set forth in the foregoing tables. The aggregate
delinquency and foreclosure experience on the Mortgage Loans comprising the
Mortgage Pool will depend on the results obtained over the life of the
Mortgage Pool.
Certificate Account
The Master Servicer is required to deposit on a daily basis all amounts
received with respect to the Mortgage Loans of the Mortgage Pool, net of its
servicing compensation, into a separate Certificate Account maintained with
____________. Interest or other income earned on funds in the Certificate
Account will be paid to the Master Servicer as additional servicing
compensation. See "Description of the Trust Funds -- Mortgage Assets" and
"Description of the Agreements -- Certificate Account and Other Collection
Accounts" in the Prospectus.
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 only from amounts received in respect of interest
on each Mortgage Loan, will accrue at the Servicing Fee Rate and will be
computed on the basis of the same principal amount and for the same period
respecting which any related interest payment on such Mortgage Loan is
computed. The Servicing Fee Rate (with respect to each Mortgage Loan equals
____% per annum) (equals the weighted average of the excesses of the Mortgage
Rates over the respective Net Mortgage Rates).
As additional servicing compensation, the Master Servicer is entitled
to retain all assumption fees, prepayment penalties and late payment charges,
to the extent collected from mortgagors, together with any interest or other
income earned on funds held in the Certificate Account and any escrow
accounts. The Servicing Standard requires the Master Servicer to, among
other things, diligently service and administer the Mortgage Loans on behalf
of the Trustee and in the best interests of the Certificateholders, but
without regard to the Master Servicer's right to receive such additional
servicing compensation. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement. See
"Description of the Agreements -- Retained Interest; Servicing Compensation
and Payment of Expenses" in the Prospectus for information regarding other
possible compensation payable to the Master Servicer and for information
regarding expenses payable by the Master Servicer (and "Certain Federal
Income Tax Consequences" herein regarding certain taxes payable by the Master
Servicer).
Reports to Certificateholders
On each Distribution Date the Master Servicer shall furnish to each
Certificateholder, to the Depositor, to the Trustee and to the Rating Agency
a statement setting forth certain information with respect to the Mortgage
Loans and the Certificates required pursuant to the Pooling and Servicing
Agreement. In addition, within a reasonable period of time after each
calendar year, the Master Servicer shall furnish to each person who at any
time during such calendar year was the holder of a Certificate a statement
containing certain information with respect to the Certificates required
pursuant to the Pooling and Servicing Agreement, aggregated for such calendar
year or portion thereof during which such person was a Certificateholder.
See "Description of the Certificates -- Reports to Certificateholders" in the
Prospectus.
Voting Rights
At all times during the term of this Agreement, the Voting Rights shall
be allocated among the Classes of Certificateholders in proportion to the
respective Certificate Balances of their Certificates ((net, in the case of
the Class ( ), Class ( ) and Class ( ) Certificates, of any Uncovered Portion
of the related Certificate Balance)). Voting Rights allocated to a class of
Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
Termination
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment 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 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 Class ( ) Certificates, but the right of the Master Servicer to
effect such termination is subject to the requirement that the aggregate
Stated Principal Balance of the Mortgage Loans then in the Trust Fund is less
than __% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date. (In addition, the Master Servicer may at its option purchase
any class or classes of Class ( ) Certificates with a Certificate Balance
less than __% of the original balance thereof at a price equal to such
Certificate Balance plus accrued interest through _________.)
USE OF PROCEEDS
The net proceeds from the sale of Class ( ) Certificates will be used
by the Depositor to pay the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class ( ) 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 Code.
For federal income tax purposes, the Class ( ) Certificates will be the
sole class of "residual interests" in the REMIC and the Class ( ), Class ( )
and Class ( ) 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 Class ( ) 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 ___% (CPR)(SPA). 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" and "--Original Issue Discount" in the Prospectus.)
The Class ( ) Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of such a
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 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" and "-- Premium" in the Prospectus.
(The Class ( ) Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code generally in the same proportion
that the assets of the REMIC underlying such Certificates would be so
treated.) (In addition, interest (including original issue discount) on the
Class ( ) Certificates will be interests described in Section 856(c)(3)(B) of
the Code to the extent that such Class ( ) Certificates are treated as "real
estate assets" under Section 856(c)(4)(A) of the Code.) (Moreover, the Class
( ) Certificates will be "obligation(s) . . . which . . .(are)
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(C) of the Code.) (The Class ( ) Certificates will not be
considered to represent an interest in "loans . . . secured by an interest
in real property" within the meaning of Section 7701 (a)(19)(C)(v) 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 Class ( ) Certificates, see "Certain Federal Income Tax
Consequences -- REMICS" in the Prospectus.
ERISA CONSIDERATIONS
(A fiduciary of any employee benefit plan or other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, that is subject to the Employee
Retirement arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code should carefully review with its legal advisors whether the
purchase or holding of Class ( ) Certificates could give rise to a
transaction that is prohibited or is not otherwise permitted either under
ERISA or Section 4975 of the Code.
(The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption (90-29) (the "Exemption"), (on May 24, 1990)
to the Underwriter, which generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA, and the excise
taxes imposed on such prohibited transactions pursuant to Sections 4975(a)
and (b) of the Code and Section 501(i) of ERISA, certain transactions, among
others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of mortgage pass-through certificates underwritten
by an Underwriter (as hereinafter defined), provided that certain conditions
set forth in the Exemption are satisfied. For purposes of this Section
"ERISA Considerations", the term "Underwriter" shall include (a) Merrill
Lynch, Pierce, Fenner & Smith Incorporated, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with Merrill Lynch, Pierce, Fenner & Smith Incorporated
and (c) any member of the underwriting syndicate or selling group of which a
person described in (a) or (b) is a manager or co-manager with respect to the
Class ( ) Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class ( )
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class ( ) Certificates by certain employee benefit plans
subject to Section 4975 of the Code (each, a "Plan"), must be on terms that
are at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests
evidenced by the Class ( ) Certificates must not be subordinate to the rights
and interests evidenced by the other certificates of the same trust. Third,
the Class ( ) Certificates at the time of acquisition by the Plan must be
rated in one of the three highest generic rating categories by Standard &
Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Service, Inc. Fourth, the Trustee cannot be an
affiliate of any member of the "Restricted Group", which consists of any
Underwriter, the Depositor, the Master Servicer, each sub-servicer and any
mortgagor with respect to 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 ( ) 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 ( ) Certificates; the sum
of all payments made to and retained by the Underwriter must represent not
more than reasonable compensation for underwriting the Class ( )
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Loans to the Trust Fund must
represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and any
sub-servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable 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 ( ) Certificates are not subordinate to any other
class of Certificates, the second general condition set forth above is
satisfied with respect to such Certificates. It is a condition of the
issuance of the Class ( ) Certificates that they be rated (not lower than)
"____" by ___________________. A fiduciary of a Plan contemplating
purchasing a Class ( ) Certificate in the secondary market must make its own
determination that at the time of such acquisition, the Class ( )
Certificates continue to satisfy the third general condition set forth above.
The Depositor expects that the fourth general condition set forth above will
be satisfied with respect to the Class ( ) Certificates. A fiduciary of a
Plan contemplating purchasing a Class ( ) Certificate must make its own
determination that the first, third, fifth and sixth general conditions set
forth above will be satisfied with respect to such Class ( ) Certificate.
Before purchasing a Class ( ) Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in the Exemption, the Plan
fiduciary should consider the availability of any other prohibited
transaction exemptions, in particular, Prohibited Transaction Class Exemption
83-1. See "ERISA Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase a Class ( )
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
LEGAL INVESTMENT
The Class ( ) Certificates (will) (will not) constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") (so long as they are rated in at least the second
highest rating category by the Rating Agency, and, as such, are legal
investments for certain entities to the extent provided in SMMEA). SMMEA
provided that states could override its provisions on legal investment and
restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA.
The Depositor makes no representations as to the proper
characterization of the Class ( ) Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Class
( ) Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the Class ( )
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their
own legal advisors in determining whether and to what extent the Class ( )
Certificates constitute a legal investment under SMMEA or are subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Class ( )
Certificates will be purchased from the Depositor by the Underwriter, an
affiliate of the Depositor, upon issuance. Distribution of the Class ( )
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. Proceeds to the Depositor from the Certificates will be
$_____________, plus accrued interest from the Cut-off Date at a rate of __%
per annum, before deducting expenses payable by the Depositor. In connection
with the purchase and sale of the Class ( ) Certificates, the Underwriter may
be deemed to have received compensation from the Depositor in the form of
underwriting discounts.
The Depositor also has been advised by the Underwriter that it
currently expects to make a market in the Class ( ) Certificates offered
hereby; 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 Class ( ) Certificates will develop.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Brown &
Wood LLP, New York, New York and for the Underwriter by Brown & Wood LLP.
RATING
It is a condition to issuance that the Class ( ) Certificates be rated
(not lower than) "______" by ________________. However, no person is
obligated to maintain the rating on the Class ( ) Certificates, and
_______________ is not obligated to monitor its rating following the Closing
Date.
________________'s ratings on mortgage pass-through certificates
address the likelihood of the receipt by holders thereof of payments to which
they are entitled. _____________'s ratings take 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 in the
mortgage pool is adequate to make payments required under the certificates.
_________________'s rating on the Class ( ) Certificates does not, however,
constitute a statement regarding frequency of prepayments on the Mortgage
Loans. (The rating of the Class ( ) Certificates does not address the
possibility that the holders of such Certificates may fail to fully recover
their initial investments.) See "Special Considerations" herein.
There can be no assurance as to whether any rating agency not requested
to rate the Class ( ) Certificates will nonetheless issue a rating and, if
so, what such rating would be. A rating assigned to the Class ( )
Certificates by a rating agency that has not been requested by the Depositor
to do so may be lower than the rating assigned by ________________'s pursuant
to the Depositor's request.
The rating of the Class ( ) 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.
INDEX OF PRINCIPAL DEFINITIONS
TERMS PAGES
Accrued Certificate Interest . . . . . . . . . . . . . . . . . . . . . S-31
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Aggregate Mortgage Loan Negative Amortization . . . . . . . . . . . . . S-30
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . S-30
Balloon Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-1, S-5
Class Negative Amortization . . . . . . . . . . . . . . . . . . . . S-8, S-32
Class ( ) Balance . . . . . . . . . . . . . . . . . . . . . . S-6, S-9, S-29
Class ( ) Certificate Owner . . . . . . . . . . . . . . . . . . . . . . S-16
Class ( ) Interest Allocation Percentage . . . . . . . . . . . . . . . S-31
Class ( ) Principal Distribution Amount . . . . . . . . . . . . . . . . S-31
Class ( ) Remittance Rate . . . . . . . . . . . . . . . . . . . . . . . S-31
Class ( ) Scheduled Principal Distribution Percentage . . . . . . . . . S-32
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Conversion Price . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Converted Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . S-18
Convertible Mortgage Loans . . . . . . . . . . . . . . . . . . . . S-5, S-18
Converting Mortgage Loan . . . . . . . . . . . . . . . . . . . . . S-5, S-18
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Definitive Class ( ) Certificate . . . . . . . . . . . . . . . . . . . S-16
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Distributable Certificate Interest . . . . . . . . . . . . . . . . . . S-30
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . 2, S-1, S-30
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
ERlSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Government Securities . . . . . . . . . . . . . . . . . . . . . 1, S-2, S-17
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Interest Accrual Period . . . . . . . . . . . . . . . . . . . . . . S-7, S-31
Interest Rate Adjustment Date . . . . . . . . . . . . . . . . . . . . . . S-3
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, S-36
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-2, S-17
Monthly Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Mortgage Asset Seller . . . . . . . . . . . . . . . . . . . . . . . . 1, S-17
Mortgage File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Net Aggregate Prepayment Interest Shortfall . . . . . . . . . . . . . . S-30
Net Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-31
Notional Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Original LTV Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Payment Adjustment Date . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Payment Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . S-6, S-36
Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Prepayment Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-6
Regular interests . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-39
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, S-13
REO Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Residual interests . . . . . . . . . . . . . . . . . . . . . . . S-14, S-39
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Scheduled Principal Distribution Amount . . . . . . . . . . . . . . . . S-31
Seller's Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
SPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . 1, S-29
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-6
Uncovered Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Unscheduled Principal Distribution Amount . . . . . . . . . . . . . . . S-32
Weighted Average Class ( ) Remittance Rate . . . . . . . . . . . . . . S-31
ANNEX A
(TITLE, SERIES OF MBS)
TERM SHEET
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUT-OFF DATE: ( ) MORTGAGE POOL CUT-OFF DATE $( )
BALANCE:
DATE OF INITIAL ( ) REFERENCE DATE BALANCE: $( )
ISSUANCE:
RELATED TRUSTEE: ( ) PERCENT OF ORIGINAL MORTGAGE POOL ( )%
MATURITY DATE: ( ) REMAINING AS OF REFERENCE DATE:
</TABLE>
Initial
Class Certificate
of Pass-Through Principal
Certificates Rate Balance Features
------------ ------------ ----------- --------
( ) ( )% $( ) ( )
(First MBS Distribution Date on which the MBS may receive a portion of
prepayments: (date))
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MINIMUM SERVICING FEE RATE:* ( )% per annum AS OF DATE OF
MAXIMUM SERVICING FEE RATE:* ( )% per annum INITIAL ISSUANCE
SPECIAL HAZARD AMOUNT: $( )
FRAUD LOSS AMOUNT: $( )
BANKRUPTCY AMOUNT: $( )
</TABLE>
As of As of Date of
Delivery Date Initial Issuance
------------- ----------------
SENIOR PERCENTAGE ( )% ( )%
SUBORDINATE PERCENTAGE ( )% ( )%
Ratings: Rating Agency Class Voting Rights:
------------- ----- -------------
( ) ( )
( )
( )
( )
-----------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS ( ) CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------
No dealer, salesman, or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus Supplement and the accompanying Prospectus in connection with
the offer contained in this Prospectus Supplement and the accompanying
Prospectus, and, if given, such information or representations must not be
relied upon as having been authorized by the Issuer, the Depositor or the
Underwriter. This Prospectus Supplement and the accompanying Prospectus
shall not constitute an offer to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
The delivery of this Prospectus Supplement and the accompanying Prospectus at
any time does not imply that the information herein is correct as of any time
subsequent to the date hereof.
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary S
Special Considerations S
Description of the Mortgage Pool S
Description of the Certificates S
Pooling and Servicing Agreement S
Use of Proceeds S
Certain Federal Income Tax Consequences S
ERISA Considerations S
Legal Investment S
Plan of Distribution S
Legal Matters S
Rating S
Prospectus
Prospectus Supplement
Available Information
Incorporation of Certain Information by Reference
Summary of Prospectus
Special Considerations
Description of the Trust Funds
Use of Proceeds
Yield Considerations
The Depositor
Description of the Certificates
Description of the Agreements
Description of Credit Support
Certain Legal Aspects of Mortgage Loans
Certain Federal Income Tax Consequences
State Tax Considerations
ERISA Considerations
Legal Investment
Plan of Distribution
Legal Matters
Financial Information
Rating
Index of Principal Definitions
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus supplement and the prospectus to which it
relates 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.
(foreign)
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus ______________________1997)
$______________
Merrill Lynch Mortgage Investors Inc.
Depositor
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _______
The Series 199_-_ Mortgage Pass-Through Certificates (the
"Certificates") will consist of ____ classes of Certificates, designated as
the Class ( ) Certificates, Class ( ) Certificates and Class ( ) Certificates
(the Class ( ) Certificates, collectively, the "Subordinate Certificates").
As further described herein, losses on the Mortgage Loans will be allocated
to the Subordinate Certificates prior to allocation to the Class ( )
Certificates. See "Description of the Certificates -- Distributions --
Priority" herein.
The Certificates will represent in the aggregate the entire beneficial
interest in a trust fund (the "Trust Fund") to be established by Merrill
Lynch Mortgage Investors Inc. (the "Depositor"). The Trust Fund will consist
primarily of (a pool (the "Mortgage Pool") of (conventional), (fixed rate)
(adjustable rate) mortgage loans, with terms to maturity of not more than ___
years (the "Mortgage Loans"), secured by first (and/or junior) liens on one-
to four-family residential properties located in _______ (name(s) of foreign
jurisdiction(s)),) (mortgage participations or co-ownership arrangements in
Mortgage Loans,) mortgage pass-through certificates, mortgage-backed
securities evidencing interests therein or secured thereby (the "MBS"),)
(and) (certain direct obligations of the United States, agencies thereof or
agencies created thereby (the "Government Securities")). The Mortgage Loans
were originated or acquired by ___________ (the "Mortgage Asset Seller") in
____________ and will be sold to the Depositor on or prior to the date of
initial issuance of the Certificates. All amounts due on the Mortgage Loans
are payable in (name of foreign currency). (The Trust Fund will exchange its
(foreign currency) collections on the Mortgage Loans for U.S. dollars
pursuant to the Swap Agreement with ______ (the "Swap Counterparty").)
The Class ( )(, Class ( ) and Class ( )) Certificates will evidence
approximately an initial ___% undivided interest in the Trust Fund and the
Subordinate Certificates, in the aggregate, will evidence approximately an
initial ___% undivided interest in the Trust Fund. Only the Class ( )
Certificates are being offered hereby.
Investors should consider, among other things, certain _______ set forth
under the caption "Risk Factors" herein on page ___ and in the Prospectus on
page ___.
(The MBS will (consist of) (include) the following series and classes of
securities: (identify title(s) and class(es) of MBS)(, including (title(s)
and class(es) of MBS).) (The (title(s) and class(es) of MBS) are
(subordinate) (interest-only) securities.) (See "Summary--The MBS."))
(The yield to investors in the (interest-only) Certificates will be
(extremely) sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) in the Mortgage Loans
which may fluctuate significantly over time. An (extremely) rapid rate of
principal payments on the Mortgage Loans could result in the failure of
investors in the interest-only Certificates to recover their initial
investments.)
------------------------
Merrill Lynch & Co.
The date of this Prospectus Supplement is _____________, 199_. The
characteristics of the Mortgage Loans are more fully described herein under
"Description of the Mortgage Pool."
Distributions on the Class ( ) Certificates will be made, to the extent
of available funds, on the __th day of each (month) (__) or, if any such day
is not a business day, on the next succeeding business day, beginning in
__________ (each, a "Distribution Date"). (As more fully described herein,
distributions allocable to interest, if any, on the Class ( ) Certificates on
each Distribution Date will be based on the (applicable) (then-applicable
variable) pass-through rate (the "Pass-Through Rate") and the aggregate
(principal balance (the "Certificate Balance")) (notional balance (the
"Notional Balance")) of such class (or each component thereof) outstanding
immediately prior to such Distribution Date. (The Pass-Through Rate
applicable to the Class ( ) Certificates from time to time will equal the
(sum of __% and the Index (as defined herein) subject to certain limitations)
(weighted average of the Class ( ) Remittance Rates (as defined herein) on
the Mortgage Loans). The Pass-Through Rate for the Class ( ) Certificates on
the first Distribution Date will be _% per annum and is expected to change
thereafter (because the weighted average of the Class ( ) Remittance Rates is
expected to change for succeeding Distribution Dates.) Distributions in
respect of principal, if any, of the Class ( ) Certificates will be made as
described herein under "Description of the Certificates -- Distributions --
Priority" and "--Calculations of Principal".)
(_______________ will act as master servicer of the Mortgage Loans (the
"Master Servicer"). The obligations of the Master Servicer with respect to
the Certificates will be limited to its contractual servicing obligations and
the obligation under certain circumstances to make Advances to the
Certificateholders. See "Description of the Certificates -- Advances"
herein. (The only) obligation of the Depositor with respect to the
Certificates will be to obtain from the Mortgage Asset Seller certain
representations and warranties with respect to the Mortgage Loans and to
assign to the Trustee the obligation of the Mortgage Asset Seller to
repurchase or substitute for any Mortgage Loan as to which there exists an
uncured material breach of any such representation or warranty.)
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE CLASS ( ) CERTIFICATES. THE CLASS ( ) CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE
OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CLASS ( ) CERTIFICATES
NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR
ANY OF THEIR AFFILIATES.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.)
---------------------------
(An election will (not) be made to treat the Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. (The Class ( ) Certificates will constitute "regular interests" in
the REMIC.)) See "Certain Federal Income Tax Consequences" herein and
"Material Federal Income Tax Consequences" in the Prospectus.
There is currently no secondary market for the Class ( ) Certificates.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter")
currently expects to make a secondary market in the Class ( ) Certificates,
but has no obligation to do so. There can be no assurance that such a market
will develop or, if it does develop, that it will continue. See "Plan of
Distribution" herein.
The Class ( ) Certificates offered hereby will be purchased by the
Underwriter from the Depositor and will be offered by the Underwriter from
time to time to the public 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 Class ( ) Certificates will be $____________ plus accrued
interest from the Cut-off Date, before deducting expenses payable by the
Depositor estimated at $_____________.
The Class ( ) Certificates are offered subject to prior sale, when, as
and if accepted by the Underwriter, and subject to approval of certain legal
matters by counsel for the Underwriter and certain other conditions. It is
expected that delivery of the Class ( ) Certificates (in book-entry form) (in
registered form) will be made on or about ___________, 199_, (through the
facilities of The Depository Trust Company) (at the offices of the
Underwriter, New York, New York) against payment therefor in immediately
available funds.
-----------------------------------
THE CLASS ( ) CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES AND ARE BEING OFFERED
PURSUANT TO THE DEPOSITOR'S PROSPECTUS DATED _______________, 199_, OF WHICH
THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED
TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE
CLASS ( ) CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS
RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
U.S. DOLLAR PRESENTATION
In this Prospectus Supplement, references to "U.S. dollars" and "$" are
references to U.S. currency and references to (name of foreign currency) are
references to (__________) currency. The "Original Exchange Rate," as used
herein, is the rate at which (foreign currency) will be exchanged for U.S.
dollars under the Swap Agreement. The Original Exchange Rate will not be
determined until the initial sale of the Certificates. Use of such rate is
not a representation that (foreign currency) amounts actually represent such
U.S. dollar amounts or could be converted into U.S. dollars at that rate. On
_____________, (foreign currency) were converted to U.S. dollars at a rate of
______.
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
are defined elsewhere in this Prospectus Supplement or in the Prospectus.
Title of Certificates Mortgage Pass-Through Certificates, Series
199_-_, (the "Certificates").
Depositor Merrill Lynch Mortgage Investors Inc., a
Delaware corporation and a wholly-owned,
limited purpose subsidiary of Merrill Lynch
Mortgage Capital Inc., which is a wholly-owned
indirect subsidiary of Merrill Lynch & Co.,
Inc. The Depositor is an affiliate of the
Underwriter. Neither Merrill Lynch & Co., Inc.
nor any of its affiliates, including the
Depositor and the Underwriter, has insured or
guaranteed the Certificates or the Mortgage
Loans or is otherwise obligated in respect
thereof. See "The Depositor" in the
Prospectus.
Issuer The trust fund (the "Trust Fund") to be formed
pursuant to the Pooling and Servicing
Agreement.
Master Servicer _______________, a ________________. See
"Pooling and Servicing Agreement -- The Master
Servicer" herein.
(Sub-Servicers _______________, a ________________)
Trustee _____________, a ____________________.
Cut-off Date ____________ 1, 199_.
Closing Date ______________ 1, 199_.
Distribution Dates Distributions on the Certificates will be made
by the Trustee, to the extent of available
funds, on the __ day of each (month) ( ) or, if
any such __ day is not a business day, then on
the next succeeding business day, beginning in
________ 19__ (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").
Denominations The Class ( ) Certificates will be issuable (on
the book-entry records of DTC and its
Participants) (in registered, certified form)
in denominations of $_______ and integral
multiples of $_____________ in excess thereof(,
with one Certificate of such class evidencing
an additional amount equal to the remainder of
the Certificate Balance thereof).
Risk Factors There are material risks to be considered in
investing in the Certificates. See "Risk
Factors" (herein and) in the Prospectus.
(The Mortgage Pool The Mortgage Pool will consist of ((conven-
tional), (fixed rate) (adjustable rate)
Mortgage Loans secured by (first) (and/or)
(junior) liens on one- to four-family
residential properties (the " Mortgaged
Properties") located in _______ (name(s) of
foreign jurisdiction(s)) (mortgage
participations or co-ownership arrangements,)
(mortgage pass-through certificates, mortgage-
backed securities evidencing interests therein
or secured thereby (the "MBS"),) (and) (certain
direct obligations of the United States,
agencies thereof or agencies created thereby
(the " Government Securities")). (The Mortgage
Loans will have an aggregate principal balance
as of the Cut-off Date of $_________ and
individual principal balances at origination of
at least $______________ but not more than
$__________, with an average principal balance
at origination of approximately $_________.
The Mortgage Loans will have terms to maturity
from the date of origination or modification of
not more than ____ years, and a weighted
average remaining term to maturity of
approximately _____ months as of the Cut-off
Date. The Mortgage Loans will bear interest at
Mortgage Rates of at least _____% per annum but
not more than _____% per annum, with a weighted
average Mortgage Rate of approximately ____%
per annum as of the Cut-off Date. The Mortgage
Loans will be acquired by the Depositor on or
before the Closing Date. In connection with
its acquisition of the Mortgage Loans, the
Depositor will be assigned (and will in turn
assign to the Trustee for the benefit of the
holders of the Certificates) certain rights in
respect of representations and warranties
described herein that were made by the Mortgage
Asset Seller.)
(_____ of the Mortgage Loans, representing
_____% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date,
provide for scheduled payments of principal
and/or interest ("Monthly Payments") to be due
on the _____ day of each month; the remainder
of the Mortgage Loans provide for Monthly
Payments to be due on (identify day or days) of
each month (the date in any month on which a
Monthly Payment on a Mortgage Loan is first
due, the "Due Date"). (The rate per annum at
which interest accrues on each Mortgage Loan is
subject to adjustment on specified Due Dates
(each such date, an " Interest Rate Adjustment
Date") by adding a fixed percentage amount (a
"Gross Margin") to the value of the
then-applicable Index (as described below)
subject, in the case of substantially all of
the Mortgage Loans, to limitations on the
periodic adjustment of the related Mortgage
Rate, and to maximum and minimum lifetime
Mortgage Rates, as described herein. ___ of
the Mortgage Loans, representing ___% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, provide for Interest
Rate Adjustment Dates to occur (monthly); the
remainder of the Mortgage Loans provide for
adjustments to the Mortgage Rate to occur
quarterly, semi-annually or annually. (Each of
the Mortgage Loans provides for an initial
fixed interest rate period;) ________ of the
Mortgage Loans, representing _____% of the
Mortgage Loans by ------- aggregate principal
balance as of the Cut-off Date, have not yet
experienced their first Interest Rate
Adjustment Date. The latest initial Interest
Rate Adjustment Date for any Mortgage Loan is
scheduled to occur on ________.))
(The amount of the Monthly Payment on each
Mortgage Loan is also subject to adjustment on
specified Due Dates (each such date, a "
Payment Adjustment Date") 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 applicable Mortgage Rate,
subject, in the case of (several) Mortgage
Loans, to payment caps, which limit the amount
by which the Monthly Payment may adjust on any
Payment Adjustment Date as described herein.
_______ of the Mortgage Loans, representing __%
of the Mortgage Loans by aggregate principal
balance as of the Cut-off Date, provide for
Payment Adjustment Dates to occur annually,
while the remainder of the Mortgage Loans
provide for adjustments of the Monthly Payment
to occur monthly, quarterly or semi-annually.)
(Only in the case of _________ Mortgage Loans,
representing ____% of the Mortgage Loans by
aggregate principal balance as of the Cut-off
Date, does a Payment Adjustment Date
immediately follow each Interest Rate
Adjustment Date. As a result, and because the
application of payment caps may limit the
amount by which the Monthly Payments may adjust
in respect of certain Mortgage Loans, the
amount of a Monthly Payment may be more or less
than the amount necessary to amortize the
remaining principal balance of the Mortgage
Loan over its then remaining amortization
schedule and pay interest at the
then-applicable Mortgage Rate. Accordingly,
Mortgage 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 then-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 then-applicable
Mortgage Rate and to reduce principal in
accordance with the applicable amortization
schedule).)
(__ Mortgage Loans, representing ____% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, permit negative
amortization. Substantially all of the
Mortgage Loans that permit negative
amortization contain provisions that limit the
extent to which the amount of their respective
original principal balances may be exceeded as
a result thereof.)
(__ Mortgage Loans, representing ____% of the
Mortgage Loans by aggregate principal balance
as of the Cut-off Date, provide for monthly
payments of principal based on amortization
schedules significantly longer than the
remaining term of such Mortgage Loans, thereby
leaving substantial outstanding principal
amounts due and payable (each such payment, a "
Balloon Payment") on their respective maturity
dates, unless prepaid prior thereto.)
For a further description of the Mortgage
Loans, see "Description of the Mortgage Pool"
herein.)
(The MBS (Title and issuer of underlying MBS, amount
deposited or pledged, amount originally issued,
maturity date, interest rate, (redemption
provisions), description of other material
terms.)
(The Index As of any Interest Rate Adjustment Date, the
Index used to determine the Mortgage Rate on
each Mortgage Loan will be the ____________.
See "Description of the Mortgage Pool -- The
Index" herein.)
(Conversion of Mortgage
Loans Approximately __% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off
Date) (the "Convertible Mortgage Loans")
provide that, at the option of the related
Mortgagors, the adjustable interest rate on
such Mortgage Loans may be converted to a fixed
interest rate, provided that certain conditions
have been satisfied. Upon notification from a
Mortgagor of such Mortgagor's intent to convert
from an adjustable interest rate to a fixed
interest rate, and prior to the conversion of
any such Mortgage Loan, the related Warrantying
Party (as defined herein) will be obligated to
purchase the Converting Mortgage Loan (as
defined herein) at the Conversion Price (as
defined herein). (In the event of a failure by
a Subservicer to purchase a "Converting
Mortgage Loan"), the Master Servicer is
required to use its best efforts to purchase
such Converted Mortgage Loan (as defined
herein) from the Mortgage Pool at the
Conversion Price during the one-month period
following the date of conversion.) In the
event that neither the related Warrantying
Party nor the Master Servicer purchases a
Converting or Converted Mortgage Loan, the
Mortgage Pool will thereafter include both
fixed-rate and adjustable-rate Mortgage Loans.
See "Certain Yield and Prepayment
Considerations" herein.)
Class ( ) Certificates The Class ( ), Class ( ) and Class ( )
Certificates (collectively, 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"). The Class ( )
Certificates have an initial Certificate
Balance of $_______ (the initial "Class ( )
Balance"), representing an initial interest of
approximately ___% in a trust fund (the "Trust
Fund"), which will consist primarily of the
Mortgage Pool. The Class ( ) Certificates will
have an initial Certificate Balance of
$________ (the initial "Class ( ) Balance"),
representing an initial interest of
approximately ____% in the Trust Fund. (The
Class ( ) Certificates have an initial
Certificate Balance of $_______ (the initial
"Class ( ) Balance"), representing an initial
interest of approximately ___% in the Trust
Fund.) (The Class ( ) Certificates will not
have a Certificate Balance.)
Distributions on the Certificates will be made
on each Distribution Date. Distributions will
be made by check or wire transfer of
immediately available funds, as provided in the
Pooling and Servicing Agreement, to the
Certificateholders of record as of the (last
business day of the month preceding the month)
of such Distribution Date (each, a "Record
Date"), except that the final distribution on
the Class ( ) Certificates will be made only
upon presentation and surrender of such
holders' Certificates at the office or agency
specified in the Pooling and Servicing
Agreement. (As more specifically described
herein, the Class ( ) Balance will be adjusted
from time to time on each Distribution Date to
reflect any additions thereto resulting from
allocations of Mortgage Loan negative
amortization to the Class ( ) Certificates and
any reductions thereof resulting from
distributions of principal of the Class ( )
Certificates. As further described herein,
interest shall accrue on the Class ( ) Balance
at a Pass-Through Rate thereon.
Pass-Through Rates on the
Class ( ), Class ( ) and
Class ( ) Certificates (The Pass-Through Rates on the Class ( ), Class
( ) and Class ( ) Certificates are fixed and
are set forth on the cover hereof.) (The Pass-
Through Rate on the Class ( ) Certificates
will be equal to the weighted average of the
Class ( ) Remittance Rates in effect from time
to time on the Mortgage Assets. The Class ( )
Remittance Rate in effect for any Mortgage
Assets as of any date of determination (is
equal to the excess of the Mortgage Rate
thereon over __% per annum) ((i) prior to its
first Interest Rate Adjustment Date is equal to
the related Mortgage Rate then in effect
minus __ basis points (the "Net Mortgage Rate")
and (ii) from and after its first Interest Rate
Adjustment Date is equal to the related
Mortgage Rate then in effect minus the excess
of the related Gross Margin over __ basis
points.)) (The Class ( ) Certificates (or
component thereof) will not be entitled to
distributions of interest and will not have a
Pass-Through Rate.) (Describe any other method
used to calculate the Pass-Through Rate.)
(Interest on the Certificates will be
calculated on the basis of a 360-day year
consisting of twelve 30-day months. Interest
will accrue with respect to each Distribution
Date during the one-month period beginning on
the ___ day of the month preceding the month of
such Distribution Date and ending on the ___
day of the month of such Distribution Date
(each, an " Interest Accrual Period").)
Distributions on the
Certificates The Available Distribution Amount in respect of
a Distribution Date will be distributed in the
following amounts and order of priority:
(describe the application of Available
Distribution Amount to make distributions of
interest and principal among the Classes of
Certificates)
(Interest on the Class ( ) Certificates at the
then-applicable Pass-Through Rate will be
reduced by the Class ( ) Certificates'
allocable share (calculated as described
herein) of ((i) the aggregate amount of
negative amortization in respect of the
Mortgage Loans for their respective Due Dates
occurring during the related Due Period and
(ii)) the aggregate portion of Prepayment
Interest Shortfalls incurred during the related
Due Period that was not covered by the
application of the Master Servicer's servicing
compensation for the related Due Period. (The
amount, if any, by which the Class ( ) Interest
Distribution Amount for any Distribution Date
is reduced as a result of negative amortization
on the Mortgage Loans shall constitute the
"Class Negative Amortization" for such
Distribution Date in respect of the Class ( )
Certificates and shall be added to the Class (
) Balance on such Distribution Date.) (The
Class ( ) Notional Amount will equal the (sum
of the) Class ( ) Balance. The Class ( )
Notional Amount does not entitle the Class ( )
Certificates (or a component thereof) to any
distributions of principal.) If the Available
Distribution Amount for any Distribution Date
is less than the Class ( ) Interest
Distribution Amount for such Distribution Date,
the shortfall will be part of the Class ( )
Interest Distribution Amount distributable to
holders of Class ( ) Certificates on subsequent
Distribution Dates, to the extent of available
funds.
The Available Distribution Amount for any
Distribution Date generally includes: (i)
scheduled payments on the Mortgage Assets due
during or prior to the related Due Period and
collected as of the related Determination Date
(to the extent not distributed on previous
Distribution Dates) and certain unscheduled
payments and other collections on the Mortgage
Assets collected during the related Due Period,
net of amounts payable or reimbursable to the
Master Servicer therefrom; (ii) any Advances
made by the Master Servicer for the related
Distribution Date; and (iii) that portion of
the Master Servicer's servicing compensation
for the related Due Period applied to cover
Prepayment Interest Shortfalls incurred during
the related Due Period. See "Description of
the Certificates -- Distributions --
Calculations of Interest" herein.
Advances The Master Servicer is required to make
advances ("Advances") in respect of delinquent
Monthly Payments on the Mortgage Loans, subject
to the limitations described herein. (The
Trustee will be obligated to make any such
Advance if the Master Servicer fails in its
obligation to do so, to the extent provided in
the Pooling and Servicing Agreement.) See
"Description of the Certificates -- Advances"
herein and "Description of the Certificates
--Advances in Respect of Delinquencies" in the
Prospectus.
Subordination The rights of holders of the Subordinate
Certificates to receive distributions of
amounts collected on the Mortgage Loans will be
subordinate, to the extent described herein, to
the rights of holders of the Class ( )
Certificates. This subordination is intended
to enhance the likelihood of receipt by the
holders of the Class ( ) Certificates of the
full amount of the Class ( ) Interest
Distribution Amount and the (ultimate receipt
of principal equal to the initial Class ( )
Balance). The protection afforded to the
holders of the Class ( ) Certificates by means
of the subordination, to the extent provided
herein, will be accomplished by the application
of the Available Distribution Amount to the
Class ( ) Certificates prior to the application
thereof to the Subordinate Certificates (and by
reducing the Class ( ) Interest Distribution
Amount and the Class ( ) Balance by an amount
equal to the interest portion and the principal
portion, respectively, of Realized Losses
allocated to such class). See "Description of
the Certificates --Subordination" herein.
(The Subordinate
Certificates The Class ( ) Certificates have an initial
Certificate Balance of $____________ (the
initial " Class ( ) Balance") and the Class ( )
Certificates have an initial Certificate
Balance of $________ (the initial "Class ( )
Balance"), representing ____% and _____%,
respectively, of the Mortgage Loans by
aggregate principal balance as of the Cut-off
Date. Interest shall accrue on the Class ( )
Balance and Class ( ) Balance at a Pass-Through
Rate equal to (____% per annum) (the weighted
average of the Net Mortgage Rates in effect
from time to time on the Mortgage Loans).
(The Class ( ) Certificates, which have no
Pass-Through Rate and initially have a
Certificate Balance of $______________ (the
initial "Class ( ) Balance"), represent the
right to receive on any Distribution Date the
balance, if any, of the Available Distribution
Amount remaining after the payment of all
interest and principal due on the other Classes
of Certificates. Subsequent to the first
Distribution Date, the Class ( ) Balance will
equal the excess, if any, of the aggregate
Stated Principal Balance of the Mortgage Loans
over the sum of the Class ( ) Balance, Class (
) Balance and Class ( ) Balance.)
(The Subordinate Certificates are not offered
hereby.))
(Currency Swap Agreement The Trust Fund will enter into a currency swap
agreement (the "Swap Agreement") with ________
(the "Swap Counterparty") pursuant to which on
each Distribution Date the Trust Fund will pay
to the Swap Counterparty the related Available
Distribution Amount in (name of foreign
currency) in exchange for U.S. dollars at an
exchange rate of _______ for one U.S. dollar.
The U.S. dollars received from the Swap
Counterparty will be applied to make the
distributions on Certificates on such
Distribution Date. If the Swap Agreement is
terminated for any reason (including without
limitation a default by the Swap Counterparty),
(the Trust Fund would become exposed to the
risk of unfavorable changes in the currency
exchange rate for (foreign currency) for U.S.
dollars) (the Trust Fund will thereafter make
distributions on the Certificates in (foreign
currency) rather than U.S. dollars, thereby
exposing Certificateholders to unfavorable
changes in the currency exchange rate for
(foreign currency) for U.S. dollars. See "Risk
Factors Swap Counterparty" herein.
(Special Prepayment
Considerations The rate of principal payments on the Class (
) Certificates collectively will depend on the
rate and timing of principal payments
(including prepayments, defaults and
liquidations) on the Mortgage Loans. As is the
case with mortgage-backed securities generally,
the Class ( ) Certificates are subject to
substantial inherent cash-flow uncertainties
because the Mortgage Loans may be prepaid at
any time. Generally, when prevailing interest
rates are increasing, prepayment rates on
mortgage loans tend to decrease, resulting in a
reduced return of principal to investors at a
time when reinvestment at such higher
prevailing rates would be desirable.
Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans
tend to increase, resulting in a greater return
of principal to investors at a time when
reinvestment at comparable yields may not be
possible.
(The multiple class structure of the Class (
) Certificates results in the allocation of
prepayments among certain classes as follows
(to be included as appropriate):
(Sequentially paying classes: (All) classes of
the Class ( ) Certificates are subject to
various priorities for payment of principal as
described herein. Distributions on classes
having an earlier priority of payment will be
immediately affected by the prepayment speed of
the Mortgage Loans early in the life of the
Mortgage Pool. Distributions on classes with a
later priority of payment will not be directly
affected by the prepayment speed until such
time as principal is distributable on such
classes; however, the timing of commencement of
principal distributions and the weighted
average lives of such classes will be affected
by the prepayment speed experienced both before
and after the commencement of principal
distributions on such classes.)
((Scheduled) Certificates: Principal
distributions on the (Scheduled) Certificates
will be payable in amounts determined based on
schedules as described herein, provided that
the prepayment speed of the Mortgage Loans each
month remains (at a constant level of) (between
approximately ___% (SPA)(CPR) (as defined
herein) and) ___% (SPA)(CPR). (However, as
discussed herein, actual principal
distributions are likely to deviate from the
described amounts, because it is highly
unlikely that the actual prepayment speed of
the Mortgage Loans each month will remain at or
near ___% (SPA)(CPR).) If the prepayment speed
of the Mortgage Loans is consistently higher
than ___% of (SPA)(CPR), then the (Companion)
Certificates will be retired before all of the
(Scheduled) Certificates are retired, and the
rate of principal distributions and the
weighted average lives of the remaining
(Scheduled) Certificates will become
significantly more sensitive to changes in the
prepayment speed of the Mortgage Loans and
principal distributions thereon will be more
likely to deviate from the described amounts.)
((Companion) Certificates: Because of the
application of amounts available for principal
distributions among the Class ( ), Class (
) and Class ( ) Certificates in any given
month, first to the (Scheduled) Certificates up
to the described amounts and then to the
(Companion) Certificates, the rate of principal
distributions and the weighted average lives of
the (Companion) Certificates will be extremely
sensitive to changes in the prepayment speed of
the Mortgage Loans. The weighted average lives
of the (Companion) Certificates will be
significantly more sensitive to changes in the
prepayment speed than that of the (Scheduled)
Certificates or a fractional undivided interest
in the Mortgage Loans.))
(Special Yield
Considerations (The multiple class structure of the Senior
Certificates causes the yields of certain
classes to be particularly sensitive to changes
in the prepayment speed of the Mortgage Loans
and other factors, as follows (to be included
as appropriate):)
(Interest strip and inverse floater classes:
The yield to investors on the (identify
classes) will be extremely sensitive to the
rate and timing of principal payments on the
Mortgage Loans (including prepayments, defaults
and liquidations), which may fluctuate
significantly over time. A rapid rate of
principal payments on the Mortgage Loans could
result in the failure of investors in the
(identify interest strip and inverse floater
strip classes) to recover their initial
investments, and a slower than anticipated rate
of principal payments on the Mortgage Loans
could adversely affect the yield to investors
on the (identify non-strip inverse floater
classes).)
((Variable Strip) Certificates. In addition to
the foregoing, the yield on the (Variable
Strip) Certificates will be materially
adversely affected to a greater extent than the
yields on the other Class ( ) Certificates if
the Mortgage Loans with higher Mortgage Rates
prepay faster than the Mortgage Loans with
lower Mortgage Rates, because holders of the
(Variable Strip) Certificates generally have
rights to relatively larger portions of
interest payments on the Mortgage Loans with
higher Mortgage Rates than on Mortgage Loans
with lower Mortgage Rates.)
(Adjustable rate (including inverse floater)
classes: The yield on the (identify floating
rate classes) will be sensitive, and the yield
on the (identify inverse floater classes) will
be extremely sensitive, to fluctuations in the
level of (the index). The Pass-Through Rate on
the (identify inverse floater classes) will
vary inversely with, and at a multiple of, (the
index).)
(Inverse floater companion classes: In
addition to the foregoing, in the event of
relatively low prevailing interest rates
(including (the index)) and relatively high
rates of principal prepayments over an extended
period, while investors in the (identify
inverse floater companion classes) may then be
experiencing a high current yield on such
Certificates, such yield may be realized only
over a relatively short period, and it is
unlikely that such investors would be able to
reinvest such principal prepayments on such
Certificates at a comparable yield.)
(Residual Certificates: Holders of the
Residual Certificates are entitled to receive
distributions of principal and interest as
described herein; however, holders of such
Certificates may have tax liabilities with
respect to their Certificates during the early
years of their term that substantially exceed
the principal and interest payable thereon
during such periods. (In addition, such
distributions will be reduced to the extent
that they are subject to United States federal
income tax withholding.)))
Optional Termination At its option, the Master Servicer may purchase
all of the Mortgage Assets, and thereby effect
termination of the Trust Fund and early
retirement of the then outstanding
Certificates, on any Distribution Date on which
the aggregate Stated Principal Balance of the
Mortgage Loans remaining in the Trust Fund is
less than __% of the aggregate principal
balance of such Mortgage Loans as of the
Cut-off Date. (At its option, the Master
Servicer may also purchase any Class ( )
Certificates on any Distribution Date on which
the Class ( ) Balance is less than ___% of the
original balance thereof.) See "Pooling and
Servicing Agreement -- Termination" herein and
"Description of the Certificates --
Termination" in the Prospectus.
Certain Federal Income Tax
Consequences (An election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit ("REMIC") for federal income tax
purposes. Upon the issuance of the Class ( )
Certificates, Brown & Wood LLP, 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, as amended (the "Code").
For federal income tax purposes, the Class ( )
Certificates will be the sole class of
"residual interests" in the REMIC and the Class
( ), Class ( ) and Class ( ) Certificates will
be the "regular interests" in the REMIC and
will be treated as debt instruments of the
REMIC.
For further information regarding the federal
income tax consequences of investing in the
Class ( ) 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 should review carefully with its legal
advisors whether the purchase or holding of
Class ( ) 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.)
See "ERISA Considerations" herein and in the
Prospectus.
Rating It is a condition to the issuance of the Class
( ) Certificates that they be rated (not lower
than) "___" by _________. 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 (whether voluntary or involuntary)
of Mortgage Loans, or the corresponding effect
on yield to investors. (The rating of the
Class ( ) Certificates does not address the
possibility that the holders of such
Certificates may fail to fully recover their
initial investments.) See "Special
Considerations" and "Rating" herein and "Yield
Considerations" in the Prospectus.
Legal Investment The appropriate characterization of the Class (
) Certificates under various legal investment
restrictions, and thus the ability of investors
subject to these restrictions to purchase the
Class ( ) Certificates, may be subject to
significant interpretative uncertainties. The
Class ( ) Certificates (will) (will not) be
"mortgage related securities" within the
meaning of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") (so long as
they are rated in at least the second highest
rating category by the Rating Agency, and, as
such, are legal investments for certain
entities to the extent provided in SMMEA).
Accordingly, investors should consult their own
legal advisors to determine whether and to what
extent the Class ( ) Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the Prospectus.
(Registration of the Class
( ) Certificates The Class ( ) 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 ( )
Certificates (any such person, a "Class ( )
Certificate Owner") will be entitled to receive
a Certificate of such class in fully
registered, certificated form (a "Definitive
Class ( ) Certificate"), except under the
limited circumstances described in the
Prospectus under "Description of the
Certificates-Book-entry Registration and
Definitive Certificates". See "Description of
the Certificates-General" herein and
"Description of the Certificates-Book-Entry
Registration and Definitive Certificates" in
the Prospectus.)
DESCRIPTION OF THE (MORTGAGE POOL) (MBS)
General
The Trust Fund will consist primarily of (___ (conventional), (fixed
interest) (adjustable interest) rate Mortgage Loans with an aggregate
principal balance as of the Cut-off Date, after deducting payments of
principal due on such date, of $____________,) (mortgage participations and
co-ownership arrangements in Mortgage Loans), (mortgage pass-through
certificates, mortgage-backed securities evidencing interests therein or
secured thereby (the "MBS"),) (and) (certain direct obligations of the United
States, agencies thereof or agencies created thereby (the "Government
Securities")). 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" creating a first (first or junior) lien on
a one- to four- family residential property (a "Mortgaged Property") located
in ________ (name(s) of foreign jurisdiction(s)). The Mortgaged Properties
consist of (description of one- to four-family residential properties).
(Because no evaluation of any mortgagor's financial condition has been
conducted, investors should consider all of the Mortgage Loans to be
non-recourse loans so that, in the event of mortgagor default, recourse may
be had only against the specific property and such limited other assets as
have been pledged to secure a Mortgage Loan, and not against the mortgagor's
other assets.) All percentages of the Mortgage Loans described herein are
approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.)
(The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by ________________ (the "Mortgage Asset Seller") in
______ (name(s) of foreign jurisdiction(s)). The Depositor will purchase the
Mortgage Loans to be included in the Mortgage Pool on or before the Closing
Date from the Mortgage Asset Seller pursuant to a seller's agreement (the
"Seller's Agreement"), to be dated as of ____________, 199_ between the
Mortgage Asset Seller and the Depositor. The Depositor will cause the
Mortgage Loans in the Mortgage Pool to be assigned to _______________, as
Trustee, pursuant to the Pooling and Servicing Agreement. _____________, in
its capacity as Master Servicer, will service the Mortgage Loans pursuant to
the Pooling and Servicing Agreement.
Under the Seller's Agreement, _______________, as seller of the Mortgage
Loans to the Depositor, will make certain representations, warranties and
covenants to the Depositor relating to, among other things, the due execution
and enforceability of the Seller's Agreement and certain characteristics of
the Mortgage Loans, and will be obligated to repurchase or substitute for any
Mortgage Loans as to which there exists deficient documentation or an uncured
material breach of any such representation, warranty or covenant. Under the
Pooling and Servicing Agreement the Depositor will assign all its right,
title and interest in such representations, warranties and covenants
(including Mortgage Asset Seller's repurchase or substitution obligation) to
the Trustee for the Trust Fund. The Depositor will make (no) representations
or warranties with respect to the Mortgage Loans and will have no obligation
to repurchase or substitute for Mortgage Loans with deficient documentation
(or which are otherwise defective). _____________, as seller of the Mortgage
Loans to the Depositor, is selling such Mortgage Loans without recourse and,
accordingly, in such capacity, will have no obligations with respect to the
Certificates other than pursuant to such representations, warranties,
covenants and repurchase obligations in respect of the Mortgage Loans. See
"Description of the Agreements -- Representations and Warranties;
Repurchases" in the Prospectus.)
(The MBS
(Title and issuer of underlying securities, amount deposited or pledged,
amount originally issued, maturity date, interest rate, (redemption
provisions), together with description of other material terms.)
(Description of principal and interest distributions on the MBS.)
(Description of advances by the servicer of the mortgage loans
underlying the MBS.)
(Description of effect on the MBS of allocation of losses on the
underlying mortgage loans.)
As to each series of MBS included in the Trust Fund, the various classes
of certificates from such series ((including classes not in the Trust Fund
but from the same series as classes that are in the Trust Fund) are listed,
together with the related pass-through rates and certain other information
applicable thereto, in Annex B hereto.)
(Convertible Mortgage Loans
____% of the Mortgage Loans ("Convertible Mortgage Loans") provide that,
at the option of the related Mortgagors, the adjustable interest rate on such
Mortgage Loans may be converted to a fixed interest rate. The first month in
which any of the Mortgage Loans may convert is ____________, and the last
month in which any of the Mortgage Loans may convert is _____________. Upon
conversion, the Mortgage Rate will be converted to a fixed interest rate
determined in accordance with the formula set forth in the related Mortgage
Note which formula is intended to result in a Mortgage Rate which is not less
than the then current market interest rate (subject to applicable usury
laws). After such conversion, the monthly payments of principal and interest
will be adjusted to provide for full amortization over the remaining term to
scheduled maturity. Upon notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable interest rate to a fixed interest rate
and prior to the conversion of any such Mortgage Loan (a "Converting Mortgage
Loan"), the related Warrantying Party will be obligated to purchase the
Converting Mortgage Loan at a price equal to the outstanding principal
balance thereof plus accrued interest thereon net of any subservicing fees
(the " Conversion Price"). In the event of a failure by a Warrantying Party
to purchase a converting Mortgage Loan, the Master Servicer is required to
use its best efforts to purchase such Mortgage Loan following its conversion
(a "Converted Mortgage Loan") during the one-month period following the date
of conversion at the Conversion Price.
In the event that the related Warrantying Party fails to purchase a
Converting Mortgage Loan and the Master Servicer does not purchase a
Converted Mortgage Loan, neither the Depositor nor any of its affiliates nor
any other entity is obligated to purchase or arrange for the purchase of any
Converted Mortgage Loan. Any such Converted Mortgage Loan will remain in the
Mortgage Pool as a fixed-rate Mortgage Loan and will result in the Mortgage
Pool's having both fixed rate and adjustable rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the
Trustee of such Mortgage Loan and the purchaser will thereafter own such
Mortgage Loan free of any further obligation to the Trustee or the
Certificateholders with respect thereto.)
(The Index
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Mortgage Rate will be a per annum rate equal to
______________, as most recently available as of the date days prior to
----
the Payment Adjustment Date (the "Index"). Such average yields reflect the
yields for the week prior to that week in which the information is reported.
In the event that the Index is no longer available, an index reasonably
acceptable to the Trustee that is based on comparable information will be
selected by the Master Servicer. The Index is currently calculated based on
information reported in ___________.)
Certain Characteristics of the Mortgage Loans
All of the Mortgage Loans are payable in (name of foreign currency).
(Approximately ___% of the Mortgage Loans have Due Dates that occur on
the ___ day of each month; approximately ___% of the Mortgage Loans have Due
Dates that occur on the ___ day of each month; approximately ____% of the
Mortgage Loans have Due Dates that occur on the ___ day of each month; and
the remainder of the Mortgage Loans have Due Dates that occur on the
fifteenth day of each month.)
(As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (i) Mortgage Rates ranging from _____% per annum to _______%
per annum; (ii) a weighted average Mortgage Rate of ______% per annum; (iii)
Gross Margins ranging from ____ basis points to ______ basis points; (iv) a
weighted average Gross Margin of ____ basis points; (v) principal balances
ranging from $_______ to $______; (vi) an average principal balance of
$_________; (vii) original terms to scheduled maturity ranging from _____
months to _________ months; (viii) a weighted average original term to
scheduled maturity of _____ months; (ix) remaining terms to scheduled
maturity ranging from ____ months to _____ months; (x) a weighted average
remaining term to scheduled maturity of ________ months; (xi) Cut-off Date
Loan-to-Value ("LTV") Ratios ranging from ______% to ________%; (xii) a
weighted average Cut-off Date LTV Ratio of _____%; (xiii) as to the _______%
of the Mortgage Loans to which such characteristic applies, (A) minimum
lifetime Mortgage Rates ranging from ____% per annum to ______ % per annum
and (B) a weighted average minimum lifetime Mortgage Rate of _______% per
annum; and (xiv) as to the__________% of Mortgage Loans to which such
characteristic applies and for which it may be currently calculated, (A)
maximum lifetime Mortgage Rate ranging from _______% per annum to ________%
per annum and (B) a weighted average maximum lifetime Mortgage Rate of
_________% per annum.)
(___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Special
Considerations -- Balloon Payments" in the Prospectus.)
(The Mortgage Rate on each Mortgage Loan is subject to adjustment on
each Interest Rate Adjustment Date by adding the related Gross Margin to the
value of the Index (described below) as most recently announced a specified
number of days prior to such Interest Rate Adjustment Date, subject, in the
case of substantially all of the Mortgage Loans, to minimum and maximum
lifetime Mortgage Rates, with ranges specified below. The Mortgage Rates on
the Mortgage Loans generally are adjusted monthly; however, certain of the
Mortgage Loans provide for Interest Rate Adjustment Dates to occur quarterly
(___% of the Mortgage Loans), semi-annually (___% of the Mortgage Loans) or
annually (____% of the Mortgage Loans). Each of the Mortgage Loans provided
for an initial fixed interest rate period; _________ Mortgage Loans,
representing ___% of the Mortgage Loans, have not experienced their first
Interest Rate Adjustment Dates. The latest initial Interest Rate Adjustment
Date for any Mortgage Loan is to occur in ___________________________________
________________________________________________.)
(Subject to the Payment Caps described below, the amount of the Monthly
Payment on each Mortgage Loan adjusts periodically on each Payment Adjustment
Date to an amount that would fully amortize 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. Approximately __% of the Mortgage Loans provide
that an adjustment of the amount of the Monthly Payment on a Payment
Adjustment Date may not result in a Monthly Payment that increases by more
than ___% (nor, in some cases, decreases by more than ____%) of the amount of
the Monthly Payment in effect immediately prior to such Payment Adjustment
Date (each such provision, a "Payment Cap"); however, certain of those
Mortgage Loans also provide that the Payment Cap will not apply on certain
Payment Adjustment Dates or if the application thereof would result in the
principal balance of the Mortgage Loan exceeding (through negative
amortization) by a specified percentage the original principal balance
thereof. Generally, the related Mortgage Note provides that if, as a result
of negative amortization, the respective principal balance of the Mortgage
Loan reaches an amount specified therein (which as to most Mortgage Loans is
not greater than _% of the Mortgage Loan principal balance as of the
origination date thereof), the amount of the Monthly Payments due thereunder
will be increased as necessary to prevent further negative amortization.
(Only in the case of _____% of the Mortgage Loans does a Payment
Adjustment Date immediately follow each Interest Rate Adjustment Date. As a
result, and because application of Payment Caps may limit the amount by which
the Monthly Payments due on certain of the Mortgage Loans may adjust, the
amount of a Monthly Payment may be more or less than the amount necessary to
amortize the Mortgage Loan principal balance over the then remaining
amortization schedule at the applicable Mortgage Rate. Accordingly, Mortgage
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).)
(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. Although
Prepayment Premiums are payable to the Master Servicer as additional
servicing compensation, the Master Servicer may waive the payment of any
Prepayment Premium only in connection with a principal prepayment that is
proposed to be made during the three month period prior to the scheduled
maturity of the related Mortgage Loan, or under certain other limited
circumstances.)
The following table sets forth the range of Mortgage Rates on the
Mortgage Loans as of the Cut-off Date:
Mortgage Rates as of the Cut-off Date
-------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
- ------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
The following table sets forth the types of Mortgaged Properties
securing the Mortgage Loans:
Property Type
-------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Type Loans Number the Cut-off Date the Cut-off Date
- ---- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Note: Percentage totals may not add due to rounding.
(The following table sets forth the range of Gross Margins for the
Mortgage Loans:)
(Gross Margins)
---------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
- ------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Gross Margin:
Note: Percentage totals may not add due to rounding.
(The following table sets forth the frequency of adjustments to the
Mortgage Rates on the Mortgage Loans as of the Cut-off Date:)
(Frequency of Adjustments to Mortgage Rates)
--------------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Frequency(A) Loans Number the Cut-off Date the Cut-off Date
- ------------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Frequency of
Adjustments to
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) _______ or ___% of Mortgage Loans have not experienced their first
Interest Rate Adjustment Date.
(The following table sets forth the frequency of adjustments to the
Monthly Payments on the Mortgage Loans as of the Cut-off Date:)
(Frequency of Adjustments to Monthly Payments)
----------------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Frequency (A) Loans Number the Cut-off Date the Cut-off Date
- ------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Frequency of
Adjustments to
Monthly Payments:
Note: Percentage totals may not add due to rounding.
(The following table sets forth the range of maximum lifetime Mortgage
Rates for the Mortgage Loans:)
(Maximum Lifetime Mortgage Rates)
---------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Maximum Number of Percent Principal Principal
Lifetime Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Maximum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Mortgage Loans without a lifetime rate cap.
(B) The lifetime rate caps for these Mortgage Loans are based upon the Index
as determined at a future point in time plus a fixed percentage.
Therefore, the rate is not determinable as of the Cut-off Date.
(C) This calculation does not include the ____ Mortgage Loans without a
lifetime rate cap or the ____ Mortgage Loans with lifetime rate caps
which are currently not determinable.
(The following table sets forth the range of minimum lifetime Mortgage
Rates on the Mortgage Loans:)
(Minimum Lifetime Mortgage Rates)
---------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Minimum Number of Percent Principal Principal
Lifetime Mortgage by Balance as of Balance as of
Mortgage Rate Loans Number the Cut-off Date the Cut-off Date
------------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Minimum Lifetime
Mortgage Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Mortgage Loans without interest rate floors.
(B) This calculation does not include the ____ Mortgage Loans without
interest rate floors.
The following table sets forth the range of principal balances of the
Mortgage Loans as of the Cut-off Date:
Principal Balances as of the Cut-off Date
-----------------------------------------
<TABLE>
<CAPTION>
Percent by
Principal Aggregate Aggregate
Balance Number of Percent Principal Principal
as of the Mortgage by Balance as of Balance as of
Cut-off Date Loans Number the Cut-off Date the Cut-off Date
------------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Average Principal Balance
as of the
Cut-off Date:
Note: Percentage totals may not add due to rounding.
The following tables set forth the original and remaining terms to
maturity (in months) of the Mortgage Loans:
Original Term to Maturity in Months
-----------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Original Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
The following tables set forth the purpose for which the Mortgage Loan
was originated, (the type of program under which it was originated and the
occupancy type).
Mortgage Loan Purpose
---------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
(Mortgage Loan Documentation Program)
-------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
Mortgage Loan Occupancy Type
----------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
Remaining Term to Maturity in Months
------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent Principal Principal
Term in Mortgage by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average Remaining
Term to Maturity:
Note: Percentage totals may not add due to rounding.
The following tables set forth the respective years in which the
Mortgage Loans were originated and are scheduled to mature:
Mortgage Loan Year of Scheduled Maturity
----------------------------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Year Loans Number the Cut-off Date the Cut-off Date
---- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Note: Percentage totals may not add due to rounding.
The following table sets forth the range of Original LTV Ratios of the
Mortgage Loans. An "Original LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the principal balance of a Mortgage
Loan on the date of its origination, and the denominator of which is (in
general) the lesser of (i) the appraised value of the related Mortgaged
Property as determined by an appraisal thereof obtained in connection with
the origination of such Mortgage Loan and (ii) the sale price of such
Mortgaged Property at the time of such origination. There can be no
assurance that the value (determined through an appraisal or otherwise) of a
Mortgaged Property determined after origination of the related Mortgage Loan
will be equal to or greater than the value thereof (determined through an
appraisal or otherwise) obtained in connection with the origination. As a
result, there can be no assurance that the loan-to-value ratio for any
Mortgage Loan determined at any time following origination thereof will be
lower than the Original LTV Ratio, notwithstanding any positive amortization
of such Mortgage Loan.
Original LTV Ratios
-------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Original Mortgage by Balance as of Balance as of
LTV Ratio Loans Number the Cut-off Date the Cut-off Date
--------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Weighted Average Original
LTV Ratio:
Note: Percentage totals may not add due to rounding.
The Mortgage Loans are secured by Mortgaged Properties in
---------
different states. The table below sets forth the states in which the
Mortgaged Properties are located:
Geographic Distribution
-----------------------
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
(Political Mortgage by Balance as of Balance as of
Subdivision) Loans Number the Cut-off Date the Cut-off Date
------------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
----- ------- --------- -------
</TABLE>
Note: Percentage totals may not add due to rounding.
(regional breakdown to be provided as appropriate)
No more than ___% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code.
Underwriting Standards
All of the Mortgage Loans were originated or acquired by _______,
generally in accordance with the underwriting criteria described herein.
(Description of underwriting standards.)
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the
issuance of the Class ( ) Certificates, a Mortgage Loan may be removed from
the Mortgage Pool as a result of incomplete documentation or otherwise, if
the Depositor deems such removal necessary or appropriate and may be prepaid
at any time. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Class ( ) 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 Class ( )
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.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Class ( ) Certificates 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 Class ( ) 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.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of ____ classes to be designated as the Class ( )
Certificates, the Class ( ) Certificates, the Class ( ) Certificates and the
Class ( ) Certificates. The Class ( ), Class ( ) and Class ( ) Certificates
(the "Subordinate Certificates") will be subordinate to the Class ( )
Certificates, as described herein. The Certificates 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 or deed in
lieu of foreclosure (upon acquisition, an "REO Property"); (iii) such funds
or assets as from time to time are deposited in the Certificate Account and
any account established in connection with REO Properties (the "REO
Account"); and (iv) the rights of the mortgagee under all insurance policies
with respect to the Mortgage Loans. Only the (Class ( ) (, Class ( ) and
Class ( )) Certificates are offered hereby.
The Class ( ) Certificates will have an initial (Certificate Balance)
(Notional Balance) of $__________. The Class ( ) Certificates represent ___%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date. The Class ( ) Certificates will have an initial Certificate Balance of
$__________, representing ___% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. The Class ( ) Certificates will have
an initial Certificate Balance of $__________, representing ___% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The initial Certificate Balance of the Class ( ) Certificates will be (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. The respective
Certificate Balances of the Class ( ), Class ( ) and Class ( ) Certificates
(respectively, the "Class ( ) Balance", "Class ( ) Balance" and "Class ( )
Balance") will in each case be (i) reduced by amounts actually distributed on
such class of Certificates that are allocable to principal and ((ii)
increased by amounts allocated to such class of Certificates in respect of
negative amortization on the Mortgage Loans (Describe Notional Balance.))
(The Certificate Balance of the Class ( ) Certificates (the "Class ( )
Balance") will at any time equal the aggregate Stated Principal Balance of
the Mortgage Loans minus the sum of the Class ( ) Balance, Class ( ) Balance
and Class ( ) Balance.) The Stated Principal Balance of any Mortgage Loan at
any date of determination will equal (a) the Cut-off Date Balance of such
Mortgage Loan, plus ((b) any negative amortization added to the principal
balance of such Mortgage Loan on any Due Date after the Cut-off Date to and
including the Due Date in the Due Period for the most recently preceding
Distribution Date), minus (c) the sum of (i) the principal portion of each
Monthly Payment due on such Mortgage Loan after the Cut-off Date, to the
extent received from the mortgagor or advanced by the Master Servicer and
distributed to holders of the Certificates before such date of determination,
(ii) all principal prepayments and other unscheduled collections of principal
received with respect to such Mortgage Loan, to the extent distributed to
holders of the Certificates before such date of determination, and (iii) any
reduction in the outstanding principal balance of such Mortgage Loan
resulting out of a bankruptcy proceeding for the related mortgagor.
Distributions
Method, Timing and Amount. Distributions on the Certificates will be
made on the ____ day of each month or, if such ____ day is not a business
day, then on the next succeeding business day, commencing in
____________________ 199_ (each, a "Distribution Date") . All distributions
(other than the final distribution on any Certificate) will be made by the
Master Servicer 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. Such distributions 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 and is the registered owner of Certificates the aggregate initial
principal amount of which is at least $ , or otherwise by check mailed to
such Certificateholder. The final distribution on any Certificate will be
made in like manner, but only upon presentment or surrender of such
Certificate at the location specified in the notice to the holder thereof of
such final distribution. All distributions made with respect to a class of
Certificates on each Distribution Date will be allocated pro rata among the
outstanding Certificates of such class based on their respective Percentage
Interests. The Percentage Interest evidenced by any Class ( ) Certificate is
equal to the initial denomination thereof as of the Closing Date, divided by
the initial Certificate Balance for such class. The aggregate distribution
to be made on the Certificates on any Distribution Date shall equal the
Available Distribution Amount.
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Certificate
Account as of the close of business on the related Determination Date, (ii)
the aggregate amount of any Advances made by the Master Servicer in respect
of such Distribution Date and (iii) the aggregate amount deposited by the
Master Servicer in the Certificate Account in respect of such Distribution
Date in connection with Prepayment Interest Shortfalls incurred during the
related Due Period, net of (b) the portion of the amount described in clause
(a)(i) hereof that represents (i) Monthly Payments due on a Due Date
subsequent to the end of the related Due Period, (ii) any voluntary principal
prepayments and other unscheduled recoveries on the Mortgage Loans received
after the end of the related Due Period or (iii) any amounts payable or
reimbursable therefrom to any person.
Calculations of Interest. The "Distributable Certificate Interest" in
respect of the Class ( ) Certificates for any 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 of (i) the aggregate portion of any Prepayment Interest Shortfalls
resulting from voluntary principal prepayments on the Mortgage Loans during
the related Due Period (that are not covered by the application of servicing
compensation of the Master Servicer for the related Due Period (such
uncovered aggregate portion, 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 the Class ( )
Certificates for any Distribution Date is equal to thirty days' interest
accrued during the related Interest Accrual Period at the Pass-Through Rate
applicable to such class of Certificates for such Distribution Date accrued
on the related (Certificate Balance) (Classes ( ) Notional Amount)
outstanding immediately prior to such Distribution Date. The Pass-Through
Rate applicable to the Class ( ) Certificates for any Distribution Date (is
fixed and is set forth on the cover hereof) (will equal the weighted average
of the Class ( ) Remittance Rates in effect for the Mortgage Assets as of the
commencement of the related Due Period (as to such Distribution Date, the
"Weighted Average Class ( ) Remittance Rate"). The "Class ( ) Remittance
Rate" in effect for any Mortgage Loan as of any date of determination (a)
prior to its first Interest Rate Adjustment Date, is equal to the related
Mortgage Rate then in effect minus ____ basis points and (b) from and after
its first Interest Rate Adjustment Date, is equal to the related Mortgage
Rate then in effect minus the excess of the related Gross Margin over ____
basis points (is equal to the excess of the Mortgage Rate thereon over ____%
per annum.) The "Interest Accrual Period" for the Certificates is the
calendar month preceding the month in which the Distribution Date occurs.)
(The Class ( ) Notional Amount will equal the (sum of the Class ( ) Balance.
The Class ( ) Notional Amount does not entitle the Class ( ) Certificate (or
a component thereof) to any distribution of principal.) (Interest will be
calculated on the basis of a 360-day year of twelve 30-day months.)
(The portion of Net Aggregate Prepayment Interest Shortfall (and the
Aggregate Mortgage Loan Negative Amortization) for any Distribution Date that
will be allocated to the Class ( ) Certificates on such Distribution Date
will be equal to the then applicable Class ( ) Interest Allocation
Percentage. The "Class ( ) Interest Allocation Percentage" for any
Distribution Date will equal a fraction, expressed as a percentage, the
numerator of which is equal to the product of (a) the Class ( ) Balance ((net
of any Uncovered Portion thereof)) outstanding immediately prior to such
Distribution Date, multiplied by (b) the Pass-Through Rate for the Class ( )
Certificates for such Distribution Date, and the denominator of which is the
product of (x) the aggregate Stated Principal Balance of the Mortgage Loans
outstanding immediately prior to such Distribution Date, multiplied by (y)
the Weighted Average Net Mortgage Rate for such Distribution Date. The "Net
Mortgage Rate" in effect for any Mortgage Loan as of any date of
determination is equal to the related Mortgage Rate then in effect minus ____
basis points. (The "Uncovered Portion" of the Class ( ) Balance, as of any
date of determination, is the portion thereof representing the excess, if
any, of (a) the Class ( ) Balance then outstanding, over (b) the aggregate
Stated Principal Balance of the Mortgage Loans then outstanding.))
(The Class ( ) Certificates (or a component thereof) will not be
entitled to distributions of interest and will not have a Pass-Through Rate.)
Calculations of Principal. (Holders of the Class ( ) Certificates will
be entitled to receive on each Distribution Date, to the extent of the
balance of the Available Distribution Amount remaining after the payment of
the Class ( ) Interest Distribution Amount for such Distribution Date an
amount equal to the Class ( ) Principal Distribution Amount. The "Class ( )
Principal Distribution Amount" for any Distribution Date will equal the sum
of (i) the product of the Scheduled Principal Distribution Amount and the
Class ( ) Scheduled Principal Distribution Percentage, (ii) the product of
the Senior Accelerated Percentage and all principal prepayments received
during the related Due Period, and (iii) to the extent not previously
advanced, (the lesser of the Class ( ) Scheduled Principal Distribution
Percentage of the Stated Principal Balance of the Mortgage Loans and the
Senior Accelerated Percentage of the Unscheduled Principal Distribution
Amount net of any prepayment amounts described in clause (ii) above. The
"Scheduled Principal Distribution Amount" for any Distribution Date is equal
to 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 mortgagor or advanced by the Master Servicer and included in the
Available Distribution Amount for such Distribution Date. The principal
portion of any Advances in respect of a Mortgage Loan delinquent as to its
Balloon Payment will constitute advances in respect of the principal portion
of such Balloon Payment.
(The portion of the Class ( ) Principal Distribution Amount payable on
any Distribution Date shall be allocated to the Class ( ) Certificates as
follows: (Describe distributions which may be concurrent or sequential and
among different classes and may be based on a schedule of payments sometimes
referred to as a Schedule of PAC, TAC or Scheduled Balances for some and not
other classes.))
(The Class ( ) Scheduled Principal Distribution Percentage for any
Distribution Date represents the portion of the Scheduled Principal
Distribution Amount for such Distribution Date payable (subject to the
payment priorities described herein) on the Class ( ) Certificates. The
"Class ( ) Scheduled Principal Distribution Percentage" for any Distribution
Date will equal the lesser of (a) 100% and (b) a fraction, expressed as a
percentage, the numerator of which is the Class ( ) Balance outstanding
immediately prior to such Distribution Date, and the denominator of which is
the lesser of (i) the sum of the Class ( ) Balance, the Class ( ) Balance and
the Class ( ) Balance and (ii) the aggregate Stated Principal Balance of the
Mortgage Loans, in either case outstanding immediately prior to such
Distribution Date.)
The "Unscheduled Principal Distribution Amount" for any Distribution
Date is equal to the sum of: (a) all voluntary principal prepayments
received on the Mortgage Loans during the related Due Period; and (b) the
excess, if any, of (i) all unscheduled recoveries received on the Mortgage
Loans during the related Due Period, whether in the form of liquidation
proceeds, condemnation proceeds, insurance proceeds or amounts paid in
connection with the purchase of a Mortgage Loan out of the Trust Fund,
exclusive in each case of any portion thereof payable or reimbursable to the
Master Servicer in connection with the related Mortgage Loan, over (ii) the
respective portions of the net amounts described in the immediately preceding
clause (i) needed to cover interest (at the applicable Net Mortgage Rate in
effect from time to time) on the related Mortgage Loan from the date to which
interest was previously paid or advanced through the Due Date for such
Mortgage Loan in the related Due Period ((exclusive of any portion of such
interest added to the principal balance of such Mortgage Loan as negative
amortization).)
(The "Class Negative Amortization" in respect of any class of
Certificates for any Distribution Date is equal to such class' allocable
share of the Aggregate Mortgage Loan Negative Amortization for such
Distribution Date.)
Distributions on Certificates. The Available Distribution Amount in
respect of a Distribution Date will be distributed in the following amounts
and order of priority:
(describe the application of Available Distribution Amount to make
distributions of interest and principal among the Classes of Certificates)
Subordination
In order to increase the likelihood of distribution in full of the
interest and principal due to be distributed to the Class ( )
Certificateholders on each Distribution Date, holders of the Class ( )
Certificates have a right to distributions of the Available Distribution
Amount that is prior to the rights of the holders of the Subordinate
Certificates, to the extent necessary to satisfy such amounts of interest and
principal.
(The entitlement to the Class ( ) Certificates of the (entire) (a larger
percentage under certain circumstances of) Unscheduled Principal Distribution
Amount will accelerate the amortization of the Class ( ) Certificates
relative to the actual amortization of the Mortgage Loans.)
(To the extent that the Class ( ) Certificates are amortized faster
than the Mortgage Loans, without taking into account losses on the Mortgage
Loans, the percentage interest evidenced by the Class ( ) 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 ( ) Certificates by the Subordinate
Certificates.)
(The principal portion of any Realized Losses will be allocated first in
reduction of the Subordinate Certificates (in the order specified here) and
then to the Class ( ) Certificates (in the order specified here). Any loss
realized on a Mortgage Loan that is finally liquidated equal to the excess of
the Stated Principal Balance of such Mortgage Loan remaining, if any, plus
interest thereon through the last day of the month in which such Mortgage
Loan was finally liquidated, after application of all amounts received (net
of amounts reimbursable to the Master Servicer or any Sub-Servicer for
Advances and expenses, including attorneys' fees) towards interest and
principal owing on the Mortgage Loan is referred to herein as a "Realized
Loss.")
Advances
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated to make advances (each, an "Advance") out
of its own funds, or 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 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 (and (ii) in the case of each Mortgage
Loan delinquent in respect of its Balloon Payment as of the related
Determination Date, an amount sufficient to amortize fully the principal
portion of such Balloon Payment over the remaining amortization term of such
Mortgage Loan and to pay interest at the Net Mortgage Rate in effect for such
Mortgage Loan for the one month period preceding its Due Date in the related
Due Period (but only to the extent that the related mortgagor has not made a
payment sufficient to cover such amount under any forbearance arrangement
that has been included in the Available Distribution Amount for such
Distribution Date)). The Master Servicer's obligations to make Advances in
respect of any Mortgage Loan will continue through liquidation of such
Mortgage Loan and out of its own funds from any amounts collected in respect
of the Mortgage Loan as to which such Advance was made, whether in the form
of late payments, insurance proceeds, liquidation proceeds, condemnation
proceeds or amounts paid in connection with the purchase of such Mortgage
Loan. Notwithstanding the foregoing, the Master Servicer will be obligated
to make any Advance only to the extent that it determines in its reasonable
good faith judgment that, if made, would be recoverable out of general funds
on deposit in the Certificate Account. Any failure by the Master Servicer to
make an Advance as required under the Pooling and Servicing Agreement will
constitute an event of default thereunder(, in which case the Trustee will be
obligated to make any such Advance, in accordance with the terms of the
Pooling and Servicing Agreement).
(THE SWAP AGREEMENT
The following summary describes certain terms of the Swap Agreement.
The summary does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the provisions of the Swap Agreement.
Payments under the Swap Agreement
On the Closing Date the Trust Fund will enter into a 1992 International
Swaps and Derivatives Association, Inc. ("ISDA") Master Agreement (Multi
Currency-Cross Border) (such agreement, the "1992 Master Agreement") with the
Swap Counterparty, as modified to reflect the transactions described below
and certain terms of the Certificates (the 1992 Master Agreement, as so
modified, the "Swap Agreement"). The Swap Agreement will incorporate certain
relevant standard definitions published by ISDA.
Under the Swap Agreement, on each Distribution Date the Trust Fund will
pay to the Swap Counterparty the Available Distribution Amount in (name of
foreign currency) in exchange for U.S. dollars at an exchange rate of _______
for one U.S. dollar (the "Original Exchange Rate"). The U.S. dollars
received from the Swap Counterparty will be applied to make the distributions
on the Certificates on that Distribution Date.
Conditions Precedent
The respective obligations of the Swap Counterparty and the Trust Fund
to pay certain amounts due under the Swap Agreement will be subject to the
following conditions precedent: (i) no Swap Default (as defined below under
"-- Defaults Under Swap Agreement") or event that with the giving of notice
or lapse of time or both would become a Swap Default shall have occurred and
be continuing and (ii) no Early Termination Date (as defined below under "--
Early Termination of Swap Agreement") has occurred or been effectively
designated.
Defaults Under Swap Agreement
"Events of Default" under the Swap Agreement (each, a "Swap Default")
are limited to: (i) the failure of the Trust Fund (or the Swap Counterparty),
to pay any amount when due under the Swap Agreement after giving effect to
the applicable grace period, if any; (ii) the occurrence of certain events of
insolvency or bankruptcy of the Trust Fund or the Swap Counterparty, and
(iii) certain other standard events of default under the 1992 Master
Agreement including "Breach of Agreement" (not applicable to the Trust Fund),
"Credit Support Default" (not applicable to the Trust Fund),
"Misrepresentation" (not applicable to the Trust Fund) and "Merger without
Assumption", as described in Sections 5(a)(ii), 5(a)(iii), 5(a)(iv) and
5(a)(viii) of the 1992 Master Agreement.
Termination Events
"Termination Events" under the Swap Agreement consist of certain
standard termination events under the 1992 Master Agreement including
"Illegality" and "Tax Event Upon Merger", as described in Sections 5(b)(i)
and 5(b)(iii) of the 1992 Master Agreement.
Early Termination of Swap Agreement
Upon the occurrence of any Swap Default under the Swap Agreement, the
non-defaulting party will have the right to designate an Early Termination
Date (as defined in the Swap Agreement) upon the occurrence and continuance
of such Swap Default. With respect to Termination Events, an Early
Termination Date may be designated by one of the parties (as specified in
each case in the Swap Agreement) and will occur only upon notice and, in
certain cases, after any Affected Party has used reasonable efforts to
transfer its rights and obligations under such Swap Agreement to a related
entity within a limited period after notice has been given of the Termination
Event, all as set forth in the Swap Agreement. Upon the occurrence of (i)
any Swap Default arising from any action taken, or failure to act, by the
Swap Counterparty, or (ii) a Termination Event with respect to which the Swap
Counterparty is the sole Affected Party, the Trustee may by notice to the
Swap Counterparty designate an Early Termination Date with respect to the
Swap Agreement. The occurrence of an Early Termination Date under the Swap
Agreement will constitute a "Swap Early Termination."
Upon any Swap Early Termination, the Trust Fund or the Swap Counterparty
may be liable to make a termination payment to the other (regardless, if
applicable, of which of such parties may have caused such termination). Such
termination payment will be calculated on the basis that the Trust Fund is
the Affected Party (as defined in the Swap Agreement), subject to certain
exceptions. (The amount of any such termination payment will be based on the
market value of the Swap Agreement computed on the basis of market quotations
of the cost of entering into swap transactions with the same terms and
conditions that would have the effect of preserving the respective full
payment obligations of the parties, in accordance with the procedures set
forth in the Swap Agreement; (state whether there are circumstances where no
termination payment will be payable).) Any such termination payment could,
if currency exchange rates between (foreign currency) and the U.S. dollar
have changed significantly, be substantial.
(In addition, in certain events of insolvency or bankruptcy pertaining
to the Swap Counterparty, which would result in the early termination of the
Swap Agreement, the Swap Counterparty shall not be entitled to a termination
payment.)
If a Swap Early Termination occurs, (the Trust Fund would become exposed
to the risk of unfavorable changes in the currency exchange rate between
(foreign currency) and U.S. dollars (i.e., it may receive fewer U.S. dollars
----
for its (foreign currency) collections on the Mortgage Loans, thus resulting
in Certificateholders receiving fewer U.S. dollars and incurring a loss on
their investment even if the loss and delinquency experience on the Mortgage
loans is favorable). (The Trust Fund will thereafter make distributions in
(foreign currency) rather than U.S. dollars, thereby exposing
Certificateholders to the risk of unfavorable changes in the exchange rate
between (foreign currency) and U.S. dollars.
Taxation
Neither the Trust Fund nor the Swap Counterparty is obligated under the
Swap Agreement to gross up if withholding taxes are imposed on payments made
under the Swap Agreement.
In the event that any withholding tax is imposed on payments due to the
Trust Fund on the Underlying Securities or payments by the Trust Fund under
the Swap Agreement, the Swap Counterparty will be entitled to deduct amounts
in the same proportion (as calculated in accordance with the Swap Agreement)
from subsequent payments due from it. In the event that the Swap
Counterparty is required to withhold amounts from payments by the Swap
Counterparty under the Swap Agreement, the payment obligations of the Swap
Counterparty will be reduced by such amounts and the payment obligations of
the Trust Fund under the Swap Agreement will remain the same. In either
event, the Trust Fund will have fewer U.S. dollars for distribution on the
Certificates.
Assignment
Except as provided below, neither the Issuer nor the Swap Counterparty
is permitted to assign, novate or transfer as a whole or in part any of its
rights, obligations or interests under the Swap Agreement. (Describe swap
assignment provisions.)
The Swap Counterparty
(Describe Swap Counterparty)
The description of the Swap Counterparty set out above has been provided
by the Swap Counterparty; the Swap Counterparty has not, however, been
involved in the preparation of and does not accept responsibility for, this
Prospectus Supplement or the Prospectus as a whole. There can be no
assurance that the Swap Counterparty will be able to perform its obligations
under the Swap Agreement. Failure by the Swap Counterparty to make required
payments may result in a delay or reduction in payments on the Securities.)
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Class ( ) Certificates will be affected by
the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
liquidation due to default, repurchase, condemnation or insurance. The yield
to maturity on the Class ( ) Certificates will also be affected by the level
of the Index. The rate of principal payments on the Class ( ) Certificates
will correspond to the rate of principal payments (including prepayments) on
the related Mortgage Loans.
(Description of factors affecting yield, prepayment and maturity of the
Mortgage Loans and Class ( ) Certificates depending upon characteristics of
the Mortgage Loans.)
Weighted Average Life of the Class ( ) Certificates
Weighted average life refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of the Class ( )
Certificates will be influenced by the rate at which principal payments
(including scheduled payments and principal prepayments) on the Mortgage
Loans are made. Principal payments on the Mortgage Loans may be in the form
of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes prepayments and liquidations due to a default or other
dispositions of the Mortgage Loans).
The table entitled "Percent of Initial Certificate Balance Outstanding
for the Class ( ) Certificates at the respective percentages of (CPR) (SPA)"
set forth below indicates the weighted average life of such Certificates and
sets forth the percentage of the initial principal amount of such
Certificates that would be outstanding after each of the dates shown at the
indicated percentages of (CPR)(SPA). The table has been prepared on the
basis of the following assumptions regarding the characteristics of the
Mortgage Loans: (i) an outstanding principal balance of $_________, a
remaining amortization term of ___ months and a term to balloon of ___
months: (ii) an interest rate equal to _____% per annum until the ______ Due
Date and thereafter an interest rate equal to ____% per annum (at an assumed
Index of ____%) and Monthly Payments that would fully amortize the remaining
balance of the Mortgage Loan over its remaining amortization term; (iii) the
Mortgage Loans prepay at the indicated percentage of (CPR)(SPA); (iv) the
maturity date of each of the Balloon Mortgage Loans is not extended; (v)
distributions on the Class ( ) Certificates are received in cash, on the
( )th day of each month, commencing in_____________; (vi) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the mortgagors of principal and interest on the Mortgage Loans
occur; (vii) the initial Certificate Balance of the Class ( ) Certificates is
$________; (viii) prepayments represent payment in full of individual
Mortgage Loans and are received on the respective Due Dates and include 30
days' interest thereon; (ix) there are no repurchases of Mortgage Loans due
to breaches of any representation and warranty or otherwise; (x) the Class (
) Certificates are purchased on ________; (xi) the Servicing Fee is ____% per
annum; and (xii) the Index on each Interest Rate Adjustment Date is ________%
per annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Class ( ) Certificates and sets forth the percentages of
the initial Certificate Balance of the Class ( ) Certificates that would be
outstanding after the Distribution Date in ___________ of each of the years
indicated, at various percentages of (CPR)(SPA). Neither (CPR)(SPA) nor any
other prepayment model or assumption purports to be a historical description
of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans
included in the Mortgage Pool. Variations in the actual prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease the percentage of initial Certificate Balance (and weighted average
life) shown in the following table. Such variations may occur even if the
average prepayment experience of all such Mortgage Loans is the same as any
of the specified assumptions.
Percent of Initial Class ( ) Certificate Balance Outstanding
at the Following Percentages of (CPR)(SPA)
<TABLE>
<CAPTION>
Distribution Date
- -----------------
<S> <C> <C> <c? <C> <C> <C>
Initial Percent . . . . . . . . . ___% ___% ___% ___% ___% ___%
____________ __, 1997 . . . . . .
____________ __, 1998 . . . . . .
____________ __, 1999 . . . . . .
____________ __, 2000 . . . . . .
____________ __, 2001 . . . . . .
____________ __, 2002 . . . . . .
____________ __, 2003 . . . . . .
____________ __, 2004 . . . . . .
____________ __, 2005 . . . . .
____________ __, 2006 . . . . . .
____________ __, 2007 . . . . . .
</TABLE>
Weighted Average Life
(Years) (+) . . . . . . . . . . . .
+ The weighted average life of the Class ( ) Certificates is determined by
(i) multiplying the amount of each distribution of principal by the
number of years from the date of issuance to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the total
principal distributions on such class of Certificates.
(Class ( ) Yield Consideration)
(Will describe assumption for various scenarios showing sensitivity of
certain classes to prepayment and default risks and set forth resulting
yield.)
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ____________ 1, 199_ (the " Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer and the Trustee.
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class ( ) Certificates. The
Depositor will provide to a prospective or actual Class ( ) Certificateholder
without charge, upon written request, a copy (without exhibits) of the
Pooling and Servicing Agreement.
Assignment of the Mortgage Loans
On or prior to the Closing Date, the Depositor will assign or cause to
be assigned the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. Prior to the Closing Date, the Depositor
will, as to each Mortgage Loan, deliver to the Trustee (or the custodian
hereinafter referred to), among other things, the following documents
(collectively, as to such Mortgage Loan, the "Mortgage File"): (list
Mortgage Loan documents and transfer documents applicable to foreign
jurisdiction).
The Master Servicer
General. ____________________, a __________________ corporation, will
act as Master Servicer (in such capacity, the "Master Servicer") for the
Mortgage Loans pursuant to the Pooling and Servicing Agreement. The Master
Servicer(, a wholly-owned subsidiary of __________,) (is engaged in the
mortgage banking business and, as such, originates, purchases, sells and
services mortgage loans. _________________ primarily originates mortgage
loans through a branch system consisting of _______________________ offices
in __________ states, and through mortgage loan brokers.)
The executive offices of the Master Servicer are located at
_______________, telephone number (__)__________.
(Include description of Servicing Standard.)
Delinquency and Foreclosure Experience. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on one- to four- family residential mortgage loans included in
the Master Servicer's servicing portfolio (which includes mortgage loans that
are subserviced by others). 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 31 days past due on a
contractual basis.
<TABLE>
<CAPTION>
As of December 31, 19 As of December 31, 19 As of , 19
----------------------- ----------------------- ----------------------
By Dollar By Dollar By Dollar
By No. of Amount of By No. of Amount of By No. of Amount of
Loans Loans Loans Loans Loans Loans
(Dollar Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio ________ $______ ________ $______ ________ $________
Period of
Delinquency
31 to 59 days
60 to 89 days
90 days or more ________ _______ _________ ________ _________ ________
Total Delinquent ________ $______ _________ $_______ _________ $_______
Loans
Percent of Portfolio % % % % % %
Foreclosures pending
(1)
Percent of Portfolio % % % % % %
Foreclosures
Percent of Portfolio % % % % % %
</TABLE>
____________________
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond
to the delinquency and foreclosure experience of the Master Servicer's
mortgage portfolio set forth in the foregoing tables. The aggregate
delinquency and foreclosure experience on the Mortgage Loans comprising the
Mortgage Pool will depend on the results obtained over the life of the
Mortgage Pool.
Certificate Account
The Master Servicer is required to deposit on a daily basis all amounts
received with respect to the Mortgage Loans of the Mortgage Pool, net of its
servicing compensation, into a separate Certificate Account maintained with
____________. Interest or other income earned on funds in the Certificate
Account will be paid to the Master Servicer as additional servicing
compensation. See "Description of the Trust Funds -- Mortgage Assets" and
"Description of the Agreements -- Certificate Account and Other Collection
Accounts" in the Prospectus.
Servicing and Other Compensation and Payment of Expenses
(All fees payable to the Master Servicer will be paid in (foreign
currency).) 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 only from amounts received in respect
of interest on each Mortgage Loan, will accrue at the Servicing Fee Rate and
will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on such Mortgage Loan is
computed. The Servicing Fee Rate (with respect to each Mortgage Loan equals
___% per annum) (equals the weighted average of the excesses of the
Mortgage Rates over the respective Net Mortgage Rates).
As additional servicing compensation, the Master Servicer is entitled to
retain all assumption fees, prepayment penalties and late payment charges, to
the extent collected from mortgagors, together with any interest or other
income earned on funds held in the Certificate Account and any escrow
accounts. The Servicing Standard requires the Master Servicer to, among
other things, diligently service and administer the Mortgage Loans on behalf
of the Trustee and in the best interests of the Certificateholders, but
without regard to the Master Servicer's right to receive such additional
servicing compensation. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement. See
"Description of the Agreements -- Retained Interest; Servicing Compensation
and Payment of Expenses" in the Prospectus for information regarding other
possible compensation payable to the Master Servicer and for information
regarding expenses payable by the Master Servicer (and "Certain Federal
Income Tax Consequences" herein regarding certain taxes payable by the Master
Servicer).
Reports to Certificateholders
On each Distribution Date the Master Servicer shall furnish to each
Certificateholder, to the Depositor, to the Trustee and to the Rating Agency
a statement setting forth certain information with respect to the Mortgage
Loans and the Certificates required pursuant to the Pooling and Servicing
Agreement. In addition, within a reasonable period of time after each
calendar year, the Master Servicer shall furnish to each person who at any
time during such calendar year was the holder of a Certificate a statement
containing certain information with respect to the Certificates required
pursuant to the Pooling and Servicing Agreement, aggregated for such calendar
year or portion thereof during which such person was a Certificateholder.
See "Description of the Certificates -- Reports to Certificateholders" in the
Prospectus.
Voting Rights
At all times during the term of this Agreement, the Voting Rights shall
be allocated among the Classes of Certificateholders in proportion to the
respective Certificate Balances of their Certificates ((net, in the case of
the Class ( ), Class ( ) and Class ( ) Certificates, of any Uncovered Portion
of the related Certificate Balance)). Voting Rights allocated to a class of
Certificateholders shall be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates.
Termination
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment 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 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 Class ( ) Certificates, but the right of the Master Servicer to
effect such termination is subject to the requirement that the aggregate
Stated Principal Balance of the Mortgage Loans then in the Trust Fund is less
than __% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date. (In addition, the Master Servicer may at its option purchase
any class or classes of Class ( ) Certificates with a Certificate Balance
less than __% of the original balance thereof at a price equal to such
Certificate Balance plus accrued interest through _________.)
USE OF PROCEEDS
The net proceeds from the sale of Class ( ) Certificates will be used by
the Depositor to pay the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class ( ) 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 Code.
For federal income tax purposes, the Class ( ) Certificates will be the
sole class of "residual interests" in the REMIC and the Class ( ), Class ( )
and Class ( ) Certificates will be the "regular interests" in the REMIC and
will be treated as debt instruments of the REMIC.
See "Material Federal Income Tax Consequences -- REMICS" in the
Prospectus.
(The Class ( ) 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 ___% (CPR)(SPA). No representation is made that the Mortgage
Loans will prepay at that rate or at any other rate. See "Material Federal
Income Tax Consequences -- REMICS -- Taxation of Owners of REMIC Regular
Certificates" and "--Original Issue Discount" in the Prospectus.)
The Class ( ) Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of such a
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 such class of
Certificates should consult their own tax advisors regarding the possibility
of making an election to amortize such premium. See "Material Federal Income
Tax Consequences -- REMICS -- Taxation of Owners of REMIC Regular
Certificates" and "-- Premium" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Class ( ) Certificates, see "Material Federal Income Tax
Consequences -- REMICS" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, that is subject to the Employee
Retirement arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code should carefully review with its legal advisors whether the
purchase or holding of Class ( ) Certificates could give rise to a
transaction that is prohibited or is not otherwise permitted either under
ERISA or Section 4975 of the Code.
(Discuss any applicable ERISA exemptions.)
Any Plan fiduciary considering whether to purchase a Class ( )
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
LEGAL INVESTMENT
The Class ( ) Certificates (will) (will not) constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") (so long as they are rated in at least the second
highest rating category by the Rating Agency, and, as such, are legal
investments for certain entities to the extent provided in SMMEA). (SMMEA
provided that states could override its provisions on legal investment and
restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA.)
The Depositor makes no representations as to the proper characterization
of the Class ( ) Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase the Class ( ) Certificates
under applicable legal investment restrictions. These uncertainties may
adversely affect the liquidity of the Class ( ) Certificates. Accordingly,
all institutions whose investment activities are subject to legal investment
laws and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining
whether and to what extent the Class ( ) Certificates constitute a legal
investment under SMMEA or are subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Class ( )
Certificates will be purchased from the Depositor by the Underwriter, an
affiliate of the Depositor, upon issuance. Distribution of the Class ( )
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. Proceeds to the Depositor from the Certificates will be $_________,
plus accrued interest from the Cut-off Date at a rate of __% per annum,
before deducting expenses payable by the Depositor. In connection with the
purchase and sale of the Class ( ) Certificates, the Underwriter may be
deemed to have received compensation from the Depositor in the form of
underwriting discounts.
The Depositor also has been advised by the Underwriter that it currently
expects to make a market in the Class ( ) Certificates offered hereby;
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 Class ( ) Certificates will develop.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Brown &
Wood LLP, New York, New York and for the Underwriter by Brown & Wood LLP.
RATING
It is a condition to issuance that the Class ( ) Certificates be rated
(not lower than) "______" by ________________. However, no person is
obligated to maintain the rating on the Class ( ) Certificates, and
_______________ is not obligated to monitor its rating following the Closing
Date.
________________'s ratings on mortgage pass-through certificates address
the likelihood of the receipt by holders thereof of payments to which they
are entitled. _____________'s ratings take 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 in the mortgage
pool is adequate to make payments required under the certificates.
_________________'s rating on the Class ( ) Certificates does not, however,
constitute a statement regarding frequency of prepayments on the Mortgage
Loans. (The rating of the Class ( ) Certificates does not address the
possibility that the holders of such Certificates may fail to fully recover
their initial investments.) See "Special Considerations" herein.
There can be no assurance as to whether any rating agency not requested
to rate the Class ( ) Certificates will nonetheless issue a rating and, if
so, what such rating would be. A rating assigned to the Class ( )
Certificates by a rating agency that has not been requested by the Depositor
to do so may be lower than the rating assigned by ________________'s pursuant
to the Depositor's request.
The rating of the Class ( ) 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.
INDEX OF PRINCIPAL DEFINITIONS
Terms Pages
Accrued Certificate Interest . . . . . . . . . . . . . . . . . . . . . S-31
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Aggregate Mortgage Loan Negative Amortization . . . . . . . . . . . . . S-30
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . S-30
Balloon Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-1, S-5
Class Negative Amortization . . . . . . . . . . . . . . . . . . . . S-8, S-32
Class ( ) Balance . . . . . . . . . . . . . . . . . . . . . . S-6, S-9, S-29
Class ( ) Certificate Owner . . . . . . . . . . . . . . . . . . . . . . S-16
Class ( ) Interest Allocation Percentage . . . . . . . . . . . . . . . S-31
Class ( ) Principal Distribution Amount . . . . . . . . . . . . . . . . S-31
Class ( ) Remittance Rate . . . . . . . . . . . . . . . . . . . . . . . S-31
Class ( ) Scheduled Principal Distribution Percentage . . . . . . . . . S-32
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Conversion Price . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Converted Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . S-18
Convertible Mortgage Loans . . . . . . . . . . . . . . . . . . . . S-5, S-18
Converting Mortgage Loan . . . . . . . . . . . . . . . . . . . . . S-5, S-18
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Definitive Class ( ) Certificate . . . . . . . . . . . . . . . . . . . S-16
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Distributable Certificate Interest . . . . . . . . . . . . . . . . . . S-30
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . 2, S-1, S-30
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Government Securities . . . . . . . . . . . . . . . . . . . . . 1, S-2, S-17
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Interest Accrual Period . . . . . . . . . . . . . . . . . . . . . . S-7, S-31
Interest Rate Adjustment Date . . . . . . . . . . . . . . . . . . . . . . S-3
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, S-36
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-2, S-17
Monthly Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Mortgage Asset Seller . . . . . . . . . . . . . . . . . . . . . . . . 1, S-17
Mortgage File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Net Aggregate Prepayment Interest Shortfall . . . . . . . . . . . . . . S-30
Net Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-31
Notional Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Original LTV Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Payment Adjustment Date . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Payment Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . S-6, S-36
Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Prepayment Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-6
Regular interests . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-39
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, S-13
REO Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Residual interests . . . . . . . . . . . . . . . . . . . . . . . S-14, S-39
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Scheduled Principal Distribution Amount . . . . . . . . . . . . . . . . S-31
Seller's Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
SPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . 1, S-29
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-6
Uncovered Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Unscheduled Principal Distribution Amount . . . . . . . . . . . . . . . S-32
Weighted Average Class ( ) Remittance Rate . . . . . . . . . . . . . . S-31
ANNEX A
(TITLE, SERIES OF MBS)
TERM SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cut-off Date: ( ) Mortgage Pool Cut-off Date $( )
Balance:
Date of Initial ( ) Reference Date Balance: $( )
Issuance:
Related Trustee: ( ) Percent of Original Mortgage Pool ( )%
Maturity Date: ( ) Remaining as of Reference Date:
</TABLE>
Initial
Class Certificate
of Pass-Through Principal
Certificates Rate Balance Features
------------ ------------ ----------- --------
( ) ( )% $( ) ( )
(First MBS Distribution Date on which the MBS may receive a portion of
prepayments: (date))
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Servicing Fee Rate:* ( )% per annum As of Date of
Maximum Servicing Fee Rate:* ( )% per annum Initial Issuance
Special Hazard Amount: $( )
Fraud Loss Amount: $( )
Bankruptcy Amount: $( )
</TABLE>
As of As of Date of
Delivery Date Initial Issuance
------------- ----------------
Senior Percentage ( )% ( )%
Subordinate Percentage ( )% ( )%
Ratings: Rating Agency Class Voting Rights:
------------- ----- -------------
( ) ( )
( )
( )
( )
-----------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS ( ) CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the accompanying Prospectus in connection with the
offer contained in this Prospectus Supplement and the accompanying
Prospectus, and, if given, such information or representations must not be
relied upon as having been authorized by the Issuer, the Depositor or the
Underwriter. This Prospectus Supplement and the accompanying Prospectus
shall not constitute an offer to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
The delivery of this Prospectus Supplement and the accompanying Prospectus at
any time does not imply that the information herein is correct as of any time
subsequent to the date hereof.
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary S
Special Considerations S
Description of the Mortgage Pool S
Description of the Certificates S
Pooling and Servicing Agreement S
Use of Proceeds S
Certain Federal Income Tax Consequences S
ERISA Considerations S
Legal Investment S
Plan of Distribution S
Legal Matters S
Rating S
Prospectus
Prospectus Supplement
Available Information
Incorporation of Certain Information by Reference
Summary of Prospectus
Special Considerations
Description of the Trust Funds
Use of Proceeds
Yield Considerations
The Depositor
Description of the Certificates
Description of the Agreements
Description of Credit Support
Certain Legal Aspects of Mortgage Loans
Certain Federal Income Tax Consequences
State Tax Considerations
ERISA Considerations
Legal Investment
Plan of Distribution
Legal Matters
Financial Information
Rating
Index of Principal Definitions
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus supplement and the prospectus to which it
relates 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.
draft 12/11/97
(U.S.)
PROSPECTUS
- ----------
SUBJECT TO COMPLETION, DATED December 11, 1997
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
Merrill Lynch Mortgage Investors, Inc.
Depositor
___________
The Asset Backed Certificates (the "Certificates") and Asset Backed
Notes (the "Notes" and, together with the Certificates, the "Securities")
offered hereby and by Supplements to this Prospectus (the "Offered
Securities") will be offered from time to time in one or more series. Each
series of Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (with respect to any series, the "Trust
Fund") consisting of one or more segregated pools of various types of single
family mortgage loans (or certain balances thereof) (collectively, the
"Mortgage Loans"), mortgage participations in Mortgage Loans ("Mortgage
Participations"), mortgage pass-through certificates or mortgage-backed
securities evidencing interests in Mortgage Loans or secured thereby ("MBS"),
manufactured housing installment sale contracts or installment loan
agreements ("Contracts") or certain direct obligations of the United States,
agencies thereof or agencies created thereby (the "Government Securities")
(with respect to any series, collectively, "Assets"). The Mortgage Loans,
Mortgage Participations and MBS are collectively referred to herein as the
"Mortgage Assets." If a series of Securities includes Notes, such Notes will
be issued and secured pursuant to an indenture and will represent
indebtedness of the Trust Fund. If so specified in the related Prospectus
Supplement, the Trust Fund for a series of Securities may include letters of
credit, insurance policies, guarantees, reserve funds or other types of
credit support, or any combination thereof (with respect to any series,
collectively, "Credit Support"), and currency or interest rate exchange
agreements and other financial assets or derivative instruments, or any
combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Securities" and "Description of Credit Support."
Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be
entitled to interest distributions, with disproportionately low, nominal or
no principal distributions; (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events, such as
the retirement of one or more other classes of Securities of such series;
(vi) provide for distributions of principal as described in the related
Prospectus Supplement; and/or (vii) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available
funds, in each case as described in the related Prospectus Supplement. Any
such classes may include classes of Offered Securities. See "Description of
the Securities."
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Securities of any series will be made only from the assets of the related
Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, any Master Servicer, any Sub-Servicer or any of their
respective affiliates, except to the limited extent described herein and in
the related Prospectus Supplement. Neither the Securities nor any assets in
the related Trust Fund will be guaranteed or insured by any governmental
agency or instrumentality or by any other person, unless otherwise provided
in the related Prospectus Supplement. The assets in each Trust Fund will be
held in trust for the benefit of the holders of the related series of
Certificates pursuant to a Pooling and Servicing Agreement or a Trust
Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the
timing of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement.
Prospective investors should review the information appearing under the
caption "Risk Factors" herein and such information as may be set forth under
the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Security.
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" for federal income tax
purposes. See also "Material Federal Income Tax Consequences" herein.
________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________
Prior to issuance there will have been no market for the Securities of
any series and there can be no assurance that a secondary market for any
Offered Securities will develop or that, if it does develop, it will
continue. This Prospectus may not be used to consummate sales of the Offered
Securities of any series unless accompanied by the Prospectus Supplement for
such series.
Offers of the Offered Securities may be made through one or more
different methods, including offerings through underwriters, as more fully
described under "Plan of Distribution" herein and in the related Prospectus
Supplement.
________
Merrill Lynch & Co.
The date of this Prospectus is ______, 199_.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Securities of each series will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities, the payment provisions with respect to
each such class and the Pass-Through Rate or interest rate or method of
determining the Pass-Through Rate or interest rate with respect to each such
class; (ii) the aggregate principal amount and distribution dates relating to
such series and, if applicable, the initial and final scheduled distribution
dates for each class; (iii) information as to the assets comprising the Trust
Fund, including the general characteristics of the assets included therein,
including the Assets and any Credit Support and Cash Flow Agreements (with
respect to the Securities of any series, the "Trust Assets"); (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) additional information with respect to the method of
distribution of such Certificates; (vi) whether one or more REMIC elections
will be made and designation of the regular interests and residual interests;
(vii) the aggregate original percentage ownership interest in the Trust Fund
to be evidenced by each class of Securities; (viii) information as to any
Master Servicer, any Sub-Servicer and the Trustee, as applicable;
(ix) information as to the nature and extent of subordination with respect to
any class of Securities that is subordinate in right of payment to any other
class; and (x) whether such Securities will be initially issued in definitive
or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Offered Securities. This Prospectus and the Prospectus
Supplement relating to each series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement
pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the
exhibits thereto. Such Registration Statement and exhibits can be inspected
and copied at prescribed rates at the public reference facilities maintained
by the Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048. The Commission maintains
a Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the
Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Offered Securities or an offer of the Offered Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus and any Prospectus Supplement hereto at any time
does not imply that information herein is correct as of any time subsequent
to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Securities, pursuant to the applicable Agreement. Such reports may be
available to holders of interests in the Securities (the "Securityholders")
upon request to their respective DTC participants. See "Description of the
Securities--Reports to Securityholders" and "Description of the Agreements--
Evidence as to Compliance." The Depositor will file or cause to be filed with
the Commission such periodic reports with respect to each Trust Fund as are
required under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the rules and regulations of the Commission thereunder, as interpreted
by the staff of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to
the termination of an offering of Offered Securities evidencing interests
therein. Upon request, the Depositor will provide or cause to be provided
without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Offered Securities, a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of
such classes of such Offered Securities, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed in writing to
Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial
Center - North Tower, 10th Floor, New York, New York 10281-1310, Attention:
Secretary, or by telephone at (212) 449-0357. The Depositor has determined
that its financial statements are not material to the offering of any Offered
Securities.
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 3
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . 4
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . 6
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
DESCRIPTION OF THE TRUST FUNDS . . . . . . . . . . . . . . . . . . . . . 19
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
YIELD CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 25
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
DESCRIPTION OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . 30
DESCRIPTION OF THE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . 37
DESCRIPTION OF CREDIT SUPPORT . . . . . . . . . . . . . . . . . . . . . . 57
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS . . . . . . . . . . . . . . . . . 59
MATERIAL FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . 72
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 107
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 112
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 113
RATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
INDEX OF PRINCIPAL DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 114
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing
elsewhere in this Prospectus and by reference to the information with respect
to each series of Securities contained in the Prospectus Supplement to be
prepared and delivered in connection with the offering of such series. An
Index of Principal Definitions is included at the end of this Prospectus.
Title of Securities Asset-Backed Certificates (the "Certificates")
and Asset Backed Notes (the "Notes" and,
together with the Certificates, the
"Securities"), issuable in series.
Issuer With respect to each series, the trust fund
(the "Trust Fund") formed to issue the
Securities of that series.
Depositor Merrill Lynch Mortgage Investors, Inc. (the
"Depositor"), a wholly owned subsidiary of
Merrill Lynch Mortgage Capital, Inc., which is
a wholly-owned indirect subsidiary of Merrill
Lynch & Co., Inc. The Depositor is an
affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Neither Merrill Lynch &
Co., Inc. nor any of its affiliates, including
the Depositor and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, will insure or guarantee
the Securities or the Mortgage Loans or be
otherwise obligated in respect thereof.
Master Servicer The master servicer or master servicers (each,
a "Master Servicer"), if any, or a servicer for
substantially all the Mortgage Loans for each
series of Securities, which servicer or master
servicer(s) may be affiliates of the Depositor,
will be named in the related Prospectus
Supplement. See "Description of the Agreements-
-General" and "--Collection and Other Servicing
Procedures."
Trustee The trustee (the "Trustee") for each series of
Certificates will be named in the related
Prospectus Supplement. See "Description of the
Agreements--The Trustee."
The Trust Assets Each series of Certificates will represent in
the aggregate the entire beneficial ownership
interest in a Trust Fund. If a series of
Securities includes Notes, such Notes will
represent indebtedness of the Trust Fund and
will be secured by a security interest in the
Assets of the Trust Fund. A Trust Fund will
consist primarily of any of the following
assets (the Mortgage Assets, Contracts and
Government Securities may be referred to
collectively or individually as "Assets"):
(a) Mortgage Assets The Mortgage Assets with respect to a series of
Certificates will consist of a pool of single
family loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), mortgage
participations ("Mortgage Participations") or
mortgage pass-through certificates or other
mortgage-backed securities (such as debt
obligations) evidencing interests in or secured
by Mortgage Loans (collectively, the "MBS") or
a combination of Mortgage Loans, Mortgage
Participations and/or MBS. The Mortgage Loans
will not be guaranteed or insured by the
Depositor or any of its affiliates or, unless
otherwise provided in the Prospectus
Supplement, by any governmental agency or
instrumentality or other person. The Mortgage
Loans will be secured by first and/or junior
liens on one- to four-family residential
properties or security interests in shares
issued by cooperative housing corporations
("Single Family Properties"), including mixed
residential and commercial structures. The
Mortgage Loans may include (i) closed-end
and/or revolving home equity loans or certain
balances thereof ("Home Equity Loans") and/or
(ii) home improvement installment sales
contracts and installment loan agreements
("Home Improvement Contracts"). The Mortgaged
Properties may be located in any one of the
fifty states, the District of Columbia, the
Commonwealth of Puerto Rico or any other U.S.
jurisdiction specified in the Prospectus
Supplement. The Prospectus Supplement will
indicate additional jurisdictions, if any, in
which the Mortgaged Properties may be located.
Unless otherwise provided in the related
Prospectus Supplement, all Mortgage Loans will
have individual principal balances at
origination of not less than $25,000 and
original terms to maturity of not more than 40
years. All Mortgage Loans will have been
originated by persons other than the Depositor,
and all Mortgage Assets will have been
purchased, either directly or indirectly, by
the Depositor on or before the date of initial
issuance of the related series of Certificates.
The related Prospectus Supplement will indicate
if any such persons are affiliates of the
Depositor.
Each Mortgage Loan may provide for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be
converted from an adjustable to a fixed
Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate, from time to time at the
mortgagor's election, in each case as described
in the related Prospectus Supplement.
Adjustable Mortgage Rates on the Mortgage Loans
in a Trust Fund may be based on one or more
indices. Each Mortgage Loan may provide for
scheduled payments to maturity, payments that
adjust from time to time to accommodate changes
in the Mortgage Rate or to reflect the
occurrence of certain events, and may provide
for negative amortization or accelerated
amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage
Loan may be fully amortizing or require a
balloon payment due on its stated maturity
date, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may
contain prohibitions on prepayment or require
payment of a premium or a yield maintenance
penalty in connection with a prepayment, in
each case as described in the related
Prospectus Supplement. The Mortgage Loans may
provide for payments of principal, interest or
both, on due dates that occur monthly,
quarterly, semi-annually or at such other
interval as is specified in the related
Prospectus Supplement. See "Description of the
Trust Funds--Assets."
(b) Contracts The Contracts with respect to a series of
Securities will consist of manufactured housing
installment sale contracts and installment loan
agreements secured by a security interest in a
new or used manufactured home (each, a
"Manufactured Home"), and, to the extent, if
any, indicated in the related Prospectus
Supplement, by real property. The Contracts
will not be insured or guaranteed by the
Depositor or any of its affiliates or, unless
otherwise specified in the related Prospectus
Supplement, by any governmental agency or
instrumentality or any other person. The
Manufactured Homes may be located in any of the
fifty states or any other jurisdiction
specified in the related Prospectus Supplement.
All Contracts will have been originated by
persons other than the Depositor, and all
Contracts will have been purchased, either
directly or indirectly, by the Depositor on or
before the date of initial issuance of the
related series of Securities. The related
Prospectus Supplement will indicate if any such
persons are affiliates of the Depositor. Each
Contract may provide for an annual percentage
rate thereon (a "Contract Rate") that is fixed
over its term or that adjusts as described in
the related Prospectus Supplement. The manner
of determining scheduled payments due on the
Contract will be described in the Prospectus
Supplement. The Prospectus Supplement will
describe the minimum principal balance of the
Contracts at origination and the maximum
original term to maturity of the Contracts.
(c) Government Securities If so provided in the related Prospectus
Supplement, the Trust Fund may include, in
addition to Mortgage Assets and/or Contracts,
certain direct obligations of the United
States, agencies thereof or agencies created
thereby which provide for payment of interest
and/or principal (collectively, "Government
Securities").
(d) Collection Accounts Each Trust Fund will include one or more
accounts established and maintained on behalf
of the Securityholders into which the person or
persons designated in the related Prospectus
Supplement will, to the extent described herein
and in such Prospectus Supplement, deposit all
payments and collections received or advanced
with respect to the Assets and other assets in
the Trust Fund. Such an account may be
maintained as an interest bearing or a non-
interest bearing account, and funds held
therein may be held as cash or invested in
certain short-term, investment grade
obligations, in each case as described in the
related Prospectus Supplement. See "Description
of the Agreements--Collection Account and
Related Accounts."
(e) Credit Support If so provided in the related Prospectus
Supplement, partial or full protection against
certain defaults and losses on the Assets in
the related Trust Fund may be provided to one
or more classes of Securities of the related
series in the form of subordination of one or
more other classes of Securities of such
series, which other classes may include one or
more classes of Offered Securities, or by one
or more other types of credit support that has
the effect of covering losses on Assets, such
as a letter of credit, insurance policy,
guarantee, reserve fund or another type of
credit support, or a combination thereof (any
such coverage with respect to the Securities of
any series, "Credit Support"). The amount and
types of coverage, the identification of the
entity providing the coverage (if applicable)
and related information with respect to each
type of Credit Support, if any, will be
described in the Prospectus Supplement for a
series of Securities. The Prospectus
Supplement for any series of Securities
evidencing an interest in a Trust Fund that
includes MBS will describe any similar forms of
credit support that are provided by or with
respect to, or are included as part of the
trust fund evidenced by or providing security
for, such MBS. See "Risk Factors--Credit
Support Limitations" and "Description of Credit
Support."
(f) 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, other swaps and derivative
instruments or other financial assets. The
principal terms of any such agreement (any such
agreement, a "Cash Flow Agreement"), including,
without limitation, provisions relating to the
timing, manner and amount of payments
thereunder and provisions relating to the
termination thereof, will be described in the
Prospectus Supplement for the related series.
In addition, the related Prospectus Supplement
will provide certain information with respect
to the obligor under any such Cash Flow
Agreement. The Prospectus Supplement for any
series of Securities evidencing an interest in
a Trust Fund that includes MBS will describe
any cash flow agreements that are included as
part of the trust fund evidenced by or
providing security for such MBS. See
"Description of the Trust Funds-Cash Flow
Agreements."
(g) Pre-Funding Account To the extent provided in a Prospectus
Supplement, the Depositor will be obligated
(subject only to the availability thereof) to
sell at a predetermined price, and the Trust
Fund for the related series of Securities will
be obligated to purchase (subject to the
satisfaction of certain conditions described in
the applicable Agreement), additional Assets
(the "Subsequent Assets") from time to time (as
frequently as daily) within the number of
months specified in the Prospectus Supplement
after the issuance of such series of Securities
having an aggregate principal balance
approximately equal to the amount on deposit in
the Pre-Funding Account (the "Pre-Funded
Amount") for such series on date of such
issuance.
Description of Securities Each series of Certificates will evidence an
interest in the related Trust Fund and will be
issued pursuant to a pooling and servicing
agreement or a trust agreement. Pooling and
servicing agreements and trust agreements are
referred to herein as the "Agreements." If a
series of Securities includes Notes, such Notes
will represent indebtedness of the related
Trust Fund and will be secured by a security
interest in the Assets of the Trust Fund (or a
specified group thereof) pursuant to an
indenture.
Each series of Securities will include one or
more classes. Each class of Securities (other
than certain Stripped Interest Securities, as
defined below) will have a stated principal
amount (a "Security Balance") and except for
certain Stripped Principal Securities, as
defined below, will accrue interest thereon
based on a fixed, variable or adjustable
interest rate (in the case of Certificates, a
"Pass-Through Rate"). The related Prospectus
Supplement will specify the Security Balance,
if any, and the Pass-Through Rate or interest
rate for each class of Securities or, in the
case of a variable or adjustable Pass-Through
Rate or interest rate, the method for
determining the Pass-Through Rate or interest
rate.
Distributions on Securities Each series of Securities will consist of one
or more classes of Securities that may
(i) provide for the accrual of interest thereon
based on fixed, variable or adjustable rates;
(ii) be senior (collectively, "Senior
Securities") or subordinate (collectively,
"Subordinate Securities") to one or more other
classes of Securities in respect of certain
distributions on the Securities; (iii) be
entitled to principal distributions, with
disproportionately low, nominal or no interest
distributions (collectively, "Stripped
Principal Securities"); (iv) be entitled to
interest distributions, with disproportionately
low, nominal or no principal distributions
(collectively, "Stripped Interest Securities");
(v) provide for distributions of accrued
interest thereon commencing only following the
occurrence of certain events, such as the
retirement of one or more other classes of
Securities of such series (collectively,
"Accrual Securities"); (vi) provide for
distributions of principal as described in the
related Prospectus Supplement;
and/or (vii) provide for distributions based on
a combination of two or more components thereof
with one or more of the characteristics
described in this paragraph, including a
Stripped Principal Security component and a
Stripped Interest Security component, to the
extent of available funds, in each case as
described in the related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, distributions on one or more
classes of a series of Securities may be
limited to collections from a designated
portion of the Mortgage Loans in the related
Mortgage Pool or Contracts in the related
Contract Pool (each such portion of Mortgage
Loans, a "Mortgage Loan Group" and each such
portion of the Contracts, a "Contract Group").
See "Description of the Securities--General."
Any such classes may include classes of Offered
Securities. With respect to Securities with
two or more components, references herein to
Security Balance, notional amount and Pass-
Through Rate or interest rate refer to the
principal balance, if any, notional amount, if
any, and the Pass-Through Rate or interest
rate, if any, for any such component.
The Securities will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person, unless
otherwise provided in the related Prospectus
Supplement. See "Risk Factors--Limited Assets"
and "Description of the Securities."
(a) Interest Interest on each class of Offered Securities
(other than Stripped Principal Securities and
certain classes of Stripped Interest
Securities) of each series will accrue at the
applicable Pass-Through Rate or interest rate
on the outstanding Security Balance thereof and
will be distributed to Securityholders as
provided in the related Prospectus Supplement.
The specified date on which distributions are
to be made is a "Distribution Date."
Distributions with respect to interest on
Stripped Interest Securities may be made on
each Distribution Date on the basis of a
notional amount as described in the related
Prospectus Supplement. Distributions of
interest with respect to one or more classes of
Securities may be reduced to the extent of
certain delinquencies, losses, prepayment
interest shortfalls, and other contingencies
described herein and in the related Prospectus
Supplement. See "Risk Factors--Average Life of
Securities; Prepayments; Yields," "Yield
Considerations" and "Description of the
Securities--Distributions of Interest on the
Securities."
(b) Principal The Securities of each series initially will
have an aggregate Security Balance no greater
than the outstanding principal balance of the
Assets as of, unless the related Prospectus
Supplement provides otherwise, the close of
business on the first day of the month of
formation of the related Trust Fund (the "Cut-
off Date"), after application of scheduled
payments due on or before such date, whether or
not received. The Security Balance of a
Security outstanding from time to time
represents the maximum amount that the holder
thereof is then entitled to receive in respect
of principal from future cash flow on the
assets in the related Trust Fund. Unless
otherwise provided in the related Prospectus
Supplement, distributions of principal will be
made on each Distribution Date to the class or
classes of Securities entitled thereto until
the Security Balances of such Securities have
been reduced to zero. Unless otherwise
specified in the related Prospectus Supplement,
distributions of principal of any class of
Securities will be made on a pro rata basis
among all of the Securities of such class or by
random selection, as described in the related
Prospectus Supplement or otherwise established
by the related Trustee. Stripped Interest
Securities with no Security Balance will not
receive distributions in respect of principal.
See "Description of the Securities--
Distributions of Principal of the Securities."
Risk Factors There are special considerations to be
considered in investing in the Securities. See
"Risk Factors" herein and, if applicable, in
the related Prospectus Supplement.
Advances Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will
be obligated as part of its servicing
responsibilities to make certain advances that
in its good faith judgment it deems recoverable
with respect to delinquent scheduled payments
on the Whole Loans or Contracts in such Trust
Fund. Neither the Depositor nor any of its
affiliates will have any responsibility to make
such advances. Advances made by a Master
Servicer are reimbursable generally from
subsequent recoveries in respect of such Whole
Loans or Contracts and otherwise to the extent
described herein and in the related Prospectus
Supplement. If and to the extent provided in
the Prospectus Supplement for any series, the
Master Servicer will be entitled to receive
interest on its outstanding advances, payable
from amounts in the related Trust Fund. The
Prospectus Supplement for any series of
Securities evidencing an interest in a Trust
Fund that includes MBS will describe any
corresponding advancing obligation of any
person in connection with such MBS. See
"Description of the Securities--Advances in
Respect of Delinquencies."
Termination If so specified in the related Prospectus
Supplement, a series of Securities may be
subject to optional early termination through
the repurchase of the Assets in the related
Trust Fund by the party specified therein,
under the circumstances and in the manner set
forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of
the Security Balance of a specified class or
classes of Securities to a specified percentage
or amount or on and after a date specified in
such Prospectus Supplement, the party specified
therein will solicit bids for the purchase of
all of the Assets of the Trust Fund, or of a
sufficient portion of such Assets to retire
such class or classes, or purchase such Assets
at a price set forth in the related Prospectus
Supplement. In addition, if so provided in the
related Prospectus Supplement, certain classes
of Securities may be purchased subject to
similar conditions. See "Description of the
Securities--Termination."
Registration of Securities If so provided in the related Prospectus
Supplement, one or more classes of the Offered
Securities will initially be represented by one
or more certificates or notes, as applicable,
registered in the name of Cede & Co., as the
nominee of DTC. No person acquiring an interest
in Offered Securities so registered will be
entitled to receive a definitive certificate or
note, as applicable, representing such person's
interest except in the event that definitive
certificates or notes, as applicable, are
issued under the limited circumstances
described herein. See "Risk Factors--Book-Entry
Registration" and "Description of the
Securities--Book-Entry Registration and
Definitive Securities."
Tax Status of the The Certificates of each series will constitute
Certificates as specified in the related Prospectus
Supplement, either (i) "regular interests"
("REMIC Regular Certificates") and "residual
interests" ("REMIC Residual Certificates") in a
Trust Fund treated as a real estate mortgage
investment conduit ("REMIC") under Sections 860A
through 860G of the Internal Revenue Code of
1986, as amended (the "Code"), (ii) interests
("Grantor Trust Certificates") in a Trust Fund
treated as a grantor trust under applicable
provisions of the Code, (iii) an interest in a
Trust Fund treated as a partnership for purposes
of federal and state income tax or (iv)
indebtedness of the Trust Fund for federal
income tax purposes.
(a) REMIC REMIC Regular Certificates generally will be
treated as debt obligations of the applicable
REMIC for federal income tax purposes. Certain
REMIC Regular Certificates may be issued with
original issue discount for federal income tax
purposes. See "Material Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement.
The Offered Certificates evidencing an interest
in a Trust Fund containing Mortgage Loans will
be treated as (i) assets described in section
7701(a)(19)(C) of the Code and (ii) "real
estate assets" within the meaning of section
856(c)(5)(A) of the Code, in each case to the
extent described herein and in the Prospectus.
See "Material Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
(b) Grantor Trust If the related Prospectus Supplement specifies
that the related Trust Fund will be a grantor
trust, the Trust Fund will be classified as a
grantor trust and not as an association taxable
as a corporation for federal income tax
purposes, and therefore holders of Certificates
will be treated as the owners of undivided pro
rata interests in the Assets held by the Trust
Fund.
(c) Partnership If so specified in a Prospectus Supplement, the
related Trust Fund will be treated as a
partnership for purposes of federal and state
income tax, and each Certificateholder, by the
acceptance of a Certificate of such Trust Fund,
will agree to treat the Trust Fund as a
partnership in which such Certificateholder is
a partner for federal income and state tax
purposes. Alternative characterizations of
such Trust Fund and such Certificates are
possible, but would not result in materially
adverse tax consequences to Certificateholders.
(d) Indebtednes If so specified in the related Prospectus
Supplement, the Certificates of a series will
be treated as indebtedness for federal income
tax purposes and the Certificateholder, in
accepting the Certificate, will agree to treat
such Certificate as indebtedness.
Investors are advised to consult their tax
advisors and to review "Material Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
Tax Status of Notes Unless otherwise specified in the related
Prospectus Supplement, Notes of a series will
be treated as indebtedness for federal and
state income tax purposes and the Noteholder,
in accepting the Note, will agree to treat such
Note as indebtedness. See "Material Federal
Income Tax Consequences" herein and in such
Prospectus Supplement.
Investors are advised to consult their tax
advisors and to review "Material Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
ERISA Considerations A fiduciary of an employee benefit plan and
certain other retirement plans and
arrangements, including individual retirement
accounts, annuities, Keogh plans, and
collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that is
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code should carefully
review with its legal advisors whether the
purchase or holding of Offered Securities could
give rise to a transaction that is prohibited
or is not otherwise permissible either under
ERISA or Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement. Certain classes of
Securities may not be transferred unless the
Trustee and the Depositor are furnished with a
letter of representations or an opinion of
counsel to the effect that such transfer will
not result in a violation of the prohibited
transaction provisions of ERISA and the Code
and will not subject the Trustee, the Depositor
or the Master Servicer to additional
obligations. See "Description of the
Securities--General" and "ERISA
Considerations".
Legal Investment Each Prospectus Supplement will specify which
class or classes of Offered Securities, if any,
will constitute "mortgage-related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Institutions whose investment activities are
subject to legal investment laws and
regulations or review by certain regulatory
authorities may be subject to restrictions on
investment in certain classes of the Offered
Securities. See "Legal Investment" herein and
in the related Prospectus Supplement.
Rating At the date of issuance, as to each series,
each class of Offered Securities will be rated
not lower than investment grade by one or more
nationally recognized statistical rating
agencies (each, a "Rating Agency"). See
"Rating" herein and in the related Prospectus
Supplement.
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and additional risk
factors, if any, listed under "Risk Factors" in the related Prospectus
Supplement.
Limited Liquidity
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the
Offered Securities, but has no obligation to do so. There can be no
assurance that a secondary market for the Securities of any series will
develop or, if it does develop, that it will provide holders with liquidity
of investment or will continue while Securities of such series remain
outstanding.
Limited Assets and Risk That Such Assets Will Not Be Sufficient To Pay
Securities in Full
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only
obligations with respect to the Securities or the Assets will be the
obligations (if any) of the Warranting Party (as defined herein) pursuant to
certain limited representations and warranties made with respect to the
Mortgage Loans or Contracts, the Master Servicer's and any Sub-Servicer's
servicing obligations under the related Agreement (including the limited
obligation to make certain advances in the event of delinquencies on the
Mortgage Loans or Contracts, but only to the extent deemed recoverable) and,
if and to the extent expressly described in the related Prospectus
Supplement, certain limited obligations of the Master Servicer in connection
with an agreement to purchase or act as remarketing agent with respect to a
convertible ARM Loan (as defined herein) upon conversion to a fixed rate or a
different index. Since certain representations and warranties with respect
to the Mortgage Assets or Contracts may have been made and/or assigned in
connection with transfers of such Mortgage Assets or Contracts prior to the
Closing Date, the rights of the Trustee and the Securityholders with respect
to such representations or warranties will be limited to their rights as an
assignee thereof. Unless otherwise specified in the related Prospectus
Supplement, none of the Depositor, the Master Servicer or any affiliate
thereof will have any obligation with respect to representations or
warranties made by any other entity. Unless otherwise specified in the
related Prospectus Supplement, neither the Securities nor the underlying
Assets will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Master Servicer, any Sub-Servicer
or any of their affiliates. Proceeds of the assets included in the related
Trust Fund for each series of Securities (including the Assets and any form
of credit enhancement) will be the sole source of payments on the Securities,
and there will be no recourse to the Depositor or any other entity in the
event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a
series of Securities will not have any claim against or security interest in
the Trust Funds for any other series. If the related Trust Fund is
insufficient to make payments on such Securities, no other assets will be
available for payment of the deficiency. Additionally, certain amounts
remaining in certain funds or accounts, including the Collection Account and
any accounts maintained as Credit Support, may be withdrawn under certain
conditions, as described in the related Prospectus Supplement. In the event
of such withdrawal, such amounts will not be available for future payment of
principal of or interest on the Securities. If so provided in the Prospectus
Supplement for a series of Securities consisting of one or more classes of
Subordinate Securities, on any Distribution Date in respect of which losses
or shortfalls in collections on the Assets have been incurred, the amount of
such losses or shortfalls will be borne first by one or more classes of the
Subordinate Securities, and, thereafter, by the remaining classes of
Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
See "Description of the Trust Funds".
Risk That Prepayments Will Adversely Affect Average Life and Yields of
Securities
Prepayments (including those caused by defaults) on the Assets in any
Trust Fund generally will result in a faster rate of principal payments on
one or more classes of the related Securities than if payments on such Assets
were made as scheduled. Thus, the prepayment experience on the Assets may
affect the average life of each class of related Securities. The rate of
principal payments on pools of mortgage loans or manufactured housing
contracts varies between pools and from time to time is influenced by a
variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Assets
in any Trust Fund or that the rate of payments will conform to any model
described herein or in any Prospectus Supplement. If prevailing interest
rates fall significantly below the applicable mortgage interest rates,
principal prepayments are likely to be higher than if prevailing rates remain
at or above the rates borne by the Mortgage Loans underlying or comprising
the Mortgage Assets in any Trust Fund. As a result, the actual maturity of
any class of Securities evidencing an interest in a Trust Fund containing
Mortgage Assets could occur significantly earlier than expected. The
relationship of prevailing interest rates and prepayment rates on Contracts
will be discussed in the related Prospectus Supplement. In addition, certain
prepayments may result in the collection of less interest than would
otherwise be the case in the month of prepayment.
A series of Securities may include one or more classes of Securities
with priorities of payment and, as a result, yields on other classes of
Securities, including classes of Offered Securities, of such series may be
more sensitive to prepayments on Assets. A series of Securities may include
one or more classes offered at a significant premium or discount. Yields on
such classes of Securities will be sensitive, and in some cases extremely
sensitive, to prepayments on Mortgage Assets and, where the amount of
interest payable with respect to a class is disproportionately high, as
compared to the amount of principal, as with certain classes of Stripped
Interest Securities, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A series of Securities may include one or
more classes of Securities, including classes of Offered Securities, that
provide for distribution of principal thereof from amounts attributable to
interest accrued but not currently distributable on one or more classes of
Accrual Securities and, as a result, yields on such Securities will be
sensitive to (a) the provisions of such Accrual Securities relating to the
timing of distributions of interest thereon and (b) if such Accrual
Securities accrue interest at a variable or adjustable Pass-Through Rate or
interest rate, changes in such rate.
See "Yield Considerations" herein and, if applicable, in the related
Prospectus Supplement.
Mortgage Loans and Mortgaged Properties In General -- Risk That Defaults by
Obligors or Declines in the Values of Mortgaged Properties Will Result in
Losses to Investors
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things,
a decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of
the related Mortgage Loans. If the relevant residential real estate market
should experience an overall decline in property values such that the
outstanding balances of the related Mortgage Loans, and any secondary
financing on the Mortgaged Properties, become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry in that market. In addition, in the case of
Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of deferred interest, the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by the
applicable Credit Support, if any, holders of Securities of the series
evidencing interests in the related Mortgage Loans will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal
and unpaid interest on the defaulted Mortgage Loans. Certain of the types of
Mortgage Loans may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans
provide for escalating or variable payments by the mortgagor under the
Mortgage Loan, as to which the mortgagor is generally qualified on the basis
of the initial payment amount. In some instances the Mortgagor's income may
not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase. In
addition to the foregoing, certain geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. The
Mortgage Loans underlying certain series of Securities may be concentrated in
these regions, and such concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without such concentration. Furthermore, the rate of default on Mortgage
Loans that are refinance or limited documentation mortgage loans, and on
Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Additionally, a decline in the value of the
Mortgaged Properties will increase the risk of loss particularly with respect
to any related junior Mortgage Loans. See "--Junior Mortgage Loans."
Junior Mortgage Loans -- Risk That There Will Be Reduced or No Proceeds
Available to Holders of Junior Lien Mortgage Loans
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior
lien"), may not be included in the Mortgage Pool. The primary risk to
holders of Mortgage Loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related senior lien to satisfy fully both the senior lien and the Mortgage
Loan. In the event that a holder of the senior lien forecloses on a
Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any
other sums due and owing to the holder of the senior lien. The claims of the
holder of the senior lien will be satisfied in full out of proceeds of the
liquidation of the Mortgage Loan, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of
the Mortgage Loan. If the Master Servicer were to foreclose on any Mortgage
Loan, it would do so subject to any related senior lien. In order for the
debt related to the Mortgage Loan to be paid in full at such sale, a bidder
at the foreclosure sale of such Mortgage Loan would have to bid an amount
sufficient to pay off all sums due under the Mortgage Loan and the senior
lien or purchase the Mortgaged Property subject to the senior lien. In the
event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate,
the Trust Fund, as the holder of the junior lien, and, accordingly, holders
of the Certificates, would bear the risk of delay in distributions while a
deficiency judgment against the borrower was being obtained and the risk of
loss if the deficiency judgment were not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions. In addition, a
junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the senior mortgage. See "Certain Legal
Aspects of the Mortgage Loans - Junior Mortgages".
Contracts and Manufactured Homes In General -- Risk That Depreciation in
Value of Manufactured Home Will Result in Losses
An investment in Certificates evidencing an interest in a Trust Fund
containing Contracts may be affected by, among other things, a downturn in
national, regional or local economic conditions. The geographic location of
the Manufactured Homes in any Contract Pool at origination of the related
Contract will be set forth in the related Prospectus Supplement under "The
Contract Pool". Regional and local economic conditions are often volatile
and, historically, regional and local economic conditions, as well as
national economic conditions, have affected the delinquency, loan loss and
repossession experience of manufactured housing installment sales contracts
and/or installment loan contracts (hereinafter generally referred to as
"contracts" or "manufactured housing contracts"). Moreover, regardless of
its location, manufactured housing generally depreciates in value. Thus,
such Securityholders should expect that, as a general matter, the market
value of any Manufactured Home will be lower than the outstanding principal
balance of the related Contract. Sufficiently high delinquencies and
liquidation losses on the Contracts in an Contract Pool will have the effect
of reducing, and could eliminate, the protection against loss afforded by any
credit enhancement supporting any class of the related Securities. If such
protection is eliminated with respect to a class of Securities, the holders
of such Securities will bear all risk of loss on the related Contracts and
will have to rely on the value of the related Manufactured Homes for recovery
of the outstanding principal of and unpaid interest on any defaulted
Contracts in the related Contract Pool. See "Description of Credit Support."
Security Interests and Certain Other Legal Aspects of the Contracts -- Risk
That Security Interest in Favor of Trustee Will Not Be Effective; Effect of
Violating Consumer Protection Laws
The Asset Seller in respect of a Contract will represent that such
Contract is secured by a security interest in a Manufactured Home.
Perfection of security interests in the Manufactured Homes and enforcement of
rights to realize upon the value of the Manufactured Homes as collateral for
the Contracts are subject to a number of Federal and state laws, including
the Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the security
interest in a Manufactured Home will vary from state to state. Because of
the expense and administrative inconvenience involved, the Master Servicer
will not amend any certificates of title to change the lienholder specified
therein from the Asset Seller to the Trustee and will not deliver any
certificate of title to the Trustee or note thereon the Trustee's interest.
Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home
may not be effective or such security interest may not be perfected and, in
the absence of such notation or delivery to the Trustee, the assignment of
the security interest in the Manufactured Home may not be effective against
creditors of the Asset Seller or a trustee in bankruptcy of the Asset Seller.
In addition, numerous Federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment
loan agreements such as the Contracts, and the failure by the lender or
seller of goods to comply with such requirements could give rise to
liabilities of assignees for amounts due under such agreements and claims by
such assignees may be subject to set-off as result of such lender's or
seller's noncompliance. These laws would apply to the Trustee as assignee of
the Contracts. The Asset Seller of the Contracts to the Depositor will
warrant that each Contracts complies with all requirements of law and will
make certain warranties relating to the validity, subsistence, perfection and
priority of the security interest in each Manufactured Home securing a
Contract. A breach of any such warranty that materially adversely affects
any Contract would create an obligation of the Asset Seller to repurchase
such Contract unless such breach is cured. If the Credit Support is
exhausted and recovery of amounts due on the Contracts is dependent on
repossession and resale of Manufactured Homes securing Contracts that are in
default, certain other factors may limit the ability of the
Certificateholders to realize upon the Manufactured Home or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of
the Contracts."
Credit Support Limitations -- Risk That Credit Support Will Not Cover All
Losses
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of
credit support, or combinations thereof. Use of Credit Support will be
subject to the conditions and limitations described herein and in the related
Prospectus Supplement. Moreover, such Credit Support may not cover all
potential losses or risks; for example, Credit Support may or may not cover
fraud or negligence by a mortgage loan or contract originator or other
parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce
the risk to holders of Senior Securities of delinquent distributions or
ultimate losses, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Securities of a series are made in a specified order of
priority, any limits with respect to the aggregate amount of claims under any
related Credit Support may be exhausted before the principal of the lower
priority classes of Securities of such series has been repaid. As a result,
the impact of significant losses and shortfalls on the Assets may fall
primarily upon those classes of Securities having a lower priority of
payment. Moreover, if a form of Credit Support covers more than one series of
Securities (each, a "Covered Trust"), holders of Securities evidencing an
interest in a Covered Trust will be subject to the risk that such Credit
Support will be exhausted by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Securities, including the subordination of one or more
classes of Securities, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Securities based on
an assumed level of defaults, delinquencies, other losses or other factors.
There can, however, be no assurance that the loss experience on the related
Assets will not exceed such assumed levels.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer will generally be permitted to reduce, terminate or substitute all
or a portion of the credit enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Securities by any
applicable Rating Agency may be lowered following the initial issuance
thereof as a result of the downgrading of the obligations of any applicable
Credit Support provider, or as a result of losses on the related Assets
substantially in excess of the levels contemplated by such Rating Agency at
the time of its initial rating analysis. None of the Depositor, the Master
Servicer or any of their affiliates will have any obligation to replace or
supplement any Credit Support or to take any other action to maintain any
rating of any series of Securities.
See "--Limited Nature of Ratings," "Description of the Securities" and
"Description of Credit Support."
Subordination of the Subordinate Securities; Effect of Losses on the
Subordinate Securities
The rights of Subordinate Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Master Servicer (to the extent that the
Master Servicer is paid its servicing fee, including any unpaid servicing
fees with respect to one or more prior Due Periods, and is reimbursed for
certain unreimbursed advances and unreimbursed liquidation expenses) and the
Senior Securityholders to the extent described in the related Prospectus
Supplement. As a result of the foregoing, investors must be prepared to bear
the risk that they may be subject to delays in payment and may not recover
their initial investments in the Subordinate Securities. See "Description of
the Securities--General" and "--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to
the loss experience of the Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate
and amount of such losses assumed by an investor, the yields to maturity on
the Subordinate Securities may be lower than anticipated.
Balloon Payments -- Risk That Obligor Will Not Be Able to Make Balloon
Payment
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage Loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or
to timely sell the related Mortgaged Property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale
or refinancing, the mortgagor's equity in the related Mortgaged Property, the
financial condition of the mortgagor, the value of the Mortgaged Property,
tax laws, prevailing general economic conditions and the availability of
credit for single family or multifamily real properties generally.
Certain Federal Tax Considerations Regarding REMIC Residual Certificates
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of
the taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a
taxable year in excess of the cash received during such period. Individual
holders of REMIC Residual Certificates may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. In addition, REMIC
Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the
taxable income arising in a given year on a REMIC Residual Certificate will
not be equal to the taxable income associated with investment in a corporate
bond or stripped instrument having similar cash flow characteristics and
pre-tax yield. Therefore, the after-tax yield on the REMIC Residual
Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics. Additionally,
prospective purchasers of a REMIC Residual Certificate should be aware that
recently issued temporary regulations provide restrictions on the ability to
mark-to-market certain "negative value" REMIC residual interests. See
"Material Federal Income Tax Consequences-REMICs."
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Securities of such class will receive payments to which such
Securityholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Mortgage Assets will be
made, the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
series of Securities. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an
investor purchasing a Security at a significant premium might fail to recoup
its initial investment under certain prepayment scenarios. Each Prospectus
Supplement will identify any payment to which holders of Offered Securities
of the related series are entitled that is not covered by the applicable
rating. See "Rating".
Book-Entry Registration
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be
registered in the names of the Securityholders or their nominees. Because of
this, unless and until Definitive Securities are issued, Securityholders will
not be recognized by the Trustee as "Securityholders" (as that term is to be
used in the related Agreement). Hence, until such time, Securityholders will
be able to exercise the rights of Securityholders only indirectly through DTC
and its participating organizations. See "Description of the Securities--
Book-Entry Registration and Definitive Securities.
DESCRIPTION OF THE TRUST FUNDS
Assets
The primary assets of each Trust Fund (the "Assets") will include
(i) single family and/or mortgage loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), including without limitation, Home
Equity Loans and Home Improvement Contracts, (ii) mortgage participations
("Mortgage Participations"), (iii) pass-through certificates or other
mortgage-backed securities evidencing interests in or secured by one or more
Mortgage Loans or other similar participations, certificates or securities
("MBS"), (iv) manufactured housing installment sale contracts and installment
loan agreements (the "Contracts") or (v) direct obligations of the United
States, agencies thereof or agencies created thereby which are (a) interest-
bearing securities, (b) non-interest-bearing securities, (c) originally
interest-bearing securities from which coupons representing the right to
payment of interest have been removed, or (d) interest-bearing securities
from which the right to payment of principal has been removed (the
"Government Securities"). As used herein, "Mortgage Loans" refers to both
whole Mortgage Loans (or certain balances thereof) and Mortgage Loans
underlying Mortgage Participations or MBS. Mortgage Loans that secure, or
interests in which are evidenced by, MBS are herein sometimes referred to as
"Underlying Mortgage Loans." Mortgage Loans (or certain balances thereof)
that are not Underlying Mortgage Loans are sometimes referred to as "Whole
Loans." Any pass-through certificates or other asset-backed certificates in
which an MBS evidences an interest or which secure an MBS are sometimes
referred to herein also as MBS or as "Underlying MBS." Mortgage Loans,
Mortgage Participations and MBS are sometimes referred to herein as "Mortgage
Assets." The Mortgage Assets will not be guaranteed or insured by Merrill
Lynch Mortgage Investors, Inc. (the "Depositor") or any of its affiliates or,
unless otherwise provided in the Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. Each Asset will be selected
by the Depositor for inclusion in a Trust Fund from among those purchased,
either directly or indirectly, from a prior holder thereof (an "Asset
Seller"), which may be an affiliate of the Depositor and, with respect to
Assets, which prior holder may or may not be the originator of such Mortgage
Loan or Contract or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of
any other trust fund established by the Depositor. If specified in the
related Prospectus Supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets.
Mortgage Loans
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property
consisting of a one- to four-family residential property (a "Single Family
Property" and the related Mortgage Loan a "Single Family Mortgage Loan") or
(ii) a security interests in shares issued by private cooperative housing
corporations ("Cooperatives"). If so specified in the related Prospectus
Supplement, a Mortgaged Property may include some commercial use. Mortgaged
Properties will be located, unless otherwise specified in the related
Prospectus Supplement, in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any U.S. possession. To the
extent specified in the related Prospectus Supplement, the Mortgage Loans
will be secured by first and/or junior mortgages or deeds of trust or other
similar security instruments creating a first or junior lien on Mortgaged
Property. The Mortgaged Properties may include apartments owned by
Cooperatives and leasehold interests in properties, the title to which is
held by third party lessors. Unless otherwise specified in the Prospectus
Supplement, the term of any such leasehold shall exceed the term of the
related mortgage note by at least five years. Each Mortgage Loan will have
been originated by a person (the "Originator") other than the Depositor. The
related Prospectus Supplement will indicate if any Originator is an affiliate
of the Depositor. The Mortgage Loans will be evidenced by promissory notes
(the "Mortgage Notes") secured by mortgages, deeds of trust or other security
instruments (the "Mortgages") creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance
of the Mortgage Loan to the Value of the related Mortgaged Property. The
"Value" of a Mortgaged Property, other than with respect to Refinance Loans,
is generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales
price for such property. "Refinance Loans" are loans made to refinance
existing loans. Unless otherwise set forth in the related Prospectus
Supplement, the Value of the Mortgaged Property securing a Refinance Loan is
the appraised value thereof determined in an appraisal obtained at the time
of origination of the Refinance Loan. The Value of a Mortgaged Property as of
the date of initial issuance of the related series of Certificates may be
less than the value at origination and will fluctuate from time to time based
upon changes in economic conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the type of property securing the
Mortgage Loans, (iii) the weighted average (by principal balance) of the
original and remaining terms to maturity of the Mortgage Loans, (iv) the
earliest and latest origination date and maturity date of the Mortgage Loans,
(v) the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans, (vi) the Mortgage Rates or range of Mortgage Rates and the weighted
average Mortgage Rate borne by the Mortgage Loans, (vii) the state or states
in which most of the Mortgaged Properties are located, (viii) information
with respect to the prepayment provisions, if any, of the Mortgage Loans,
(ix) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index, the frequency of the adjustment dates, the range of
margins added to the index, and the maximum Mortgage Rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Loan and (x) information regarding the payment characteristics of the
Mortgage Loans, including without limitation balloon payment and other
amortization provisions. If specific information respecting the Mortgage
Loans is not known to the Depositor at the time Securities are initially
offered, more general information of the nature described above will be
provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as
part of a Current Report on Form 8-K with the Securities and Exchange
Commission within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"), which may be secured by Mortgages that are
junior to other liens on the related Mortgaged Property and/or (ii) home
improvement installment sales contracts or installment loan agreements (the
"Home Improvement Contracts") originated by a home improvement contractor and
secured by a Mortgage on the related Mortgaged Property that is junior to
other liens on the Mortgaged Property. Except as otherwise described in the
related Prospectus Supplement, the home improvements purchased with the Home
Improvement Contracts will generally be replacement windows, house siding,
roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods and solar heating panels. The related Prospectus Supplement will
specify whether the Home Improvement Contracts are partially insured under
Title I of the National Housing Act and, if so, the limitations on such
insurance.
If specified in the related Prospectus Supplement, new draws by
borrowers under the revolving Home Equity Loans will, during a specified
period of time, automatically become part of the Trust Fund for a series. As
a result, the aggregate balance of the revolving Home Equity Loans will
fluctuate from day to day as new draws by borrowers are added to the Trust
Fund and principal payments are applied to such balances and such amounts
will usually differ each day, as more specifically described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
principal collections received on the closed-end Home Equity Loans may be
applied to purchase additional closed-end Home Equity Loans which will become
part of the Trust Fund for a series.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will (i) have individual principal balances at origination
of not less than $25,000, (ii) have original terms to maturity of not more
than 40 years and (iii) provide for payments of principal, interest or both,
on due dates that occur monthly, quarterly or semi-annually or at such other
interval as is specified in the related Prospectus Supplement. Each Mortgage
Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term
or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate or a different adjustable Mortgage Rate,
or from a fixed to an adjustable Mortgage Rate, from time to time pursuant to
an election or as otherwise specified on the related Mortgage Note, in each
case as described in the related Prospectus Supplement. Each Mortgage Loan
may provide for scheduled payments to maturity or payments that adjust from
time to time to accommodate changes in the Mortgage Rate or to reflect the
occurrence of certain events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due
on its stated maturity date, in each case as described in the related
Prospectus Supplement.
Mortgage Participations
Mortgage Participations will evidence an undivided participation
interest in Underlying Mortgage Loans. To the extent available to the
Depositor, the related Prospectus Supplement will contain information in
respect of the Underlying Mortgage Loans substantially similar to the
information described above in respect of Mortgage Loans. Such Prospectus
Supplement will also specify the amount of the participation interest and
describe the servicing provisions of the participation and servicing
agreements.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a trust agreement, an indenture or similar agreement (an "MBS
Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS Servicer")
of the underlying Mortgage Loans (or Underlying MBS) will have entered into
the MBS Agreement with a trustee or a custodian under the MBS Agreement (the
"MBS Trustee"), if any, or with the original purchaser of the interest in the
underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made
on MBS on the dates specified in the related Prospectus Supplement. The MBS
may be issued in one or more classes with characteristics similar to the
classes of Securities described in this Prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms
of credit support similar to that described for the Securities under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Underlying Mortgage Loans or
Underlying MBS evidenced by or securing such MBS and other factors and
generally will have been established for the MBS on the basis of requirements
of either any Rating Agency that may have assigned a rating to the MBS or the
initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing
interests in Mortgage Assets that include MBS will specify, to the extent
available to the Depositor, (i) the aggregate approximate initial and
outstanding principal amount or notional amount, as applicable, and type of
the MBS to be included in the Trust Fund, (ii) the original and remaining
term to stated maturity of the MBS, if applicable, (iii) whether such MBS is
entitled only to interest payments, only to principal payments or to both,
(iv) the pass-through or bond rate of the MBS or formula for determining such
rates, if any, (v) the applicable payment provisions for the MBS, including,
but not limited to, any priorities, payment schedules and subordination
features, (vi) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related Underlying Mortgage Loans, the Underlying
MBS or directly to such MBS, (viii) the terms on which the related Underlying
Mortgage Loans or Underlying MBS for such MBS or the MBS may, or are required
to, be purchased prior to their maturity, (ix) the terms on which Mortgage
Loans or Underlying MBS may be substituted for those originally underlying
the MBS, (x) the servicing fees payable under the MBS Agreement, (xi) the
type of information in respect of the Underlying Mortgage Loans described
under "--Mortgage Loans--Mortgage Loan Information in Prospectus Supplements"
above, and the type of information in respect of the Underlying MBS described
in this paragraph, (xii) the characteristics of any cash flow agreements that
are included as part of the trust fund evidenced or secured by the MBS and
(xiii) whether the MBS is in certificated form or held through a depository
such as The Depository Trust Company or the Participants Trust Company.
Each MBS will be either (i) an exempted security, (ii) a security that
has been previously registered under the Securities Act or (iii) a security
that is eligible for sale under Rule 144(k) under the Securities Act. In the
case of clauses (ii) and (iii), such security will be acquired in a secondary
market transaction not from the issuer thereof or an affiliate of such
issuer.
Contracts
General
Unless otherwise specified in the related Prospectus Supplement, each
Contract will be secured by a security interest in a new or used Manufactured
Home. Such Prospectus Supplement will specify the states or other
jurisdictions in which the Manufactured Homes are located as of the related
Cut-off Date. The method of computing the "Loan-to-Value Ratio" of a
Contract will be described in the related Prospectus Supplement.
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the
dates specified in such Prospectus Supplement and to the extent then
applicable and specifically known to the Depositor, with respect to the
Contracts, including (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Contracts
as of the applicable Cut-off Date, (ii) whether the Manufactured Homes were
new or used as of the origination of the related Contracts, (iii) the
weighted average (by principal balance) of the original and remaining terms
to maturity of the Contracts, (iv) the earliest and latest origination date
and maturity date of the Contracts, (v) the range of the Loan-to-Value Ratios
at origination of the Contracts, (vi) the Contract Rates or range of Contract
Rates and the weighted average Contract Rate borne by the Contracts, (vii)
the state or states in which most of the Manufactured Homes are located at
origination, (viii) information with respect to the prepayment provisions, if
any, of the Contracts, (ix) with respect to Contracts with adjustable
Contract Rates ("ARM Contracts"), the index, the frequency of the adjustment
dates, and the maximum Contract Rate or monthly payment variation at the time
of any adjustment thereof and over the life of the ARM Contract, and (x)
information regarding the payment characteristics of the Contracts. If
specific information respecting the Contracts is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance
thereof and will be filed as part of a Current Report on Form 8-K with the
Securities and Exchange Commission after such initial issuance.
Payment Provisions of the Contracts
Unless otherwise specified in the related Prospectus Supplement, all of
the Contracts will (i) have individual principal balances at origination of
not less than $1,000, (ii) have original terms to maturity of not more than
40 years and (iii) provide for payments of principal, interest or both, on
due dates that occur monthly or at such other interval as is specified in the
related Prospectus Supplement. Each Contract may provide for no accrual of
interest or for accrual of interest thereon at an annual percentage rate (a
"Contract Rate") that is fixed over its term or that adjusts from time to
time, or as otherwise specified in the related Prospectus Supplement. Each
Contract may provide for scheduled payments to maturity or payments that
adjust from time to time to accommodate changes in the Contract Rate as
otherwise described in the related Prospectus Supplement.
Government Securities
The Prospectus Supplement for a series of Securities evidencing
interests in Assets of a Trust Fund that include Government Securities will
specify, to the extent available, (i) the aggregate approximate initial and
outstanding principal amounts or notional amounts, as applicable, and types
of the Government Securities to be included in the Trust Fund, (ii) the
original and remaining terms to stated maturity of the Government Securities,
(iii) whether such Government Securities are entitled only to interest
payments, only to principal payments or to both, (iv) the interest rates of
the Government Securities or the formula to determine such rates, if any, (v)
the applicable payment provisions for the Government Securities and (vi) to
what extent, if any, the obligation evidenced thereby is backed by the full
faith and credit of the United States.
Pre-Funding Account
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of Securities
will be obligated to purchase (subject to the satisfaction of certain
conditions described in the applicable Agreement), additional Assets (the
"Subsequent Assets") from time to time (as frequently as daily) within the
number of months specified in the related Prospectus Supplement after the
issuance of such series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
"Pre-Funded Amount") for such series on date of such issuance.
Accounts
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreement--Collection Account and Related Accounts."
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the
related series in the form of subordination of one or more other classes of
Securities in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee, reserve fund or
another type of credit support, or a combination thereof (any such coverage
with respect to the Securities of any series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "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, other swaps and derivative
instruments or other financial assets. The principal terms of any such
agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be
described in the Prospectus Supplement for the related series. In addition,
the related Prospectus Supplement will provide certain information with
respect to the obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing
and amount of offerings of Securities will depend on a number of factors,
including the volume of Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the
weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors."
Pass-Through Rate and Interest Rate
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be
based upon the interest rates borne by the Assets in the related Trust Fund.
The Prospectus Supplement with respect to any series of Securities will
specify the Pass-Through Rate or interest rate for each class of such
Securities or, in the case of a variable or adjustable Pass-Through Rate or
interest rate, the method of determining the Pass-Through Rate or interest
rate; the effect, if any, of the prepayment of any Asset on the Pass-Through
Rate or interest rate of one or more classes of Securities; and whether the
distributions of interest on the Securities of any class will be dependent,
in whole or in part, on the performance of any obligor under a Cash Flow
Agreement.
If so specified in the related Prospectus Supplement, the effective
yield to maturity to each holder of Securities entitled to payments of
interest will be below that otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price of such Security because, while
interest may accrue on each Asset during a certain period, the distribution
of such interest will be made on a day which may be several days, weeks or
months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution
Date. As indicated above under "--Pass-Through Rate and Interest Rate," if
the Interest Accrual Period ends on a date other than the day before a
Distribution Date for the related series, the yield realized by the holders
of such Securities may be lower than the yield that would result if the
Interest Accrual Period ended on such day before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the
borrowers and involuntary liquidations). The rate at which principal
prepayments occur on the Mortgage Loans and Contracts will be affected by a
variety of factors, including, without limitation, the terms of the Mortgage
Loans and Contracts, the level of prevailing interest rates, the availability
of mortgage credit and economic, demographic, geographic, tax, legal and
other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund, such Mortgage Loans are
likely to be the subject of higher principal prepayments than if prevailing
rates remain at or above the rates borne by such Mortgage Loans. In this
regard, it should be noted that certain Assets may consist of Mortgage Loans
with different Mortgage Rates and the stated pass-through or pay-through
interest rate of certain MBS may be a number of percentage points higher or
lower than certain of the Underlying Mortgage Loans. The rate of principal
payments on some or all of the classes of Securities of a series will
correspond to the rate of principal payments on the Assets in the related
Trust Fund. Mortgage Loans with a prepayment premium provision, to the
extent enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical Mortgage Loans without such
provisions or with lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal
amounts of manufactured housing contracts are generally shorter and smaller
than the terms and principal amounts of mortgage loans secured by site-built
homes, changes in interest rates have a correspondingly smaller effect on the
amount of the monthly payments on manufactured housing contracts than on the
amount of the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and certain of the other factors mentioned above may play
a larger role in the prepayment behavior of manufactured housing contracts
than they do in the prepayment behavior of loans secured by mortgages on
site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Security offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. In either
case, if so provided in the Prospectus Supplement for a series of Securities,
the effect on yield on one or more classes of the Securities of such series
of prepayments of the Assets in the related Trust Fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to such classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan or a Contract, the obligor is
charged interest on the principal amount of the Mortgage Loan or Contract so
prepaid for the number of days in the month actually elapsed up to the date
of the prepayment. Unless otherwise specified in the related Prospectus
Supplement, the effect of prepayments in full will be to reduce the amount of
interest paid in the following month to holders of Securities entitled to
payments of interest because interest on the principal amount of any Mortgage
Loan or Contract so prepaid will be paid only to the date of prepayment
rather than for a full month. Unless otherwise specified in the related
Prospectus Supplement, a partial prepayment of principal is applied so as to
reduce the outstanding principal balance of the related Mortgage Loan or
Contract as of the Due Date in the month in which such partial prepayment is
received.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by
the investor during a given period may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are
made from any Credit Support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans or Contracts
comprising or underlying the Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes
of the Securities of the related series.
If so provided in the Prospectus Supplement for a series of Securities,
one or more classes of Securities may have a final scheduled Distribution
Date, which is the date on or prior to which the Security Balance thereof is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Securities of a series will be influenced by the rate at which
principal on the Mortgage Loans or Contracts comprising or underlying the
Assets is paid to such class, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments, in whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Mortgage Loans or Contracts comprising or
underlying the Assets in a Trust Fund. If any Mortgage Loans or Contracts
comprising or underlying the Assets in a particular Trust Fund have actual
terms to maturity less than those assumed in calculating final scheduled
Distribution Dates for the classes of Securities of the related series, one
or more classes of such Securities may be fully paid prior to their
respective final scheduled Distribution Dates, even in the absence of
prepayments. Accordingly, the prepayment experience of the Assets will, to
some extent, be a function of the mix of Mortgage Rates or Contract Rates and
maturities of the Mortgage Loans or Contracts comprising or underlying such
Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans.
A prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per
annum of the then outstanding principal balance of such loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Beginning in the thirtieth month and in
each month thereafter during the life of the loans, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the Mortgage Loans or Contracts underlying or comprising the
Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Securities of such series and the percentage of
the initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such
Prospectus Supplement, including assumptions that prepayments on the Mortgage
Loans comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR, SPA or such other standard
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Securities to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual
weighted average life of the Securities. It is unlikely that prepayment of
any Mortgage Loans or Contracts comprising or underlying the Assets for any
series will conform to any particular level of CPR, SPA or any other rate
specified in the related Prospectus Supplement.
Other Factors Affecting Weighted Average Life
Type of Mortgage Asset or Contract
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon
its ability either to refinance the loan or to sell the related Mortgaged
Property, there is a risk that a number of Mortgage Loans having balloon
payments may default at maturity. In the case of defaults, recovery of
proceeds may be delayed by, among other things, bankruptcy of the mortgagor
or adverse conditions in the market where the property is located. In order
to minimize losses on defaulted Mortgage Loans, the servicer may, to the
extent and under the circumstances set forth in the related Prospectus
Supplement, be permitted to modify Mortgage Loans that are in default or as
to which a payment default is imminent. Any defaulted balloon payment or
modification that extends the maturity of a Mortgage Loan will tend to extend
the weighted average life of the Securities, thereby lengthening the period
of time elapsed from the date of issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. With respect
to certain Contracts, the Contract Rate may be "stepped up" during its term
or may otherwise vary or be adjusted. Under the applicable underwriting
standards, the mortgagor under each Mortgage Loan or Contract generally will
be qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract
Rate. In addition, certain Mortgage Loans may be subject to temporary buydown
plans ("Buydown Mortgage Loans") pursuant to which the monthly payments made
by the mortgagor during the early years of the Mortgage Loan will be less
than the scheduled monthly payments thereon (the "Buydown Period"). The
periodic increase in the amount paid by the mortgagor of a Buydown Mortgage
Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the mortgagor, who might not have otherwise
qualified for a mortgage, and may accordingly increase the risk of default
with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition
of any such deferred interest to the principal balance of any related class
or classes of Securities will lengthen the weighted average life thereof and
may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased. In addition, with respect to certain
ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly
payment on such a Mortgage Loan would exceed the amount of scheduled
principal and accrued interest on the principal balance thereof, and since
such excess will be applied to reduce the principal balance of the related
class or classes of Securities, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof, depending
upon the price at which such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans or Contracts will also affect
the rate, timing and amount of principal payments on the Assets and thus the
yield on the Securities. In general, defaults on mortgage loans or contracts
are expected to occur with greater frequency in their early years. The rate
of default on Mortgage Loans which are refinance or limited documentation
mortgage loans, and on Mortgage Loans with high Loan-to-Value Ratios, may be
higher than for other types of Mortgage Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans and
Contracts will be affected by the general economic condition of the region of
the country in which the related Mortgage Properties or Manufactured Homes
are located. The risk of delinquencies and loss is greater and prepayments
are less likely in regions where a weak or deteriorating economy exists, as
may be evidenced by, among other factors, increasing unemployment or falling
property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms
will affect the weighted average life of the Mortgage Loans or Contracts
comprising or underlying the Assets and that of the related series of
Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan or Contract in any Trust Fund by
accepting prepayments thereon and permitting a new loan secured by a mortgage
on the same property. In the event of such a refinancing, the new loan would
not be included in the related Trust Fund and, therefore, such refinancing
would have the same effect as a prepayment in full of the related Mortgage
Loan or Contract. A Sub-Servicer or the Master Servicer may, from time to
time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In
addition, Sub-Servicers may encourage the refinancing of Mortgage Loans or
Contracts, including defaulted Mortgage Loans or Contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of such
Mortgage Loans or Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant Prospectus Supplement. A number of the Mortgage Loans comprising or
underlying the Assets may include "due-on-sale" clauses that allow the holder
of the Mortgage Loans to demand payment in full of the remaining principal
balance of the Mortgage Loans upon sale, transfer or conveyance of the
related Mortgaged Property. With respect to any Whole Loans, unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of
the conveyance or proposed conveyance of the underlying Mortgaged Property
and it is entitled to do so under applicable law; provided, however, that the
Master Servicer will not take any action in relation to the enforcement of
any due-on-sale provision which would adversely affect or jeopardize coverage
under any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Due-on-Sale
Provisions." Unless otherwise specified in the related Prospectus
Supplement, the Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Master Servicer and
permit the acceleration of the maturity of the Contracts by the Master
Servicer upon any such sale or transfer that is not consented to. Unless
otherwise specified in the related Prospectus Supplement, it is expected that
the Master Servicer will permit most transfers of Manufactured Homes and not
accelerate the maturity of the related Contracts. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
of the Manufactured Home. In the case of a transfer of a Manufactured Home
after which the Master Servicer desires to accelerate the maturity of the
related Contract, the Master Servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale" clause. See "Certain
Legal Aspects of the Contracts-Transfers of Manufactured Homes; Due-on-Sale
Clauses".
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310.
Its telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it
expected in the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the
related Trust Fund and will be issued and secured pursuant to an indenture
(an "Indenture"). Each series of Securities will consist of one or more
classes of Securities that may (i) provide for the accrual of interest
thereon based on fixed, variable or adjustable rates; (ii) be senior
(collectively, "Senior Securities") or subordinate (collectively,
"Subordinate Securities") to one or more other classes of Securities in
respect of certain distributions on the Securities; (iii) be entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions (collectively, "Stripped Principal Securities"); (iv) be
entitled to interest distributions, with disproportionately low, nominal or
no principal distributions (collectively, "Stripped Interest Securities");
(v) provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of one or
more other classes of Securities of such series (collectively, "Accrual
Securities"); (vi) provide for payments of principal as described in the
related Prospectus Supplement, from all or only a portion of the Assets in
such Trust Fund, to the extent of available funds, in each case as described
in the related Prospectus Supplement; and/or (vii) provide for distributions
based on a combination of two or more components thereof with one or more of
the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If
so specified in the related Prospectus Supplement, a Trust Fund may include
(i) additional Mortgage Loans (or certain balances thereof) that will be
transferred to the Trust from time to time and/or (ii) in the case of
revolving Home Equity loans or certain balances thereof, any additional
balances advanced to the borrowers under the revolving Home Equity loans
during certain periods. If so specified in the related Prospectus Supplement,
distributions on one or more classes of a series of Securities may be limited
to collections from a designated portion of the Whole Loans in the related
Mortgage Pool (each such portion of Whole Loans, a "Mortgage Loan Group") or
a designated portion of Contracts in the related Contract Pool (each such
portion of Contracts, a "Contract Group"). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in
the related Prospectus Supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge.
One or more classes of Securities of a series may be issued in definitive
form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus Supplement. See "Risk
Factors--Book-Entry Registration" and "Description of the Securities--
Book-Entry Registration and Definitive Securities." Definitive Securities
will be exchangeable for other Securities of the same class and series of a
like aggregate Security Balance, notional amount or percentage interest but
of different authorized denominations. See "Risk Factors--Limited Liquidity"
and "--Limited Assets."
Distributions
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made to the persons in whose names the Securities are registered at the
close of business on the last business day of the month preceding the month
in which the Distribution Date occurs (the "Record Date"), and the amount of
each distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date").
All distributions with respect to each class of Securities on each
Distribution Date will be allocated pro rata among the outstanding Securities
in such class or by random selection, as described in the related Prospectus
Supplement or otherwise established by the related Trustee. Payments will be
made either by wire transfer in immediately available funds to the account of
a Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or other person
required to make such payments no later than the date specified in the
related Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or
by check mailed to the address of the person entitled thereto as it appears
on the Security Register; provided, however, that the final distribution in
retirement of the Securities (whether Definitive Securities or Book-Entry
Securities) will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
Available Distribution Amount
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement.
Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period"
with respect to any Distribution Date will commence on the second
day of the month in which the immediately preceding Distribution
Date occurs, or the day after the Cut-off Date in the case of the
first Due Period, and will end on the first day of the month of the
related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise, all
prepayments, together with related payments of the interest thereon
and related Prepayment Premiums, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received subsequent to the
related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified
in the related Prospectus Supplement or that are payable in respect
of certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment
Period; and
(v) unless the related Prospectus Supplement provides otherwise, to the
extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or
in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not
offered hereby) on each Distribution Date, and accordingly will be released
from the Trust Fund and will not be available for any future distributions.
Distributions of Interest on the Securities
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a
different Pass-Through Rate or interest rate, which will be a fixed, variable
or adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable
Pass-Through Rate or interest rate, the method for determining the
Pass-Through Rate or interest rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Securities will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will
be made on each Distribution Date (other than any class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances,
specified in the related Prospectus Supplement, and any class of Stripped
Principal Securities that are not entitled to any distributions of interest)
based on the Accrued Security Interest for such class and such Distribution
Date, subject to the sufficiency of the portion of the Available Distribution
Amount allocable to such class on such Distribution Date. Prior to the time
interest is distributable on any class of Accrual Securities, the amount of
Accrued Security Interest otherwise distributable on such class will be added
to the Security Balance thereof on each Distribution Date. With respect to
each class of Securities and each Distribution Date (other than certain
classes of Stripped Interest Securities), "Accrued Security Interest" will be
equal to interest accrued for a specified period on the outstanding Security
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. Unless
otherwise provided in the Prospectus Supplement, Accrued Security Interest on
Stripped Interest Securities will be equal to interest accrued for a
specified period on the outstanding notional amount thereof immediately prior
to each Distribution Date, at the applicable Pass-Through Rate or interest
rate, reduced as described below. The method of determining the notional
amount for any class of Stripped Interest Securities will be described in the
related Prospectus Supplement. Reference to notional amount is solely for
convenience in certain calculations and does not represent the right to
receive any distributions of principal. Unless otherwise provided in the
related Prospectus Supplement, the Accrued Security Interest on a series of
Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on
the Mortgage Loans or Contracts comprising or underlying the Assets in the
Trust Fund for such series. The particular manner in which such shortfalls
are to be allocated among some or all of the classes of Securities of that
series will be specified in the related Prospectus Supplement. The related
Prospectus Supplement will also describe the extent to which the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the
case of Accrual Securities, that may otherwise be added to the Security
Balance of) a class of Offered Securities may be reduced as a result of any
other contingencies, including delinquencies, losses and deferred interest on
or in respect of the Mortgage Loans or Contracts comprising or underlying the
Assets in the related Trust Fund. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Security
Interest otherwise distributable on a class of Securities by reason of the
allocation to such class of a portion of any deferred interest on the
Mortgage Loans or Contracts comprising or underlying the Assets in the
related Trust Fund will result in a corresponding increase in the Security
Balance of such class. See "Risk Factors--Average Life of Securities;
Prepayments; Yields" and "Yield Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other
assets included in the related Trust Fund. The outstanding Security Balance
of a Security will be reduced to the extent of distributions of principal
thereon from time to time and, if and to the extent so provided in the
related Prospectus Supplement, by the amount of losses incurred in respect of
the related Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Securities prior to the Distribution
Date on which distributions of interest are required to commence, will be
increased by any related Accrued Security Interest. Unless otherwise provided
in the related Prospectus Supplement, the initial aggregate Security Balance
of all classes of Securities of a series will not be greater than the
outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a series
and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Distribution Date to the
class or classes of Securities entitled thereto in accordance with the
provisions described in such Prospectus Supplement until the Security Balance
of such class has been reduced to zero. Stripped Interest Securities with no
Security Balance are not entitled to any distributions of principal.
Components
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such
extent, the descriptions set forth under "--Distributions of Interests on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference
in such sections to Security Balance and Pass-Through Rate or interest rate
refer to the principal balance, if any, of any such component and the Pass-
Through Rate or interest rate, if any, on any such component, respectively.
Allocation of Losses and Shortfalls
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will
be borne first by a class of Subordinate Securities in the priority and
manner and subject to the limitations specified in such Prospectus
Supplement. See "Description of Credit Support" for a description of the
types of protection that may be included in a Trust Fund against losses and
shortfalls on Assets comprising such Trust Fund.
Advances in Respect of Delinquencies
With respect to any series of Securities evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer or another entity described therein will be required as
part of its servicing responsibilities to advance on or before each
Distribution Date its own funds or funds held in the Collection Account that
are not included in the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of payments of principal (other
than any balloon payments) and interest (net of related servicing fees and
Retained Interest) that were due on the Whole Loans or Contracts in such
Trust Fund during the related Due Period and were delinquent on the related
Determination Date, subject to the Master Servicer's (or another entity's)
good faith determination that such advances will be reimbursable from Related
Proceeds (as defined below). In the case of a series of Securities that
includes one or more classes of Subordinate Securities and if so provided in
the related Prospectus Supplement, the Master Servicer's (or another
entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's
(or another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on
other Assets otherwise distributable on one or more classes of such
Subordinate Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the
Master Servicer's (or another entity's) funds will be reimbursable only out
of related recoveries on the Mortgage Loans or Contracts (including amounts
received under any form of Credit Support) respecting which such advances
were made (as to any Mortgage Loan or Contract, "Related Proceeds") and, if
so provided in the Prospectus Supplement, out of any amounts otherwise
distributable on one or more classes of Subordinate Securities of such
series; provided, however, that any such advance will be reimbursable from
any amounts in the Collection Account prior to any distributions being made
on the Securities to the extent that the Master Servicer (or such other
entity) shall determine in good faith that such advance (a "Nonrecoverable
Advance") is not ultimately recoverable from Related Proceeds or, if
applicable, from collections on other Assets otherwise distributable on such
Subordinate Securities. If advances have been made by the Master Servicer
from excess funds in the Collection Account, the Master Servicer is required
to replace such funds in the Collection Account on any future Distribution
Date to the extent that funds in the Collection Account on such Distribution
Date are less than payments required to be made to Securityholders on such
date. If so specified in the related Prospectus Supplement, the obligations
of the Master Servicer (or another entity) to make advances may be secured by
a cash advance reserve fund, a surety bond, a letter of credit or another
form of limited guaranty. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer (or another entity) will be entitled to receive interest
at the rate specified therein on its outstanding advances and will be
entitled to pay itself such interest periodically from general collections on
the Assets prior to any payment to Securityholders or as otherwise provided
in the related Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
Reports to Securityholders
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement,
will forward or cause to be forwarded to each such holder, to the Depositor
and to such other parties as may be specified in the related Agreement, a
statement setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a
Master Servicer (and, if payable directly out of the related Trust Fund, by
any Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans or
Contracts in respect of which (a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan or Contract liquidated during the
related Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of such
Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the loan number of the related Mortgage Loan or Contract and
(b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related Mortgage
Loan or Contract immediately following such Distribution Date (calculated as
if such Mortgage Loan or Contract were still outstanding taking into account
certain limited modifications to the terms thereof specified in the
Agreement), (c) the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof and (d) if applicable, the aggregate
amount of interest accrued and payable on related servicing expenses and
related advances;
(xi) with respect to any such REO Property sold during the related
Due Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the amount
of any loss to Securityholders in respect of the related Mortgage Loan or
Contract;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been added
to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the
close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding Distribution
Date, as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xii), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Securities. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any MBS. The Prospectus Supplement for each
series of Offered Securities will describe any additional information to be
included in reports to the holders of such Securities.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the extent that substantially comparable information shall
be provided by the Master Servicer or the Trustee pursuant to any
requirements of the Code as are from time to time in force. See "Description
of the Securities--Registration and Definitive Securities."
Termination
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Whole Loan or Contract subject
thereto and (ii) the purchase of all of the assets of the Trust Fund by the
party entitled to effect such termination, under the circumstances and in the
manner set forth in the related Prospectus Supplement. In no event, however,
will the trust created by the Agreement continue beyond the date specified in
the related Prospectus Supplement. Written notice of termination of the
Agreement will be given to each Securityholder, and the final distribution
will be made only upon presentation and surrender of the Securities at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by the party specified
therein, under the circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the reduction of the
Security Balance of a specified class or classes of Securities by a specified
percentage or amount, the party specified therein will solicit bids for the
purchase of all assets of the Trust Fund, or of a sufficient portion of such
assets to retire such class or classes or purchase such class or classes at a
price set forth in the related Prospectus Supplement, in each case, under the
circumstances and in the manner set forth therein.
Book-Entry Registration and Definitive Securities
If so provided in the related Prospectus Supplement, one or more classes
of the Offered Securities of any series will be issued as Book-Entry
Securities, and each such class will be represented by one or more single
Securities registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also
is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive
all distributions on the Book-Entry Securities through DTC and its
Participants. Under a book-entry format, Security Owners will receive
payments after the related Distribution Date because, while payments are
required to be forwarded to Cede & Co., as nominee for DTC ("Cede"), on each
such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus
Supplement, the only "Securityholder" (as such term is used in the Agreement)
will be Cede, as nominee of DTC, and the Security Owners will not be
recognized by the Trustee as Securityholders under the Agreement. Security
Owners will be permitted to exercise the rights of Securityholders under the
related Agreement, Trust Agreement or Indenture, as applicable, only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry
Securities and is required to receive and transmit distributions of principal
of and interest on the Book-Entry Securities. Participants and Indirect
Participants with which Security Owners have accounts with respect to the
Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Security
Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in the Book-Entry Securities, may be limited due
to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Securityholder under an Agreement only at the direction of one
or more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Unless otherwise specified in the related Prospectus Supplement,
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees
("Definitive Securities"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or
able to properly discharge its responsibilities as depository with respect to
the Securities and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Securities, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Security Owners identified
in such instructions the Definitive Securities to which they are entitled,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax
purposes will be issued, and the related Trust Fund will be created, pursuant
to a pooling and servicing agreement (a "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer and the Trustee. The Assets of such
Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with the terms of the Pooling and Servicing Agreement. In the
context of the conveyance and servicing of the related Assets, the Pooling
and Servicing Agreement may be referred to herein as the "Agreement".
Notwithstanding the foregoing, if the Assets of the Trust Fund for such a
series consists only of Government Securities or MBS, such Assets will be
conveyed to the Trust Fund and administered pursuant to a trust agreement
between the Depositor and the Trustee (a "Trust Agreement"), which may also
be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and Notes.
Certificates that are partnership interests for tax purposes will be issued,
and the related Trust Fund will be created, pursuant to a Trust Agreement
between the Depositor and the Trustee. The Assets of the related Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a "Servicing Agreement") between the Depositor,
the Servicer and the Trustee. In the context of the conveyance and servicing
of the related Assets, a Servicing may be referred to herein as the
"Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist
only of MBS or Government Securities, such Assets will be conveyed to the
Trust Fund and administered in accordance with the terms of the Trust
Agreement, which in such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series
of Securities will be named in the related Prospectus Supplement. In any
series of Securities for which there are multiple Master Servicers, there may
also be multiple Mortgage Loan Groups or Contract Groups, each corresponding
to a particular Master Servicer; and, if the related Prospectus Supplement so
specifies, the servicing obligations of each such Master Servicer will be
limited to the Whole Loans in such corresponding Mortgage Loan Group or the
Contracts in the corresponding Contract Group. In lieu of appointing a
Master Servicer, a servicer may be appointed pursuant to the Agreement for
any Trust Fund. Such servicer will service all or a significant number of
Whole Loans or Contracts directly without a Sub-Servicer. Unless otherwise
specified in the related Prospectus Supplement, the obligations of any such
servicer shall be commensurate with those of the Master Servicer described
herein. References in this Prospectus to Master Servicer and its rights and
obligations, unless otherwise specified in the related Prospectus Supplement,
shall be deemed to also be references to any servicer servicing Whole Loans
or Contracts directly. A manager or administrator may be appointed pursuant
to the Trust Agreement for any Trust Fund to administer such Trust Fund. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund.
Forms of a Pooling and Servicing Agreement, a Sale and Servicing Agreement
and a Trust Agreement have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in
each Agreement. The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that
materially differs from the description thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Security" refers to all of the Securities of that series, whether or
not offered hereby and by the related Prospectus Supplement, unless the
context otherwise requires. The Depositor will provide a copy of the
Agreement (without exhibits) relating to any series of Securities without
charge upon written request of a holder of a Security of such series
addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest
to be received on or with respect to such Assets after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date and other
than any Retained Interest. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Depositor in exchange for the
Assets and the other assets comprising the Trust Fund for such series. Each
Asset will be identified in a schedule appearing as an exhibit to the related
Agreement. Unless otherwise provided in the related Prospectus Supplement,
such schedule will include detailed information (i) in respect of each Whole
Loan included in the related Trust Fund, including without limitation, the
address of the related Mortgaged Property and type of such property, the
Mortgage Rate and, if applicable, the applicable index, margin, adjustment
date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment,
if any, the Value and Loan-to-Value Ratio as of the date indicated and
payment and prepayment provisions, if applicable; (ii) in respect of each
Contract included in the related Trust Fund, including without limitation the
Contract number, the outstanding principal amount and the Contract Rate; and
(iii) in respect of each MBS included in the related Trust Fund, including
without limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the
pass-through or bond rate or formula for determining such rate, the issue
date and original and remaining term to maturity, if applicable, the original
and outstanding principal amount and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which unless otherwise specified in the related
Prospectus Supplement will include the original Mortgage Note endorsed,
without recourse, in blank or to the order of the Trustee, the original
Mortgage (or a certified copy thereof) with evidence of recording indicated
thereon and an assignment of the Mortgage to the Trustee in recordable form.
Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans where
the original Mortgage Note is not delivered to the Trustee if the Depositor
delivers to the Trustee or the custodian a copy or a duplicate original of
the Mortgage Note, together with an affidavit certifying that the original
thereof has been lost or destroyed. With respect to such Mortgage Loans, the
Trustee (or its nominee) may not be able to enforce the Mortgage Note against
the related borrower. Unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if
the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original Mortgage Note. Unless otherwise
provided in the related Prospectus Supplement, the related Agreement will
require the Depositor or another party specified therein to promptly cause
each such assignment of Mortgage to be recorded in the appropriate public
office for real property records, except in the State of California or in
other states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interest in the related
Whole Loan against the claim of any subsequent transferee or any successor to
or creditor of the Depositor, the Master Servicer, the relevant Asset Seller
or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or
a custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify
the Master Servicer and the Depositor, and the Master Servicer shall
immediately notify the relevant Asset Seller. If the Asset Seller cannot cure
the omission or defect within a specified number of days after receipt of
such notice, then unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be obligated, within a specified number of
days of receipt of such notice, to repurchase the related Whole Loan from the
Trustee at the Purchase Price or substitute for such Mortgage Loan. There can
be no assurance that an Asset Seller will fulfill this repurchase or
substitution obligation, and neither the Master Servicer nor the Depositor
will be obligated to repurchase or substitute for such Mortgage Loan if the
Asset Seller defaults on its obligation. Unless otherwise specified in the
related Prospectus Supplement, this repurchase or substitution obligation
constitutes the sole remedy available to the Certificateholders or the
Trustee for omission of, or a material defect in, a constituent document. To
the extent specified in the related Prospectus Supplement, in lieu of curing
any omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller may agree to cover any losses suffered by the Trust
Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified
in the related Prospectus Supplement, the documents with respect to Home
Equity Loans and Home Improvement Contracts will not be delivered to the
Trustee (or a custodian), but will be retained by the Master Servicer, which
may also be the Asset Seller. In addition, assignments of the related
Mortgages to the Trustee will not be recorded, unless otherwise provided in
the related Prospectus Supplement.
With respect to each Contract, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer (which may also be the Asset
Seller) will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest
in the Manufactured Home securing each Contract. In order to give notice of
the right, title and interest of the Trustee in the Contracts, the Depositor
will cause UCC-1 financing statements to be executed by the related Asset
Seller identifying the Depositor as secured party and by the Depositor
identifying the Trustee as the secured party and, in each case, identifying
all Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or otherwise marked
to reflect their assignment from the Company to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the interest of the Trustee in the Contracts could be defeated. See "Certain
Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Master Servicer, if the Master Servicer finds that any such document is
missing or defective in any material respect, the Master Servicer shall
immediately notify the Depositor and the relevant Asset Seller. If the Asset
Seller cannot cure the omission or defect within a specified number of days
after receipt of such notice, then unless otherwise specified in the related
Prospectus Supplement, the Asset Seller will be obligated, within a specified
number of days of receipt of such notice, to repurchase the related Contract
from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller will fulfill this repurchase
or substitution obligation, and neither the Master Servicer nor the Depositor
will be obligated to repurchase or substitute for such Contract if the asset
Seller defaults on its obligation. Unless otherwise specified in the related
Prospectus Supplement, this repurchase or substitution obligation constitutes
the sole remedy available to the Certificateholders or the Trustee for
omission of, or a material defect in, a constituent document. To the extent
specified in the related Prospectus Supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller may agree to cover any losses suffered by the Trust
Fund as a result of such breach or defect.
With respect to each Government Security or MBS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of
the Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name
of the Trustee for the benefit of the Securityholders. Unless otherwise
provided in the related Prospectus Supplement, the related Agreement will
require that either the Depositor or the Trustee promptly cause any MBS and
Government Securities in certificated form not registered in the name of the
Trustee to be re-registered, with the applicable persons, in the name of the
Trustee.
Representations and Warranties; Repurchases
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan or Contract, assign certain
representations and warranties, as of a specified date (the person making
such representations and warranties, the "Warranting Party") covering, by way
of example, the following types of matters: (i) the accuracy of the
information set forth for such Whole Loan or Contract on the schedule of
Assets appearing as an exhibit to the related Agreement; (ii) in the case of
a Whole Loan, the existence of title insurance insuring the lien priority of
the Whole Loan and, in the case of a Contract, that the Contract creates a
valid first security interest in or lien on the related Manufactured Home;
(iii) the authority of the Warranting Party to sell the Whole Loan or
Contract; (iv) the payment status of the Whole Loan or Contract; (v) in the
case of a Whole Loan, the existence of customary provisions in the related
Mortgage Note and Mortgage to permit realization against the Mortgaged
Property of the benefit of the security of the Mortgage; and (vi) the
existence of hazard and extended perils insurance coverage on the Mortgaged
Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan or
Contract may have been made as of a date prior to the applicable Cut-off
Date. A substantial period of time may have elapsed between such date and the
date of initial issuance of the related series of Certificates evidencing an
interest in such Whole Loan or Contract. Unless otherwise specified in the
related Prospectus Supplement, in the event of a breach of any such
representation or warranty, the Warranting Party will be obligated to
reimburse the Trust Fund for losses caused by any such breach or either cure
such breach or repurchase or replace the affected Whole Loan or Contract as
described below. Since the representations and warranties may not address
events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes
such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Warranting Party of any breach of
any representation or warranty made by it in respect of a Whole Loan or
Contract that materially and adversely affects the value of such Whole Loan
or Contract or the interests therein of the Securityholders. If such
Warranting Party cannot cure such breach within a specified period following
the date on which such party was notified of such breach, then such
Warranting Party will be obligated to repurchase such Whole Loan or Contract
from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor.
As to any Whole Loan or Contract, unless otherwise specified in the related
Prospectus Supplement, the "Purchase Price" is equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest thereon at the
Mortgage Rate or Contract Rate from the date as to which interest was last
paid to the due date in the Due Period in which the relevant purchase is to
occur, plus certain servicing expenses that are reimbursable to the Master
Servicer. If so provided in the Prospectus Supplement for a series, a
Warranting Party, rather than repurchase a Whole Loan or Contract as to which
a breach has occurred, will have the option, within a specified period after
initial issuance of such series of Certificates, to cause the removal of such
Whole Loan or Contract from the Trust Fund and substitute in its place one or
more other Whole Loans or Contracts, as applicable, in accordance with the
standards described in the related Prospectus Supplement. If so provided in
the Prospectus Supplement for a series, a Warranting Party, rather than
repurchase or substitute a Whole Loan or Contract as to which a breach has
occurred, will have the option to reimburse the Trust Fund or the
Securityholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement,
repurchase or substitution obligation will constitute the sole remedy
available to holders of Securities or the Trustee for a breach of
representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute
for a Whole Loan or Contract if a Warranting Party defaults on its obligation
to do so, and no assurance can be given that Warranting Parties will carry
out such obligations with respect to Whole Loans or Contracts.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as
of a specified date, with respect to such Government Securities or MBS,
covering (i) the accuracy of the information set forth therefor on the
schedule of Assets appearing as an exhibit to the related Agreement and (ii)
the authority of the Warranting Party to sell such Assets. The related
Prospectus Supplement will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Certificateholders and which continues unremedied for the number of
days specified in the Agreement after the giving of written notice of such
breach to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights (unless otherwise specified
in the related Prospectus Supplement), will constitute an Event of Default
under such Pooling and Servicing Agreement. See "Events of Default" and
"Rights Upon Event of Default."
Collection Account and Related Accounts
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and the
uninsured deposits in which are otherwise secured such that the Trustee have
a claim with respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing such funds
that is superior to the claims of any other depositors or general creditors
of the institution with which the Collection Account is maintained or
(ii) otherwise maintained with a bank or trust company, and in a manner,
satisfactory to the Rating Agency or Agencies rating any class of Securities
of such series. The collateral eligible to secure amounts in the Collection
Account is limited to United States government securities and other
investment grade obligations specified in the Agreement ("Permitted
Investments"). A Collection Account may be maintained as an interest bearing
or a non-interest bearing account and the funds held therein may be invested
pending each succeeding Distribution Date in certain short-term Permitted
Investments. Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in the Collection Account will
be paid to a Master Servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution
that is an affiliate of the Master Servicer, if applicable, provided that
such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in
the related Prospectus Supplement, a Collection Account may contain funds
relating to more than one series of mortgage pass-through certificates and
may contain other funds respecting payments on mortgage loans belonging to
the Master Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis,
unless otherwise provided in the related Agreement, the following payments
and collections received, or advances made, by the Master Servicer or the
Trustee or on its behalf subsequent to the Cut-off Date (other than payments
due on or before the Cut-off Date, and exclusive of any amounts representing
a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof retained
by a Master Servicer or a Sub-Servicer as its servicing compensation and net
of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in the Trust Fund
(to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the normal servicing
procedures of a Master Servicer or the related Sub-Servicer, subject to the
terms and conditions of the related Mortgage and Mortgage Note)
(collectively, "Insurance Proceeds") and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans in
the Trust Fund, by foreclosure or otherwise ("Liquidation Proceeds"),
together with the net proceeds on a monthly basis with respect to any
Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of Securities as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the Securities-
- -Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under "Assignment of
Assets; Repurchases" and "Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described under
"Realization Upon Defaulted Whole Loans," and all proceeds of any Asset
purchased as described under "Description of the Securities--Termination"
(also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans or Contracts in the
Trust Fund as described under "Description of the Agreements--Retained
Interest; Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment Premiums
on the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy described
under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit of
the Master Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise specified in the related Prospectus Supplement or the related
Agreement, make withdrawals from the Collection Account for each Trust Fund
for any of the following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Whole Loans or Contracts with respect to which
the advances were made or out of amounts drawn under any form of Credit
Support with respect to such Whole Loans or Contracts;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans or Contracts and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation Proceeds
and Insurance Proceeds collected on the particular Whole Loans or Contracts
and properties, and net income collected on the particular properties, with
respect to which such fees were earned or such expenses were incurred or out
of amounts drawn under any form of Credit Support with respect to such Whole
Loans or Contracts and properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause (iii) above
which, in the Master Servicer's good faith judgment, will not be recoverable
from the amounts described in clauses (ii) and (iii), respectively, such
reimbursement to be made from amounts collected on other Assets or, if and to
the extent so provided by the related Agreement and described in the related
Prospectus Supplement, just from that portion of amounts collected on other
Assets that is otherwise distributable on one or more classes of Subordinate
Securities, if any, remain outstanding, and otherwise any outstanding class
of Securities, of the related series;
(v) if and to the extent described in the related Prospectus Supplement,
to pay a Master Servicer interest accrued on the advances described in clause
(ii) above and the servicing expenses described in clause (iii) above while
such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "Certain Matters Regarding a Master Servicer and the
Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of foreclosure
or otherwise, such payments to be made out of income received on such
property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Material Federal Income Tax Consequences--REMICS--
Prohibited Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in connection
with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or substitution
as contemplated by "Assignment of Assets; Repurchase" and "Representations
and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the termination
of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by
a time specified in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, any amounts which could be
withdrawn from the Collection Account as described under "--Withdrawals"
above, may also be withdrawn from any such collection account. The
Prospectus Supplement will set forth any restrictions with respect to any
such collection account, including investment restrictions and any
restrictions with respect to financial institutions with which any such
collection account may be maintained.
Collection and Other Servicing Procedures
The Master Servicer, directly or through Sub-Servicers, is required to
make reasonable efforts to collect all scheduled payments under the Whole
Loans and will follow or cause to be followed such collection procedures as
it would follow with respect to mortgage loans that are comparable to the
Whole Loans or manufactured housing contracts comparable to the Contracts and
held for its own account, provided such procedures are consistent with
(i) the terms of the related Agreement and any related hazard insurance
policy or instrument of Credit Support, if any, included in the related Trust
Fund described herein or under "Description of Credit Support,"
(ii) applicable law and (iii) the general servicing standard specified in the
related Prospectus Supplement or, if no such standard is so specified, its
normal servicing practices (in either case, the "Servicing Standard"). In
connection therewith, the Master Servicer will be permitted in its discretion
to waive any late payment charge or penalty interest in respect of a late
payment on a Whole Loan or Contract.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to a Whole Loan;
processing assumptions or substitutions in those cases where the Master
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures or repossessions;
inspecting and managing Mortgaged Properties or Manufactured Homes under
certain circumstances; and maintaining accounting records relating to the
Whole Loans or Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of particular Whole Loans or Contracts under any
applicable instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan or Contract in a manner consistent with the Servicing Standard so
long as the modification, waiver or amendment will not (i) affect the amount
or timing of any scheduled payments of principal or interest on the Whole
Loan or Contract or (ii) in its judgment, materially impair the security for
the Whole Loan or Contract or reduce the likelihood of timely payment of
amounts due thereon. The Master Servicer also may agree to any modification,
waiver or amendment that would so affect or impair the payments on, or the
security for, a Whole Loan or Contract if, unless otherwise provided in the
related Prospectus Supplement, (i) in its judgment, a material default on the
Whole Loan or Contract has occurred or a payment default is imminent and
(ii) in its judgment, such modification, waiver or amendment is reasonably
likely to produce a greater recovery with respect to the Whole Loan or
Contract on a present value basis than would liquidation. The Master Servicer
is required to notify the Trustee in the event of any modification, waiver or
amendment of any Whole Loan or Contract.
Sub-Servicers
A Master Servicer may delegate its servicing obligations in respect of
the Whole Loans or Contracts to third-party servicers (each, a
"Sub-Servicer"), but such Master Servicer will remain obligated under the
related Agreement. Each sub-servicing agreement between a Master Servicer and
a Sub-Servicer (a "Sub-Servicing Agreement") must be consistent with the
terms of the related Agreement and must provide that, if for any reason the
Master Servicer for the related series of Securities is no longer acting in
such capacity, the Trustee or any successor Master Servicer may assume the
Master Servicer's rights and obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub- Servicer may be entitled to a Retained Interest in certain Whole Loans
or Contracts. Each Sub-Servicer will be reimbursed by the Master Servicer for
certain expenditures which it makes, generally to the same extent the Master
Servicer would be reimbursed under an Agreement. See "Retained Interest;
Servicing Compensation and Payment of Expenses."
Realization Upon Defaulted Whole Loans or Contracts
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Whole Loan or Contract which is in
default, initiate corrective action in cooperation with the mortgagor or
obligor if cure is likely, inspect the Mortgaged Property or Manufactured
Home and take such other actions as are consistent with the Servicing
Standard. A significant period of time may elapse before the Master Servicer
is able to assess the success of such corrective action or the need for
additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans or
Contracts may grant to the Master Servicer and/or the holder or holders of
certain classes of Securities a right of first refusal to purchase from the
Trust Fund at a predetermined purchase price any such Whole Loan or Contract
as to which a specified number of scheduled payments thereunder are
delinquent. Any such right granted to the holder of an Offered Security will
be described in the related Prospectus Supplement. The related Prospectus
Supplement will also describe any such right granted to any person if the
predetermined purchase price is less than the Purchase Price described under
"Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan or Contract described in
the preceding paragraph and not otherwise purchased by any person having a
right of first refusal with respect thereto, if and when the Master Servicer
determines, consistent with the Servicing Standard, that such a sale would
produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related
Agreement will provide that any such offering be made in a commercially
reasonable manner for a specified period and that the Master Servicer accept
the highest cash bid received from any person (including itself, an affiliate
of the Master Servicer or any Securityholder) that constitutes a fair price
for such defaulted Whole Loan or Contract. In the absence of any bid
determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan or
Contract as described below. Any bid in an amount at least equal to the
Purchase Price described under "Representations and Warranties; Repurchases"
will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to
a Mortgaged Property securing a Whole Loan by operation of law or otherwise
and may at any time repossess and realize upon any Manufactured Home, if such
action is consistent with the Servicing Standard and a default on such Whole
Loan or Contract has occurred or, in the Master Servicer's judgment, is
imminent.
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a
REMIC election has been made, the Master Servicer, on behalf of the Trust
Fund, will be required to sell the Mortgaged Property within three years of
acquisition, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
Trust Fund subsequent to three 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 Security is
outstanding. Subject to the foregoing, the Master Servicer will be required
to (i) solicit bids for any Mortgaged Property so acquired in such a manner
as will be reasonably likely to realize a fair price for such property and
(ii) accept the first (and, if multiple bids are contemporaneously received,
the highest) cash bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Whole Loan or Contract under any related
instrument of Credit Support is not available, the Master Servicer
nevertheless will be obligated to follow or cause to be followed such normal
practices and procedures as it deems necessary or advisable to realize upon
the defaulted Whole Loan or Contract. If the proceeds of any liquidation of
the property securing the defaulted Whole Loan or Contract are less than the
outstanding principal balance of the defaulted Whole Loan or Contract plus
interest accrued thereon at the Mortgage Rate or Contract Rate, as
applicable, plus the aggregate amount of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Whole Loan or Contract, prior to the distribution
of such Liquidation Proceeds to Securityholders, amounts representing its
normal servicing compensation on the Whole Loan or Contract, unreimbursed
servicing expenses incurred with respect to the Whole Loan or Contract and
any unreimbursed advances of delinquent payments made with respect to the
Whole Loan or Contract.
If any property securing a defaulted Whole Loan or Contract is damaged
the Master Servicer is not required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will increase
the proceeds to Securityholders on liquidation of the Whole Loan or Contract
after reimbursement of the Master Servicer for its expenses and (ii) that
such expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
As servicer of the Whole Loans or Contracts, a Master Servicer, on
behalf of itself, the Trustee and the Securityholders, will present claims to
the obligor under each instrument of Credit Support, and will take such
reasonable steps as are necessary to receive payment or to permit recovery
thereunder with respect to defaulted Whole Loans or Contracts.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan or
Contract, the Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of such proceeds, prior to
distribution thereof to Certificateholders, amounts representing its normal
servicing compensation on such Whole Loan or Contract, unreimbursed servicing
expenses incurred with respect to the Whole Loan or Contract and any
unreimbursed advances of delinquent payments made with respect to the Whole
Loan or Contract. See "Hazard Insurance Policies" and "Description of Credit
Support."
Hazard Insurance Policies
Whole Loans
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such
coverage will be in general in an amount equal to the lesser of the principal
balance owing on such Whole Loan and the amount necessary to fully compensate
for any damage or loss to the improvements on the Mortgaged Property on a
replacement cost basis, but in either case not less than the amount necessary
to avoid the application of any co-insurance clause contained in the hazard
insurance policy. The ability of the Master Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under
any other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected
by the Master Servicer under any such policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the mortgagor in accordance with the Master Servicer's normal servicing
procedures, subject to the terms and conditions of the related Mortgage and
Mortgage Note) will be deposited in the Collection Account. The Agreement
will provide that the Master Servicer may satisfy its obligation to cause
each mortgagor to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Whole Loans. If such blanket policy contains a deductible clause, the Master
Servicer will be required to deposit in the Collection Account all sums that
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike
and civil commotion, subject to the conditions and exclusions specified in
each policy. Although the policies relating to the Whole Loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin, domestic animals and
certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified
percentage, such clause generally provides that the insurer's liability in
the event of partial loss does not exceed the lesser of (i) the replacement
cost of the improvements less physical depreciation and (ii) such proportion
of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan to maintain all
such other insurance coverage with respect to the related Mortgaged Property
as is consistent with the terms of the related Mortgage and the Servicing
Standard, which insurance may typically include flood insurance (if the
related Mortgaged Property was located at the time of origination in a
federally designated flood area).
Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan
where the terms of the Mortgage Loan so permit; provided, however, that the
addition of such cost will not be taken into account for purposes of
calculating the distribution to be made to Certificateholders. Such costs may
be recovered by the Master Servicer or Sub-Servicer, as the case may be, from
the Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on
behalf of the Trustee and Certificateholders, is obligated to present or
cause to be presented claims under any blanket insurance policy insuring
against hazard losses on Mortgaged Properties securing the Whole Loans.
However, the ability of the Master Servicer to present or cause to be
presented such claims is dependent upon the extent to which information in
this regard is furnished to the Master Servicer by mortgagors.
Contracts
Except as otherwise specified in the related Prospectus Supplement, the
terms of the Agreement for a Trust Fund comprised of Contracts will require
the Master Servicer to cause to be maintained with respect to each Contract
one or more hazard insurance policies which provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that
is customary for manufactured housing, issued by a company authorized to
issue such policies in the state in which the Manufactured Home is located,
and in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the
related Contract, whichever is less; provided, however, that the amount of
coverage provided by each such hazard insurance policy shall be sufficient to
avoid the application of any co-insurance clause contained therein. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the Master
Servicer shall cause such flood insurance to be maintained, which coverage
shall be at least equal to the minimum amount specified in the preceding
sentence or such lesser amount as may be available under the federal flood
insurance program. Each hazard insurance policy caused to be maintained by
the Master Servicer shall contain a standard loss payee clause in favor of
the Master Servicer and its successors and assigns. If any obligor is in
default in the payment of premiums on its hazard insurance policy or
policies, the Master Servicer shall pay such premiums out of its own funds,
and may add separately such premium to the Obligor's obligation as provided
by the Contract, but may not add such premium to the remaining principal
balance of the Contract.
The Master Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home,
and shall maintain, to the extent that the related Contract does not require
the Obligor to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on
the obligor's interest in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies. The Master Servicer
shall pay the premium for such blanket policy on the basis described therein
and shall pay any deductible amount with respect to claims under such policy
relating to the Contracts.
Fidelity Bonds and Errors and Omissions Insurance
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees
and agents of the Master Servicer. The related Agreement will allow the
Master Servicer to self-insure against loss occasioned by the errors and
omissions of the officers, employees and agents of the Master Servicer so
long as certain criteria set forth in the Agreement are met.
Due-on-Sale Provisions
The Whole Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Whole Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will generally enforce any due-on-sale clause to the extent
it has knowledge of the conveyance or proposed conveyance of the underlying
Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize coverage under any applicable insurance
policy. Unless otherwise specified in the related Prospectus Supplement, any
fee collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale and Due-on-Encumbrance." The Contracts may also contain
such clauses. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will permit such transfer so long as the
transferee satisfies the Master Servicer's then applicable underwriting
standards. The purpose of such transfers is often to avoid a default by the
transferring obligor. See "Certain Legal Aspects of the Contracts--Transfers
of Manufactured Homes; Enforceability of Due-on-Sale Clauses".
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion
of the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust
Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Securities will come from the periodic payment to it
of a portion of the interest payment on each Asset. Since any Retained
Interest and a Master Servicer's primary compensation are percentages of the
principal balance of each Asset, such amounts will decrease in accordance
with the amortization of the Assets. The Prospectus Supplement with respect
to a series of Securities evidencing interests in a Trust Fund that includes
Whole Loans or Contracts may provide that, as additional compensation, the
Master Servicer or the Sub-Servicers may retain all or a portion of
assumption fees, modification fees, late payment charges or Prepayment
Premiums collected from mortgagors and any interest or other income which may
be earned on funds held in the Collection Account or any account established
by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets,
including, without limitation, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in
connection with distributions and reports to Securityholders, and payment of
any other expenses described in the related Prospectus Supplement. Certain
other expenses, including certain expenses relating to defaults and
liquidations on the Whole Loans or Contracts and, to the extent so provided
in the related Prospectus Supplement, interest thereon at the rate specified
therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Whole
Loans or Contracts in the related Trust Fund during such period prior to
their respective due dates therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Whole Loans or Contracts
will provide that on or before a specified date in each year, beginning with
the first such date at least six months after the related Cut-off Date, a
firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with either the Uniform Single
Attestation Program for Mortgage Bankers, the Audit Program for Mortgages
serviced for the Federal Home Loan Mortgage Corporation ("FHLMC") or such
other program used by the Master Servicer, the servicing by or on behalf of
the Master Servicer of mortgage loans under agreements substantially similar
to each other (including the related Agreement) was conducted in compliance
with the terms of such agreements or such program except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform
Single Attestation Program for Mortgage Bankers, or such other program
requires it to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of mortgage loans by Sub-Servicers,
upon comparable statements for examinations conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers
or the Audit Program for Mortgages serviced for FHLMC or such other program
used by such Sub-Servicer (rendered within one year of such statement) of
firms of independent public accountants with respect to the related
Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding
calendar year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus
Supplement.
Certain Matters Regarding a Master Servicer and the Depositor
The Master Servicer, if any, or a servicer for substantially all the
Whole Loans or Contracts under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer (or as such
servicer) may be an affiliate of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to the Master Servicer shall be deemed to be to the servicer
of substantially all of the Whole Loans or Contracts, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Master Servicer so causing such
a conflict being of a type and nature carried on by the Master Servicer at
the date of the Agreement. No such resignation will become effective until
the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the
Depositor nor any director, officer, employee, or agent of a Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Security holders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be
protected against any breach of a representation, warranty or covenant made
in such Agreement, or against any liability specifically imposed thereby, or
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations
or duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Unless otherwise specified in the related Prospectus
Supplement, each Agreement will further provide that any Master Servicer, the
Depositor and any director, officer, employee or agent of a Master Servicer
or the Depositor will be entitled to indemnification by the related Trust
Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
Securities; provided, however, that such indemnification will not extend to
any loss, liability or expense (i) specifically imposed by such Agreement or
otherwise incidental to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of an
enforcement action in respect of any specific Whole Loan or Whole Loans or
Contract or Contracts (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to such Agreement); (ii) incurred in
connection with any breach of a representation, warranty or covenant made in
such Agreement; (iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder, or by
reason of reckless disregard of such obligations or duties; (iv) incurred in
connection with any violation of any state or federal securities law; or (v)
imposed by any taxing authority if such loss, liability or expense is not
specifically reimbursable pursuant to the terms of the related Agreement. In
addition, each Agreement will provide that neither any Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. Any such Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
the Master Servicer or the Depositor, as the case may be, will be entitled to
be reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged
or consolidated, or any person resulting from any merger or consolidation to
which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be
the successor of the Master Servicer or the Depositor, as the case may be,
under the related Agreement.
Events of Default under the Agreement
Unless otherwise provided in the related Prospectus Supplement for a
Trust Fund that includes Whole Loans or Contracts, Events of Default under
the related Agreement will include (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders, or to remit to the
Trustee or Indenture Trustee, as applicable, for distribution to
Securityholders, any required payment that continues after a grace period, if
any; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any of its other covenants or obligations under the
Agreement which continues unremedied for thirty days after written notice of
such failure has been given to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Securities evidencing not less than 25% of the Voting Rights;
(iii) any breach of a representation or warranty made by the Master Servicer
under the Agreement which materially and adversely affects the interests of
Securityholders and which continues unremedied for thirty days (or such
longer period specified in the related Prospectus Supplement) after written
notice of such breach has been given to the Master Servicer by the Trustee or
the Depositor, or to the Master Servicer, the Depositor and the Trustee by
the holders of Securities evidencing not less than 25% of the Voting Rights;
and (iv) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by or on
behalf of the Master Servicer indicating its insolvency or inability to pay
its obligations. Material variations to the foregoing Events of Default
(other than to shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Trustee shall, not later than the
later of 60 days after the occurrence of any event which constitutes or, with
notice or lapse of time or both, would constitute an Event of Default and
five days after certain officers of the Trustee become aware of the
occurrence of such an event, transmit by mail to the Depositor and all
Securityholders of the applicable series notice of such occurrence, unless
such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
Rights Upon Event of Default under the Agreement
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities evidencing not less than 51% (or such other percentage specified
in the related Prospectus Supplement) of the Voting Rights, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer
under the Agreement and in and to the Mortgage Loans or Contracts (other than
as a Securityholder or as the owner of any Retained Interest), whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities
of the Master Servicer under the Agreement (except that if the Trustee is
prohibited by law from obligating itself to make advances regarding
delinquent Mortgage Loans or Contracts, or if the related Prospectus
Supplement so specifies, then the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, in the event that
the Trustee is unwilling or unable so to act, it may or, at the written
request of the holders of Securities entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting
Rights, it shall appoint, or petition a court of competent jurisdiction for
the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least
$15,000,000 (or such other amount specified in the related Prospectus
Supplement) to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity.
The Trustee and any such successor may agree upon the servicing compensation
to be paid, which in no event may be greater than the compensation payable to
the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights
allocated to the respective classes of Securities affected by any Event of
Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default involving a failure to distribute a required payment
to Securityholders described in clause (i) under "Events of Default" may be
waived only by all of the Securityholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given
to the Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the
Trustee for sixty days (or such other number of days specified in the related
Prospectus Supplement) has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of
the trusts or powers vested in it by any Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the holders of Securities covered by such Agreement,
unless such Securityholders have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Securities covered by the Agreement, (i) to
cure any ambiguity or mistake, (ii) to correct, modify or supplement any
provision therein which may be inconsistent with any other provision therein
or with the related Prospectus Supplement, (iii) to make any other provisions
with respect to matters or questions arising under the Agreement which are
not materially inconsistent with the provisions thereof, or (iv) to comply
with any requirements imposed by the Code; provided that, in the case of
clause (iii), such amendment will not (as evidenced by an opinion of counsel
to such effect) adversely affect in any material respect the interests of any
holder of Securities covered by the Agreement. Unless otherwise specified in
the related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer, if any, and the Trustee, with the consent of
the holders of Securities affected thereby evidencing not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, for any purpose; provided, however, that unless otherwise
specified in the related Prospectus Supplement, no such amendment may
(i) reduce in any manner the amount of or delay the timing of, payments
received or advanced on Mortgage Loans or Contracts which are required to be
distributed on any Security without the consent of the holder of such
Security or (ii) reduce the consent percentages described in this paragraph
without the consent of the holders of all Securities covered by such
Agreement then outstanding. However, with respect to any series of Securities
as to which a REMIC election is to be made, the Trustee will not consent to
any amendment of the Agreement unless it shall first have received an opinion
of counsel to the effect that such amendment will not 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 Securities are
outstanding.
The Trustee
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have
a banking relationship with the Depositor and its affiliates and with any
Master Servicer and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of any Agreement or Trust Agreement, the Securities or any Asset
or related document and is not accountable for the use or application by or
on behalf of any Master Servicer of any funds paid to the Master Servicer or
its designee in respect of the Securities or the Assets, or deposited into or
withdrawn from the Collection Account or any other account by or on behalf of
the Master Servicer. If no Event of Default has occurred and is continuing,
the Trustee is required to perform only those duties specifically required
under the related Agreement or Trust Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement or Trust
Agreement, as applicable.
Certain Matters Regarding the Trustee
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the Trustee's (i) enforcing its
rights and remedies and protecting the interests, of the Securityholders
during the continuance of an Event of Default, (ii) defending or prosecuting
any legal action in respect of the related Agreement or series of Securities
(iii) being the mortgagee of record with respect to the Mortgage Loans in a
Trust Fund and the owner of record with respect to any Mortgaged Property
acquired in respect thereof for the benefit of Securityholders, or
(iv) acting or refraining from acting in good faith at the direction of the
holders of the related series of Securities entitled to not less than 25% (or
such other percentage as is specified in the related Agreement with respect
to any particular matter) of the Voting Rights for such series; provided,
however, that such indemnification will not extend to any loss, liability or
expense that constitutes a specific liability of the Trustee pursuant to the
related Agreement, or to any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence on the part of the Trustee in
the performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a
breach of any representation, warranty or covenant of the Trustee made
therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, or if
a change in the financial condition of the Trustee has adversely affected or
will adversely affect the rating on any class of the Securities, then the
Depositor may remove the Trustee and appoint a successor trustee acceptable
to the Master Servicer, if any. Holders of the Securities of any series
entitled to at least 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series may at any time
remove the Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
Certain Terms of the Indenture
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any
principal of or interest on any Note of such series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
series having been incorrect in a material respect as of the time made, and
such breach is not cured within sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or
the holders of a majority of the then aggregate outstanding amount of the
Notes of such series may declare the principal amount (or, if the Notes of
that series are Accrual Securities, such portion of the principal amount as
may be specified in the terms of that series, as provided in the related
Prospectus Supplement) of all the Notes of such series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of a majority in aggregate outstanding amount of
the Notes of such series.
If, following an Event of Default with respect to any series of Notes,
the Notes of such series have been declared to be due and payable, the
Indenture Trustee may, in its discretion, notwithstanding such acceleration,
elect to maintain possession of the collateral securing the Notes of such
series and to continue to apply distributions on such collateral as if there
had been no declaration of acceleration if such collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of such series as they would have become due if there had not been such
a declaration. In addition, the Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an Event of
Default, other than a default in the payment of any principal or interest on
any Note of such series for thirty (30) days or more, unless (a) the holders
of 100% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such series at the date of such sale or
(c) the Indenture Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of
662/3% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days
(or such other number of days specified in the related Prospectus Supplement)
or more in the payment of principal of or interest on the Notes of a series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for distribution to the Noteholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless
such holders offered to the Indenture Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities which might be
incurred by it in complying with such request or direction. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority of the then aggregate outstanding amount
of the Notes of such series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Notes of such series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such series
may, in certain cases, waive any default with respect thereto, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of such series
affected thereby.
Discharge of the Indenture. The Indenture will be discharged with
respect to a series of Notes (except with respect to certain continuing
rights specified in the Indenture) upon the delivery to the Indenture Trustee
for cancellation of all the Notes of such series or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for
the payment in full of all of the Notes of such series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such series, to replace stolen, lost or mutilated Notes of
such series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the
Notes of such series on the maturity date for such Notes and any installment
of interest on such Notes in accordance with the terms of the Indenture and
the Notes of such series. In the event of any such defeasance and discharge
of Notes of such series, holders of Notes of such series would be able to
look only to such money and/or direct obligations for payment of principal
and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each
series of Notes will be required to mail each year to all related Noteholders
a brief report relating to its eligibility and qualification to continue as
Indenture Trustee under the related Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by such Indenture
Trustee as such and any action taken by it that materially affects such Notes
and that has not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will
be specified in the related Prospectus Supplement. The Indenture Trustee for
any series may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee for such series. The Depositor may
also remove any such Indenture Trustee if such Indenture Trustee ceases to be
eligible to continue as such under the related Indenture or if such Indenture
Trustee becomes insolvent. In such circumstances the Depositor will be
obligated to appoint a successor trustee for the applicable series of Notes.
Any resignation or removal of the Indenture Trustee and appointment of a
successor trustee for any series of Notes does not become effective until
acceptance of the appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates or the
Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
General
For any series of Securities Credit Support may be provided with respect
to one or more classes thereof or the related Assets. Credit Support may be
in the form of the subordination of one or more classes of Securities,
letters of credit, insurance policies, guarantees, the establishment of one
or more reserve funds or another method of Credit Support described in the
related Prospectus Supplement, or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of Credit Support may
be structured so as to be drawn upon by more than one series to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Securities the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Security
Balance of the Securities and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Securityholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities (each, a "Covered Trust"), holders of Securities
evidencing interests in any of such Covered Trusts will be subject to the
risk that such Credit Support will be exhausted by the claims of other
Covered Trusts prior to such Covered Trust receiving any of its intended
share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of
coverage under such Credit Support, (b) any conditions to payment thereunder
not otherwise described herein, (c) the conditions (if any) under which the
amount of coverage under such Credit Support may be reduced and under which
such Credit Support may be terminated or replaced and (d) the material
provisions relating to such Credit Support. Additionally, the related
Prospectus Supplement will set forth certain information with respect to the
obligor under any instrument of Credit Support, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of
its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See "Risk Factors--Credit Support Limitations--Risk
That Credit Support Will Not Cover All Losses."
Subordinate Securities
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Securities to receive distributions of principal and
interest from the Collection Account on any Distribution Date will be
subordinated to such rights of the holders of Senior Securities. If so
provided in the related Prospectus Supplement, the subordination of a class
may apply only in the event of (or may be limited to) certain types of losses
or shortfalls. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a class or classes of Subordinate
Securities in a series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of subordination will
be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group
of Assets prior to distributions on Subordinate Securities evidencing
interests in a different group of 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
If so provided in the Prospectus Supplement for a series of Securities,
the Whole Loans or Contracts in the related Trust Fund will be covered for
various default risks by insurance policies or guarantees.
Letter of Credit
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the
"L/C Bank"). Under a letter of credit, the L/C Bank will be obligated to
honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified
in the related Prospectus Supplement of the aggregate principal balance of
the Assets on the related Cut-off Date or of the initial aggregate Security
Balance of one or more classes of Securities. If so specified in the related
Prospectus Supplement, the letter of credit may permit draws in the event of
only certain types of losses and shortfalls. The amount available under the
letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Securities will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Securities of the related
series, timely distributions of interest and/or full distributions of
principal on the basis of a schedule of principal distributions set forth in
or determined in the manner specified in the related Prospectus Supplement.
Reserve Funds
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by one or more reserve funds in which cash, a
letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Certificates. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide limited protection against only certain types of
losses and shortfalls. Following each Distribution Date amounts in a reserve
fund in excess of any amount required to be maintained therein may be
released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement and will not be available for
further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund
may be applied to make distributions to Securityholders and use of investment
earnings from the Reserve Fund, if any.
Credit Support with respect to MBS
If so provided in the Prospectus Supplement for a series of Securities,
the MBS in the related Trust Fund and/or the Mortgage Loans underlying such
MBS may be covered by one or more of the types of Credit Support described
herein. The related Prospectus Supplement will specify as to each such form
of Credit Support the information indicated above with respect thereto, to
the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain state law legal aspects of loans secured by single-family
or multi-family residential properties. Because such legal aspects are
governed primarily by the applicable laws of the state in which the related
Mortgaged Property is located (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the
security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws
governing the Mortgage Loans. See "Description of the Trust Funds--Assets."
General
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which
may be mortgages, deeds of trust, security deeds or deeds to secure debt,
depending upon the prevailing practice and law in the state in which the
Mortgaged Property is located. Mortgages, deeds of trust and deeds to secure
debt are herein collectively referred to as "mortgages." Any of the foregoing
types of mortgages will create a lien upon, or grant a title interest in, the
subject property, the priority of which will depend on the terms of the
particular security instrument, as well as separate, recorded, contractual
arrangements with others holding interests in the mortgaged property, the
knowledge of the parties to such instrument as well as the order of
recordation of the instrument in the appropriate public recording office.
However, recording does not generally establish priority over governmental
claims for real estate taxes and assessments and other charges imposed under
governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of
a mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a
deed to secure debt. Under a deed of trust, the mortgagor grants the
property, irrevocably until the debt is paid, in trust, generally with a
power of sale as security for the indebtedness evidenced by the related note.
A deed to secure debt typically has two parties. By executing a deed to
secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the
underlying debt is repaid, generally with a power of sale as security for the
indebtedness evidenced by the related mortgage note. In case the mortgagor
under a mortgage is a land trust, there would be an additional party because
legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the mortgagor. At origination of a mortgage loan
involving a land trust, the mortgagor executes a separate undertaking to make
payments on the mortgage note. The mortgagee's authority under a mortgage,
the trustee's authority under a deed of trust and the grantee's authority
under a deed to secure debt are governed by the express provisions of the
mortgage, the law of the state in which the real property is located, certain
federal laws (including, without limitation, the Soldiers' and Sailors' Civil
Relief Act of 1940) and, in some cases, in deed of trust transactions, the
directions of the beneficiary.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property
such as a tenant's interest in a lease of land or improvements, or both, and
the leasehold estate created by such lease. An instrument covering an
interest in real property other than the fee estate requires special
provisions in the instrument creating such interest or in the mortgage, deed
of trust, security deed or deed to secure debt, to protect the mortgagee
against termination of such interest before the mortgage, deed of trust,
security deed or deed to secure debt is paid. Unless otherwise specified in
the Prospectus Supplement, the Depositor or the Asset Seller will make
certain representations and warranties in the Agreement with respect to any
Mortgage Loans that are secured by an interest in a leasehold estate. Such
representation and warranties, if applicable, will be set forth in the
Prospectus Supplement.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Offered Securities, the Mortgage Loans may also consist of cooperative
apartment loans ("Cooperative Loans") secured by security interests in shares
issued by a cooperative housing corporation (a "Cooperative") and in the
related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. The
security agreement will create a lien upon, or grant a title interest in, the
property which it covers, the priority of which will depend on the terms of
the particular security agreement as well as the order of recordation of the
agreement in the appropriate recording office. Such a lien or title interest
is not prior to the lien for real estate taxes and assessments and other
charges imposed under governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate
dwelling units therein. The cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building or
underlying land, as is generally the case, or an underlying lease of the
land, as is the case in some instances, the cooperative, as property
mortgagor, or lessee, as the case may be, is also responsible for meeting
these mortgage or rental obligations. A blanket mortgage is ordinarily
incurred by the cooperative in connection with either the construction or
purchase of the cooperative's apartment building or obtaining of capital by
the cooperative. The interest of the occupant under proprietary leases or
occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and
to the interest of the holder of a land lease. If the cooperative is unable
to meet the payment obligations (i) arising under a blanket mortgage, the
mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity.
The inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability
of the cooperative to extend its term or, in the alternative, to purchase the
land could lead to termination of the cooperatives's interest in the property
and termination of all proprietary leases and occupancy agreement. In either
event, a foreclosure by the holder of a blanket mortgage or the termination
of the underlying lease could eliminate or significantly diminish the value
of any collateral held by the lender that financed the purchase by an
individual tenant stockholder of cooperative shares or, in the case of the
Mortgage Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units.
Generally, a tenant-stockholder of a cooperative must make a monthly payment
to the cooperative representing such tenant-stockholder's pro rata share of
the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory note and secured
by an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related cooperative shares.
The lender generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue
for judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-
stockholder as an individual as provided in the security agreement covering
the assignment of the proprietary lease or occupancy agreement and the pledge
of cooperative shares. See "Foreclosure--Cooperatives" below.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated
by the service of legal pleadings upon all parties having an interest of
record in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged
property, the proceeds of which are used to satisfy the judgment. Such sales
are made in accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court
may alter the specific terms of a loan to the extent it considers necessary
to prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to
determine the cause of the mortgagor's default and the likelihood that the
mortgagor will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's and have required that lenders
reinstate loans or recast payment schedules in order to accommodate
mortgagors who are suffering from a temporary financial disability. In other
cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the mortgagor failed to
maintain the mortgaged property adequately or the mortgagor executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to
it. Finally, some courts have been faced with the issue of whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a
public sale under a mortgage providing for a power of sale does not involve
sufficient state action to afford constitutional protections to the
mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may
also be contained in any other type of mortgage instrument. A power of sale
allows a non-judicial public sale to be conducted generally following a
request from the beneficiary/lender to the trustee to sell the property upon
any default by the mortgagor under the terms of the mortgage note or the
mortgage instrument and after notice of sale is given in accordance with the
terms of the mortgage instrument, as well as applicable state law. In some
states, prior to such sale, the trustee under a deed of trust must record a
notice of default and notice of sale and send a copy to the mortgagor and to
any other party who has recorded a request for a copy of a notice of default
and notice of sale. In addition, in some states the trustee must provide
notice to any other party having an interest of record in the real property,
including junior lienholders. A notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. The mortgagor or junior lienholder may then have the right,
during a reinstatement period required in some states, to cure the default by
paying the entire actual amount in arrears (without acceleration) plus the
expenses incurred in enforcing the obligation. In other states, the mortgagor
or the junior lienholder is not provided a period to reinstate the loan, but
has only the right to pay off the entire debt to prevent the foreclosure
sale. Generally, the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods are
governed by state law and vary among the states. Foreclosure of a deed to
secure debt is also generally accomplished by a non-judicial sale similar to
that required by a deed of trust, except that the lender or its agent, rather
than a trustee, is typically empowered to perform the sale in accordance with
the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such
property at the time of sale, due to, among other things, redemption rights
which may exist and the possibility of physical deterioration of the property
during the foreclosure proceedings. For these reasons, it is common for the
lender to purchase the mortgaged property for an amount equal to or less than
the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs
and expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property.
For example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions,
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, a lender commonly incurs substantial
legal fees and court costs in acquiring a mortgaged property through
contested foreclosure and/or bankruptcy proceedings. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required
to pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will
be subject to all senior mortgages, prior liens and certain governmental
liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage under which the sale
was conducted. Any proceeds remaining after satisfaction of senior mortgage
debt are generally payable to the holders of junior mortgages and other liens
and claims in order of their priority, whether or not the mortgagor is in
default. Any additional proceeds are generally payable to the mortgagor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgage or a subsequent ancillary
proceeding or may require the institution of separate legal proceedings by
such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have
an interest in the property which is subordinate to the mortgage being
foreclosed, from exercise of their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage
has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having an interest which is subordinate to that of
the foreclosing mortgagee have an equity of redemption and may redeem the
property by paying the entire debt with interest. In addition, in some
states, when a foreclosure action has been commenced, the redeeming party
must pay certain costs of such action. Those having an equity of redemption
must generally be made parties and joined in the foreclosure proceeding in
order for their equity of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be authorized if the former mortgagor
pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser from a foreclosure sale or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund
or a part thereof as a REMIC, the Agreement will permit foreclosed property
to be held for more than three years if the Internal Revenue Service grants
an extension of time within which to sell such property or independent
counsel renders an opinion to the effect that holding such property for such
additional period is permissible under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as
set forth in the Cooperative's Certificate of Incorporation and By-laws, as
well as the proprietary lease or occupancy agreement, and may be cancelled by
the cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such tenant-
stockholder. The proprietary lease or occupancy agreement generally permit
the Cooperative to terminate such lease or agreement in the event an obligor
fails to make payments or defaults in the performance of covenants required
thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from the sale of the Cooperative
apartment, subject, however, to the Cooperative's right to sums due under
such proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-
stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner
will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the
method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the Cooperatives to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction
plan, some states require that a purchaser at a foreclosure sale take the
property subject to rent control and rent stabilization laws which apply to
certain tenants who elected to remain in the building was so converted.
Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are subordinate to first or other senior mortgages or deeds
of trust held by other lenders. The rights of the Trust Fund as the holder of
a junior deed of trust or a junior mortgage are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the
defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust
and the junior mortgage or deed of trust, the terms of the first mortgage or
deed of trust will generally govern. Upon a failure of the mortgagor or
trustor to perform any of its obligations, the senior mortgagee or
beneficiary, subject to the terms of the senior mortgage or deed of trust,
may have the right to perform the obligation itself. Generally, all sums so
expended by the mortgagee or beneficiary become part of the indebtedness
secured by the mortgage or deed of trust. To the extent a first mortgagee
expends such sums, such sums will generally have priority over all sums due
under the junior mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment
against the mortgagor following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former mortgagor
equal to the difference between the net amount realized upon the public sale
of the real property and the amount due to the lender. Some states require
the lender to exhaust the security afforded under a mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action
against the mortgagor. In certain other states, the lender has the option of
bringing a personal action against the mortgagor on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the mortgagor. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor following a judicial sale to
the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally
to prevent a lender from obtaining a large deficiency judgment against the
former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere
with or affect the ability of the secured mortgage lender to realize upon
collateral or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 rehabilitative
plan to cure a monetary default in respect of a mortgage loan on a debtor's
residence by paying arrearages within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the
lender accelerated the mortgage loan and final judgment of foreclosure had
been entered in state court (provided no sale of the residence had yet
occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing the lender's
security interest to the value of the residence, thus leaving the lender a
general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to
mortgage payment arrearages, which may be cured within a reasonable time
period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose
specific statutory liabilities upon lenders who originate mortgage loans and
who fail to comply with the provisions of the law. In some cases this
liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award
unless the creditor establishes that the sale of the collateral (which, in
the case of a Cooperative Loan, would be the shares of the Cooperative and
the related proprietary lease or occupancy agreement) was conducted in a
commercially reasonable manner.
Environmental Legislation
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such
a lien will generally have priority over all subsequent liens on the property
and, in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event
that title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund
was acquired by the Trust Fund and cleanup costs were incurred in respect of
the Mortgaged Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust Fund.
Due-on-Sale Clauses
Unless the related Prospectus Supplement indicates otherwise, the
Mortgage Loans will contain due-on-sale clauses. These clauses generally
provide that the lender may accelerate the maturity of the loan if the
mortgagor sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, with respect to certain loans the
Garn-St Germain Depository Institutions Act of 1982 preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in
accordance with their terms, subject to certain limited exceptions. Due-on-
sale clauses contained in mortgage loans originated by federal savings and
loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded
by the Office of Thrift Supervision, which preempt state law restrictions on
the enforcement of such clauses. Similarly, "due-on-sale" clauses in
mortgage loans made by national banks and federal credit unions are now fully
enforceable pursuant to preemptive regulations of the Comptroller of the
Currency and the National Credit Union Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a
junior encumbrance. Regulations promulgated under the Garn-St Germain Act
also prohibit the imposition of a prepayment penalty upon the acceleration of
a loan pursuant to a due-on-sale clause. The inability to enforce a
"due-on-sale" clause may result in a mortgage that bears an interest rate
below the current market rate being assumed by a new home buyer rather than
being paid off, which may affect the average life of the Mortgage Loans and
the number of Mortgage Loans which may extend to maturity.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the
mortgagor may have difficulty servicing and repaying multiple loans. In
addition, if the junior loan permits recourse to the mortgagor (as junior
loans often do) and the senior loan does not, a mortgagor may be more likely
to repay sums due on the junior loan than those on the senior loan. Second,
acts of the senior lender that prejudice the junior lender or impair the
junior lender's security may create a superior equity in favor of the junior
lender. For example, if the mortgagor and the senior lender agree to an
increase in the principal amount of or the interest rate payable on the
senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the mortgagor is additionally burdened.
Third, if the mortgagor defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of
a junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose
interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would
not apply to such mortgage loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given
effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this
statutory scheme, the mortgagor may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in
the invalidation of the transaction, thereby permitting the mortgagor to
cancel the recorded mortgage or deed of trust without any payment or
prohibiting the lender from foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally
chartered lenders have historically been subject to a variety of
restrictions. Such restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage
instrument originated by a state-chartered lender was in compliance with
applicable law. These difficulties were alleviated substantially as a result
of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary,
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency
with respect to origination of alternative mortgage instruments by national
banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with
the regulations promulgated by the Federal Home Loan Bank Board, predecessor
to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations.
Title VIII provides that any state may reject applicability of the provisions
of Title VIII by adopting, prior to October 15, 1985, a law or constitutional
provision expressly rejecting the applicability of such provisions. Certain
states have taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a mortgagor who enters military service after
the origination of such mortgagor's Mortgage Loan (including a mortgagor who
was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to mortgagors who are members of the Army, Navy, Air
Force, Marines, National Guard, Reserves, Coast Guard and officers of the
U.S. Public Health Service assigned to duty with the military. Because the
Relief Act applies to mortgagors who enter military service (including
reservists who are called to active duty) after origination of the related
Mortgage Loan, no information can be provided as to the number of loans that
may be affected by the Relief Act. Application of the Relief Act would
adversely affect, for an indeterminate period of time, the ability of any
servicer to collect full amounts of interest on certain of the Mortgage
Loans. Any shortfalls in interest collections resulting from the application
of the Relief Act would result in a reduction of the amounts distributable to
the holders of the related series of Certificates, and would not be covered
by advances or, unless otherwise specified in the related Prospectus
Supplement, any form of Credit Support provided in connection with such
Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in
the event that such a Mortgage Loan goes into default, there may be delays
and losses occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before
commission of the crime upon which the forfeiture is based, or (ii) the
lender was, at the time of execution of the mortgage, "reasonably without
cause to believe" that the property was used in, or purchased with the
proceeds of, illegal drug or RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Contracts. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete nor to
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Contracts is situated. The summaries
are qualified in their entirety by reference to the appropriate laws of the
states in which Contracts may be originated.
General
As a result of the assignment of the Contracts to the Trustee, the
Trustee will succeed collectively to all of the rights (including the right
to receive payment on the Contracts) of the obligee under the Contracts.
Each Contract evidences both (a) the obligation of the obligor to repay the
loan evidenced thereby, and (b) the grant of a security interest in the
Manufactured Home to secure repayment of such loan. Certain aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel
paper is treated in a manner similar to perfection of a security interest in
chattel paper. Under the Agreement, the Master Servicer will transfer
physical possession of the Contracts to the Trustee or its custodian or may
retain possession of the Contracts as custodian for the Trustee. In
addition, the Master Servicer will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Trustee's
ownership of the Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or marked otherwise
to reflect their assignment from the Company to the Trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. The Asset
Seller may effect such notation or delivery of the required documents and
fees, and obtain possession of the certificate of title, as appropriate under
the laws of the state in which any manufactured home securing a manufactured
housing conditional sales contract is registered. In the event the Asset
Seller fails, due to clerical error, to effect such notation or delivery, or
files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Asset
Seller may not have a first priority security interest in the Manufactured
Home securing a Contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention to move
them, courts in many states have held that manufactured homes, under certain
circumstances, may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the
home under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate
records office of the county where the home is located. Substantially all of
the Contracts contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. So long as the borrower does
not violate this agreement, a security interest in the Manufactured Home will
be governed by the certificate of title laws or the UCC, and the notation of
the security interest on the certificate of title or the filing of a UCC
financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home
is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect
to a Series of Certificates and if so described in the related Prospectus
Supplement, the Master Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. The
Warranting Party will represent that as of the date of the sale to the
Depositor it has obtained a perfected first priority security interest by
proper notation or delivery of the required documents and fees with respect
to substantially all of the Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured
Homes to be assigned to the Trustee on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Depositor nor the Trustee will amend the certificates of title (or file UCC-3
statements) to identify the Trustee as the new secured party, and neither the
Depositor nor the Master Servicer will deliver the certificates of title to
the Trustee or note thereon the interest of the Trustee. Accordingly, the
Asset Seller (or other originator of the Contracts) will continue to be named
as the secured party on the certificates of title relating to the
Manufactured Homes. In some states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on
the related certificate of title and the new secured party succeeds to Master
Servicer's rights as the secured party. However, in some states, in the
absence of an amendment to the certificate of title (or the filing of a UCC-3
statement), such assignment of the security interest in the Manufactured Home
may not be held effective or such security interests may not be perfected and
in the absence of such notation or delivery to the Trustee, the assignment of
the security interest in the Manufactured Home may not be effective against
creditors of the Asset Seller (or such other originator of the Contracts) or
a trustee in bankruptcy of the Asset Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien
of the Asset Seller (or other originator of the Contracts) on the certificate
of title or delivery of the required documents and fees will be sufficient to
protect the Certificateholders against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
security interest assigned to the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee as the new secured
party on the certificate of title that, through fraud or negligence, the
security interest of the Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another
state and not re-register the Manufactured Home in such state, and if steps
are not taken to re-perfect the Trustee's security interest in such state,
the security interest in the Manufactured Home would cease to be perfected.
A majority of states generally require surrender of a certificate of title to
re-register a Manufactured Home; accordingly, the Master Servicer must
surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Asset Seller (or other originator)
would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require
a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing
the manufactured housing contracts, the Master Servicer takes steps to effect
such re-perfection upon receipt of notice of re-registration or information
from the obligor as to relocation. Similarly, when an obligor under a
manufactured housing contract sells a manufactured home, the Master Servicer
must surrender possession of the certificate of title or, if it is noted as
lienholder on the certificate of title, will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under the Agreement, the Master Servicer is
obligated to take such steps, at the Master Servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even
over a perfected security interest. The Warranting Party will represent in
the Agreement that it has no knowledge of any such liens with respect to any
Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Master Servicer on behalf of the Trustee, to the extent required by
the related Agreement, may take action to enforce the Trustee's security
interest with respect to Contracts in default by repossession and resale of
the Manufactured Homes securing such Defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a Contract
must give the debtor a number of days' notice, which varies from 10 to 30
days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the unit so that the debtor may redeem at or before such resale. In the
event of such repossession and resale of a Manufactured Home, the Trustee
would be entitled to be paid out of the sale proceeds before such proceeds
could be applied to the payment of the claims of unsecured creditors or the
holders of subsequently perfected security interests or, thereafter, to the
debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such debtor's loan. However,
some states impose prohibitions or limitations on deficiency judgments, and
in many cases the defaulting borrower would have no assets with which to pay
a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Under the terms of the federal Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), an Obligor who enters military
service after the origination of such Obligor's Contract (including an
Obligor who is a member of the National Guard or is in reserve status at the
time of the origination of the Contract and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of
such Obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Contracts.
Any shortfall in interest collections resulting from the application of the
Relief Act, to the extent not covered by the subordination of a Class of
Subordinated Certificates, could result in losses to the holders of a Series
of Certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the Master Servicer to foreclose on an affected
Contract during the Obligor's period of active duty status. Thus, in the
event that such a Contract goes into default, there may be delays and losses
occasioned by the inability to realize upon the Manufactured Home in a timely
fashion.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of
this rule is to subject the assignee of such a contract to all claims and
defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Contract;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trustee against such
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
Contracts, including the Truth in Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure
to comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified
in the related Prospectus Supplement, the Master Servicer expects that it
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Master
Servicer desires to accelerate the maturity of the related Contract, the
Master Servicer's ability to do so will depend on the enforceability under
state law of the "due-on-sale" clause. The Garn-St Germain Depositary
Institutions Act of 1982 preempts, subject to certain exceptions and
conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the Manufactured Homes. Consequently, in some states the
Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The related Asset Seller will represent that all of the
Contracts comply with applicable usury law.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered
Certificates is based on the advice of Brown & Wood LLP, counsel to the
Depositor. This summary is based on laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations)
proposed, all of which are subject to change either prospectively or
retroactively. This summary does not address the federal income tax
consequences of an investment in Securities applicable to all categories of
investors, some of which (for example, banks and insurance companies) may be
subject to special rules. Prospective investors should consult their tax
advisors regarding the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of Securities.
The term "U.S. 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 (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations), or an estate whose income is subject to
U.S. federal income tax regardless of its source of income, or a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996 and treated as United States persons prior to
such date that elect to continue to be treated as United states persons shall
be considered U.S. persons as well.
Unless otherwise stated or unless the context otherwise requires, in the
following discussion a reference to the term "Mortgage Loan" or "Mortgage
Asset" will also be deemed to include a reference to a "Contract".
General
The federal income tax consequences to Securityholders will vary
depending on whether an election is made to treat the Trust Fund relating to
a particular Series of Securities as a REMIC under the Code. The Prospectus
Supplement for each Series of Securities will specify whether a REMIC
election will be made.
Grantor Trust Funds
If the related Prospectus Supplement indicates that the Trust Fund will
be treated as a grantor trust, then Brown & Wood LLP will deliver its opinion
that the Trust Fund will not be classified as an association taxable as a
corporation and that each such Trust Fund will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
owners of Certificates will be treated for federal income tax purposes as
owners of a portion of the Trust Fund's assets as described below.
a. Single Class of Grantor Trust Certificates
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust
Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust Fund represented
by the Grantor Trust Certificates and will be considered the equitable owner
of a pro rata undivided interest in each of the Mortgage Assets in the Pool.
Any amounts received by a Grantor Trust Certificateholder in lieu of amounts
due with respect to any Mortgage Asset because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections
162 or 212 each Grantor Trust Certificateholder will be entitled to deduct
its pro rata share of servicing fees, prepayment fees, assumption fees, any
loss recognized upon an assumption and late payment charges retained by the
Master Servicer, provided that such amounts are reasonable compensation for
services rendered to the Trust Fund. Grantor Trust Certificateholders that
are individuals, estates or trusts will be entitled to deduct their share of
expenses as itemized deductions only to the extent such expenses plus all
other Code Section 212 expenses exceed two percent of its adjusted gross
income. In addition, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds
the applicable amount (which amount will be adjusted for inflation) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over
the applicable amount and (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year. A Grantor Trust Certificateholder
using the cash method of accounting must take into account its pro rata share
of income and deductions as and when collected by or paid to the Master
Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions
as they become due or are paid to the Master Servicer, whichever is earlier.
If the servicing fees paid to the Master Servicer are deemed to exceed
reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of
the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to
each Series of Certificates evidencing an interest in a Trust Fund comprised
of Mortgage Loans (not including Contracts), Brown & Wood LLP will have
advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19)
representing principal and interest payments on Mortgage Assets will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of
Code Section 7701(a)(19)(C)(v), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type described in
such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent "real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest income on the Mortgage Assets will be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), to the extent
that the Mortgage Assets represented by that Grantor Trust Certificate
are of a type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation(s) ... which (are) principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3).
Under Code Section 7701(a)(19)(C)(v), "loans secured by an interest in
real property" include loans secured by mobile homes not used on a transient
basis. The Treasury regulations under Code Section 593 define "qualifying
real property loan" to include a loan secured by a mobile home unit
"permanently fixed to real property" except during a brief period in which
the unit is transported to its site. The Treasury regulations under Code
Section 856 state that the local law definitions are not controlling in
determining the meaning of the term "real property" for purposes of Code
Section 856, and the Internal Revenue Service ("IRS") has ruled that
obligations secured by permanently installed mobile home units qualify as
"real estate assets" under this provision. Entities affected by the
foregoing Code provisions that are considering the purchase of Certificates
evidencing interests in Trust Fund comprised of Contracts should consult
their tax advisors regarding such provisions.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons"
as those terms are defined in section 1286 of the Code, and, as a result,
such assets would be subject to the stripped bond provisions of the Code.
Under these rules, such Government Securities are treated as having original
issue discount based on the purchase price and the stated redemption price at
maturity of each Security. As such, Grantor Trust Certificateholders would
be required to include in income their pro rata share of the original issue
discount on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the
Grantor Trust Certificateholder in any taxable year may exceed amounts
actually received during such year.
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such
holder's undivided interest in each Mortgage Asset will have its own tax
basis. A Grantor Trust Certificateholder that acquires an interest in
Mortgage Assets at a premium may elect to amortize such premium under a
constant interest method, provided that the underlying mortgage loans with
respect to such Mortgage Assets were originated after September 27, 1985.
Premium allocable to mortgage loans originated on or before September 27,
1985 should be allocated among the principal payments on such mortgage loans
and allowed as an ordinary deduction as principal payments are made.
Amortizable bond premium will be treated as an offset to interest income on
such Grantor Trust Certificate. The basis for such Grantor Trust Certificate
will be reduced to the extent that amortizable premium is applied to offset
interest payments. It is not clear whether a reasonable prepayment
assumption should be used in computing amortization of premium allowable
under Code Section 171. A Certificateholder that makes this election for a
Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year
of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at
a premium should recognize a loss if a Mortgage Loan (or an underlying
mortgage loan with respect to a Mortgage Asset) prepays in full, equal to the
difference between the portion of the prepaid principal amount of such
Mortgage Loan (or underlying mortgage loan) that is allocable to the
Certificate and the portion of the adjusted basis of the Certificate that is
allocable to such Mortgage Loan (or underlying mortgage loan). If a
reasonable prepayment assumption is used to amortize such premium, it appears
that such a loss would be available, if at all, only if prepayments have
occurred at a rate faster than the reasonable assumed prepayment rate. It is
not clear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Securities. Absent further guidance
from the IRS, the Trustee intends to account for amortizable bond premium in
the manner described above. Prospective purchasers of the Securities should
consult their tax advisors regarding the possible application of the
amortizable Bond Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to original issue discount ("OID") (currently Code Sections
1271 through 1273 and 1275) and Treasury regulations issued on January 27,
1994, as amended on June 11, 1996, under such Sections (the "OID
Regulations"), will be applicable to a Grantor Trust Certificateholder's
interest in those Mortgage Assets meeting the conditions necessary for these
sections to apply. Rules regarding periodic inclusion of OID income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Such OID could arise by the financing of points or other charges by
the originator of the mortgages in an amount greater than a statutory de
minimis exception to the extent that the points are not currently deductible
under applicable Code provisions or are not for services provided by the
lender. OID generally must be reported as ordinary gross income as it
accrues under a constant interest method. See "--Multiple Classes of Grantor
Trust Certificates--Accrual of Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest
in a Mortgage Asset is considered to have been purchased at a "market
discount." Generally, the amount of market discount is equal to the excess
of the portion of the principal amount of such Mortgage Asset allocable to
such holder's undivided interest over such holder's tax basis in such
interest. Market discount with respect to a Grantor Trust Certificate will
be considered to be zero if the amount allocable to the Grantor Trust
Certificate is less than 0.25% of the Grantor Trust Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and
the advisability of making any of the elections allowed under Code Sections
1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the
holder of a market discount bond may elect to accrue market discount either
on the basis of a constant interest rate or according to one of the following
methods. If a Grantor Trust Certificate is issued with OID, the amount of
market discount that accrues during any accrual period would be equal to the
product of (i) the total remaining market discount and (ii) a fraction, the
numerator of which is the OID accruing during the period and the denominator
of which is the total remaining OID at the beginning of the accrual period.
For Grantor Trust Certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of (i) the
total remaining market discount and (ii) a fraction, the numerator of which
is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period. For purposes of calculating
market discount under any of the above methods in the case of instruments
(such as the Grantor Trust Certificates) that provide for payments that may
be accelerated by reason of prepayments of other obligations securing such
instruments, the same prepayment assumption applicable to calculating the
accrual of OID will apply. Because the regulations described above have not
been issued, it is impossible to predict what effect those regulations might
have on the tax treatment of a Grantor Trust Certificate purchased at a
discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Grantor Trust Certificate purchased with market
discount. For these purposes, the de minimis rule referred above applies.
Any such deferred interest expense would not exceed the market discount that
accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includible in
income. If such holder elects to include market discount in income currently
as it accrues on all market discount instruments acquired by such holder in
that taxable year or thereafter, the interest deferral rule described above
will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April
4, 1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--Regular
Certificates--Premium" herein. The election to accrue interest, discount and
premium on a constant yield method with respect to a Certificate is
irrevocable.
b. Multiple Classes of Grantor Trust Certificates
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments
results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. For
purposes of Code Sections 1271 through 1288, Code Section 1286 treats a
stripped bond or a stripped coupon as an obligation issued on the date that
such stripped interest is created. If a Trust Fund is created with two
classes of Grantor Trust Certificates, one class of Grantor Trust
Certificates may represent the right to principal and interest, or principal
only, on all or a portion of the Mortgage Assets (the "Stripped Bond
Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the
Mortgage Asset principal balance) or the Certificates are initially sold with
a de minimis discount (assuming no prepayment assumption is required), any
non-de minimis discount arising from a subsequent transfer of the
Certificates should be treated as market discount. The IRS appears to
require that reasonable servicing fees be calculated on a Mortgage Asset by
Mortgage Asset basis, which could result in some Mortgage Assets being
treated as having more than 100 basis points of interest stripped off. See
"--Non-REMIC Certificates" and "Multiple Classes of Grantor Trust
Certificates--Stripped Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if
the discount on a Mortgage Asset is larger than a de minimis amount (as
calculated for purposes of the OID rules) a purchaser of such a Certificate
will be required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust Certificates-
- -Original Issue Discount" herein. However, a purchaser of a Stripped Bond
Certificate will be required to account for any discount on the Mortgage
Assets as market discount rather than OID if either (i) the amount of OID
with respect to the Mortgage Assets is treated as zero under the OID de
minimis rule when the Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing fees in excess of reasonable
servicing fees) is stripped off of the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first
timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that
OID computations be made for each payment from each Mortgage Asset. However,
based on the recent IRS guidance, it appears that all payments from a
Mortgage Asset underlying a Stripped Coupon Certificate should be treated as
a single installment obligation subject to the OID rules of the Code, in
which case, all payments from such Mortgage Asset would be included in the
Mortgage Asset's stated redemption price at maturity for purposes of
calculating income on such certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account
in computing yield with respect to such Grantor Trust Certificate, it appears
that no loss will be available as a result of any particular prepayment
unless prepayments occur at a rate faster than the assumed prepayment rate.
However, if such Certificate is treated as an interest in discrete Mortgage
Assets, or if no prepayment assumption is used, then when a Mortgage Asset is
prepaid, the holder of such Certificate should be able to recognize a loss
equal to the portion of the adjusted issue price of such Certificate that is
allocable to such Mortgage Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper
treatment of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type
that make up the Trust Fund. With respect to these Code sections, no
specific legal authority exists regarding whether the character of the
Grantor Trust Certificates, for federal income tax purposes, will be the same
as that of the underlying Mortgage Assets. While Code Section 1286 treats a
stripped obligation as a separate obligation for purposes of the Code
provisions addressing OID, it is not clear whether such characterization
would apply with regard to these other Code sections. Although the issue is
not free from doubt, based on policy considerations, each class of Grantor
Trust Certificates, unless otherwise specified in the related Prospectus
Supplement, should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A) and "loans . . . secured by, an
interest in real property which is . . . residential real property" within
the meaning of Code Section 7701(a)(19)(C)(v), and interest income
attributable to Grantor Trust Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Assets and interest on such Mortgage Assets qualify for
such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the
income therefrom. Grantor Trust Certificates will be "obligation(s) ...
which (are) principally secured, directly or indirectly, by an interest in
real property" within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in Loans Other
Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275
will be applicable to a Certificateholder's interest in those Mortgage Assets
as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount in income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Under the OID Regulations, such original issue discount could arise by
the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that
is currently deductible by the borrower under applicable Code provisions, or
under certain circumstances, by the presence of "teaser" rates on the
Mortgage Assets. OID on each Grantor Trust Certificate must be included in
the owner's ordinary income for federal income tax purposes as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of receipt of the cash attributable to
such income. The amount of OID required to be included in an owner's income
in any taxable year with respect to a Grantor Trust Certificate representing
an interest in Mortgage Assets other than Mortgage Assets with interest rates
that adjust periodically ("ARM Loans") likely will be computed as described
below under "--Accrual of Original Issue Discount." The following discussion
is based in part on the OID Regulations and in part on the provisions of the
Tax Reform Act of 1986 (the "1986 Act"). The OID Regulations generally are
effective for debt instruments issued on or after April 4, 1994, but may be
relied upon as authority with respect to debt instruments, such as the
Grantor Trust Certificates, issued after December 21, 1992. Alternatively,
proposed Treasury regulations issued December 21, 1992 may be treated as
authority for debt instruments issued after December 21, 1992 and prior to
April 4, 1994, and proposed Treasury regulations issued in 1986 and 1991 may
be treated as authority for instruments issued before December 21, 1992. In
applying these dates, the issued date of the Mortgage Assets should be used,
or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the proposed OID
Regulations nor the OID Regulations adequately address certain issues
relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of
a Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments
to be made on such Mortgage Asset other than payments that are treated as
qualified stated interest payments. The accrual of this OID, as described
below under "--Accrual of Original Issue Discount," will, unless otherwise
specified in the related Prospectus Supplement, utilize the original yield to
maturity of the Grantor Trust Certificate calculated based on a reasonable
assumed prepayment rate for the mortgage loans underlying the Grantor Trust
Certificates (the "Prepayment Assumption"), and will take into account events
that occur during the calculation period. The Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the 1986 Act (the "Legislative History")
provides, however, that the regulations will require that the Prepayment
Assumption be the prepayment assumption that is used in determining the
offering price of such Certificate. No representation is made that any
Certificate will prepay at the Prepayment Assumption or at any other rate.
The prepayment assumption contained in the Code literally only applies to
debt instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments,
such as the Certificates represent. However, no other legal authority
provides guidance with regard to the proper method for accruing OID on
obligations that are subject to prepayment, and, until further guidance is
issued, the Master Servicer intends to calculate and report OID under the
method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily
portions," as defined below, of the OID on such Grantor Trust Certificate for
each day on which it owns such Certificate, including the date of purchase
but excluding the date of disposition. In the case of an original owner, the
daily portions of OID with respect to each component generally will be
determined as set forth under the OID Regulations. A calculation will be
made by the Master Servicer or such other entity specified in the related
Prospectus Supplement of the portion of OID that accrues during each
successive monthly accrual period (or shorter period from the date of
original issue) that ends on the day in the calendar year corresponding to
each of the Distribution Dates on the Grantor Trust Certificates (or the day
prior to each such date). This will be done, in the case of each full month
accrual period, by (i) adding (a) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to
maturity of the respective component under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption on the
respective component and (b) any payments included in the state redemption
price at maturity received during such accrual period, and (ii) subtracting
from that total the "adjusted issue price" of the respective component at the
beginning of such accrual period. The adjusted issue price of a Grantor
Trust Certificate at the beginning of the first accrual period is its issue
price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under any reasonable
method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received.
However, the amount of original issue discount includible in the income of a
holder of an obligation is reduced when the obligation is acquired after its
initial issuance at a price greater than the sum of the original issue price
and the previously accrued original issue discount, less prior payments of
principal. Accordingly, if such Mortgage Assets acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Asset, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Asset (i.e. points) will be includible by such holder. Other
original issue discount on the Mortgage Assets (e.g., that arising from a
"teaser" rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon
stripping rules with respect to such instruments. In the absence of any
authority, the Master Servicer will report OID on Grantor Trust Certificates
attributable to ARM Loans ("Stripped ARM Obligations") to holders in a manner
it believes is consistent with the rules described above under the heading "-
- -Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans" and with the OID Regulations. In general, application of these rules
may require inclusion of income on a Stripped ARM Obligation in advance of
the receipt of cash attributable to such income. Further, the addition of
interest deferred by reason of negative amortization ("Deferred Interest") to
the principal balance of an ARM Loan may require the inclusion of such amount
in the income of the Grantor Trust Certificateholder when such amount
accrues. Furthermore, the addition of Deferred Interest to the Grantor Trust
Certificate's principal balance will result in additional income (including
possibly OID income) to the Grantor Trust Certificateholder over the
remaining life of such Grantor Trust Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will
be includible with respect to such Certificates.
c. Sale or Exchange of a Grantor Trust Certificate
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the
amount received and the owner's adjusted basis in the Grantor Trust
Certificate. Such adjusted basis generally will equal the seller's purchase
price for the Grantor Trust Certificate, increased by the OID included in the
seller's gross income with respect to the Grantor Trust Certificate, and
reduced by principal payments on the Grantor Trust Certificate previously
received by the seller. Such gain or loss will be capital gain or loss to an
owner for which a Grantor Trust Certificate is a "capital asset" within the
meaning of Code Section 1221, and will be long-term or short-term depending
on whether the Grantor Trust Certificate has been owned for the long-term
capital gain holding period (generally more than one year).
The Taxpayer Relief Act of 1997 (the "Act") reduces the maximum rates on
long-term capital gains recognized on capital assets held by individuals
taxpayers for more than eighteen months as of the date of disposition (and
would further reduce the maximum rates on such gains in the year 2001 and
thereafter for certain individual taxpayers who meed specified conditions).
The capital gains rate for capital assets held by individual taxpayers for
more than twelve months but less than eighteen months was not changed by the
Act ("mid-term rate"). The Act does not change the capital gain rates for
corporations. Prospective investors should consult their own tax advisors
concerning these tax law changes.
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from
the sale of a Grantor Trust Certificate by a bank or a thrift institution to
which such section applies will be treated as ordinary income or loss.
d. Non-U.S. Persons
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July
18, 1984, interest or OID paid by the person required to withhold tax under
Code Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as
defined below) or (ii) a Grantor Trust Certificateholder holding on behalf of
an owner that is not a U.S. Person will be subject to federal income tax,
collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued OID recognized by
the owner on the sale or exchange of such a Grantor Trust Certificate also
will be subject to federal income tax at the same rate. Generally, such
payments would not be subject to withholding to the extent that a Grantor
Trust Certificate evidences ownership in Mortgage Assets issued after July
18, 1984, by natural persons if such Grantor Trust Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the Grantor Trust Certificateholder under penalties of perjury,
certifying that such Grantor Trust Certificateholder is not a U.S. Person and
providing the name and address of such Grantor Trust Certificateholder).
Additional restrictions apply to Mortgage Assets of where the mortgagor is
not a natural person in order to qualify for the exemption from withholding.
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation or a partnership organized in or under the laws
of the United States or any political subdivision thereof, an estate, the
income of which from sources outside the United States is includible in gross
income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States, or a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States trustees have
authority to control all substantial decisions of the trust.
e. Information Reporting and Backup Withholding
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that
such person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be
required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
REMICs
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance
with certain conditions. Although a REMIC is not generally subject to
federal income tax (see, however "--Taxation of Owners of REMIC Residual
Certificates" and "--Prohibited Transactions" below), if a Trust Fund with
respect to which a REMIC election is made fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, including the implementation of restrictions on the purchase and
transfer of the residual interests in a REMIC as described below under
"Taxation of Owners of REMIC Residual Certificates," the Code provides that a
Trust Fund will not be treated as a REMIC for such year and thereafter. In
that event, such entity may be taxable as a separate corporation, and the
related Certificates (the "REMIC Certificates") may not be accorded the
status or given the tax treatment described below. While the Code authorizes
the Treasury Department to issue regulations providing relief in the event of
an inadvertent termination of the status of a trust fund as a REMIC, no such
regulations have been issued. Any such relief, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion
of the REMIC's income for the period in which the requirements for such
status are not satisfied. With respect to each Trust Fund that elects REMIC
status, Brown & Wood LLP will deliver its opinion generally to the effect
that, under then existing law and assuming compliance with all provisions of
the related Pooling and Servicing Agreement, such Trust Fund will qualify as
a REMIC, and the related Certificates will be considered to be regular
interests ("REMIC Regular Certificates") or a sole class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related
Prospectus Supplement for each Series of Certificates will indicate whether
the Trust Fund will make a REMIC election and whether a class of Certificates
will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) such Certificates held by a thrift institution
taxed as a "domestic building and loan association" will constitute assets
described in Code Section 7701(a)(19)(C); (ii) such Certificates held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A); and (iii) interest on such Certificates
held by a real estate investment trust will be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B). Under Code Section 7701(a)(19)(C)(v), "loans secured
by an interest in real property" include loans secured by mobile homes not
used on a transient basis. The Treasury regulations under Code Section 856
state that the local law definitions are not controlling in determining the
meaning of the term "real property" for purposes of Section 856, and the IRS
has ruled that obligations secured by permanently installed mobile home units
qualify as "real estate assets" under this provision. Entities affected by
the foregoing Code provisions that are considering the purchase of
Certificates evidencing interests in a Trust Fund comprised of Contracts
should consult their tax advisors regarding such provisions. If less than
95% of the REMIC's assets are assets qualifying under any of the foregoing
Code sections, the Certificates will be qualifying assets only to the extent
that the REMIC's assets are qualifying assets. In addition, payments on
Mortgage Assets held pending distribution on the REMIC Certificates will be
considered to be real estate assets for purposes of Code Section 856(c). The
Small Business Job Protection Act of 1996, as part of the repeal of the bad
debt reserve method for thrift institutions, repealed the application of Code
Section 593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets may not be treated entirely as
assets described in the foregoing sections. See, in this regard, the
discussion of Buydown Loans contained in "--Non-REMIC Certificates--Single
Class of Grantor Trust Certificates" above. REMIC Certificates held by a
real estate investment trust will not constitute "Government Securities"
within the meaning of Code Section 856(c)(4)(A), and REMIC Certificates held
by a regulated investment company will not constitute "Government Securities"
within the meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held
by certain financial institutions will constitute "evidences of indebtedness"
within the meaning of Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally
secured by an interest in real property and that is transferred to the REMIC
within a prescribed time period in exchange for regular or residual interests
in the REMIC. The REMIC Regulations provide that manufactured housing or
mobile homes (not including recreational vehicles, campers or similar
vehicles) that are "single family residences" under Code Section 25(e)(10)
will qualify as real property without regard to state law classifications.
Under Code Section 25(e)(10), a single family residence includes any
manufactured home that has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and that is of a kind customarily used
at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two
separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of any such
Series of Certificates, Brown & Wood LLP, counsel to the Depositor, will
deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Agreement, the Master REMIC as well as any
Subsidiary REMIC will each qualify as a REMIC, and the REMIC Certificates
issued by the Master REMIC and the Subsidiary REMIC, respectively, will be
considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
provisions.
Only REMIC Certificates, other than the residual interest in the
Subsidiary REMIC, issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code; (ii)
"loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code; and (iii) whether the income on such Certificates is interest
described in Section 856(c)(3)(B) of the Code.
a. Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC
or its assets. Moreover, holders of REMIC Regular Certificates that
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Original Issue Discount and Premium. The REMIC Regular Certificates may
be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular
Certificate and its "issue price." Holders of any class of Certificates
issued with OID will be required to include such OID in gross income for
federal income tax purposes as it accrues, in accordance with a constant
interest method based on the compounding of interest as it accrues rather
than in accordance with receipt of the interest payments. The following
discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). Holders of REMIC
Regular Certificates (the "REMIC Regular Certificateholders") should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the REMIC Regular
Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated
reinvestment rate, if any, relating to the REMIC Regular Certificates and
prescribe a method for adjusting the amount and rate of accrual of such
discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in
the manner prescribed by regulations, which regulations have not yet been
issued. The Legislative History provides, however, that Congress intended
the regulations to require that the Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such
REMIC Regular Certificates. The Prospectus Supplement for each Series of
REMIC Regular Certificates will specify the Prepayment Assumption to be used
for the purpose of determining the amount and rate of accrual of OID. No
representation is made that the REMIC Regular Certificates will prepay at the
Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of
its "stated redemption price at maturity" over its "issue price." The issue
price of a REMIC Regular Certificate is the first price at which a
substantial amount of REMIC Regular Certificates of that class are first sold
to the public (excluding bond houses, brokers, underwriters or wholesalers).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be treated
as the fair market value of such class on the Closing Date. The issue price
of a REMIC Regular Certificate also includes the amount paid by an initial
Certificateholder for accrued interest that relates to a period prior to the
issue date of the REMIC Regular Certificate. The stated redemption price at
maturity of a REMIC Regular Certificate includes the original principal
amount of the REMIC Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Qualified stated interest generally means interest payable at a
single fixed rate or qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately
takes into account the length of the interval between payments.
Distributions of interest on REMIC Regular Certificates with respect to which
Deferred Interest will accrue will not constitute qualified stated interest
payments, and the stated redemption price at maturity of such REMIC Regular
Certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during
the first period is treated as the amount by which the stated redemption
price at maturity of the Certificate exceeds its issue price for purposes of
the de minimis rule described below. The OID Regulations suggest that all
interest on a long first period REMIC Regular Certificate that is issued with
non-de minimis OID, as determined under the foregoing rule, will be treated
as OID. Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to
the Certificates stated redemption price at maturity. REMIC Regular
Certificateholders should consult their own tax advisors to determine the
issue price and stated redemption price at maturity of a REMIC Regular
Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the REMIC Regular Certificate
and the denominator of which is the stated redemption price at maturity of
the REMIC Regular Certificate. Although currently unclear, it appears that
the schedule of such distributions should be determined in accordance with
the Prepayment Assumption. The Prepayment Assumption with respect to a
Series of REMIC Regular Certificates will be set forth in the related
Prospectus Supplement. Holders generally must report de minimis OID pro rata
as principal payments are received, and such income will be capital gain if
the REMIC Regular Certificate is held as a capital asset. However, accrual
method holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances
(the "Super-Premium Certificates"). The income tax treatment of such REMIC
Regular Certificates is not entirely certain. For information reporting
purposes, the Trust Fund intends to take the position that the stated
redemption price at maturity of such REMIC Regular Certificates is the sum of
all payments to be made on such REMIC Regular Certificates determined under
the Prepayment Assumption, with the result that such REMIC Regular
Certificates would be issued with OID. The calculation of income in this
manner could result in negative original issue discount (which delays future
accruals of OID rather than being immediately deductible) when prepayments on
the Mortgage Assets exceed those estimated under the Prepayment Assumption.
The IRS might contend, however, that certain proposed contingent payment
rules contained in regulations issued on December 15, 1994, with respect to
original issue discount, should apply to such Certificates. Although such
rules are not applicable to instruments governed by Code Section 1272(a)(6),
they represent the only guidance regarding the current views of the IRS with
respect to contingent payment instruments. In the alternative, the IRS could
assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to
be issued at a premium. If such a position were to prevail, the rules
described below under "--Taxation of Owners of REMIC Regular Certificates--
Premium" would apply. It is unclear when a loss may be claimed for any
unrecovered basis for a Super-Premium Certificate. It is possible that a
holder of a Super-Premium Certificate may only claim a loss when its
remaining basis exceeds the maximum amount of future payments, assuming no
further prepayments or when the final payment is received with respect to
such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular
Certificate generally should not be treated as a Super-Premium Certificate
and the rules described below under "--REMIC Regular Certificates--Premium"
should apply. However, it is possible that holders of REMIC Regular
Certificates issued at a premium, even if the premium is less than 25% of
such Certificate's actual principal balance, will be required to amortize the
premium under an original issue discount method or contingent interest method
even though no election under Code Section 171 is made to amortize such
premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on
a REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a REMIC Regular
Certificate, a calculation will be made of the portion of the OID that
accrues during each successive period ("an accrual period") that ends on the
day in the calendar year corresponding to a Distribution Date (or if
Distribution Dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last
day of the immediately preceding month) and begins on the day after the end
of the immediately preceding accrual period (or on the issue date in the case
of the first accrual period). This will be done, in the case of each full
accrual period, by (i) adding (a) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to
maturity of the REMIC Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and (b) any payments included in
the stated redemption price at maturity received during such accrual period,
and (ii) subtracting from that total the adjusted issue price of the REMIC
Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first
accrual period is its issue price; the adjusted issue price of a REMIC
Regular Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest
made at the end of or during that accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease (but never below zero) in a given accrual
period to reflect the fact that prepayments are occurring faster or slower
than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable
method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular
Certificate. In computing the daily portions of OID for such a purchaser (as
well as an initial purchaser that purchases at a price higher than the
adjusted issue price but less than the stated redemption price at maturity),
however, the daily portion is reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by
which the price paid by such holder for that REMIC Regular Certificate
exceeds the following amount: (a) the sum of the issue price plus the
aggregate amount of OID that would have been includible in the gross income
of an original REMIC Regular Certificateholder (who purchased the REMIC
Regular Certificate at its issue price), less (b) any prior payments included
in the stated redemption price at maturity, and the denominator of which is
the sum of the daily portions for that REMIC Regular Certificate for all days
beginning on the date after the purchase date and ending on the maturity date
computed under the Prepayment Assumption. A holder who pays an acquisition
premium instead may elect to accrue OID by treating the purchase as a
purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a
variable rate will constitute qualified stated interest and not contingent
interest if, generally, (i) such interest is unconditionally payable at least
annually, (ii) the issue price of the debt instrument does not exceed the
total noncontingent principal payments and (iii) interest is based on a
"qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates," one "qualified inverse
floating rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers interest
payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under "--
Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on
a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest. In such case, the
weighted average rate used to compute the initial pass-through rate on the
REMIC Regular Certificates will be deemed to be the index in effect through
the life of the REMIC Regular Certificates. It is possible, however, that
the IRS may treat some or all of the interest on REMIC Regular Certificates
with a weighted average rate as taxable under the rules relating to
obligations providing for contingent payments. Such treatment may effect the
timing of income accruals on such REMIC Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such Certificateholder acquires during the year
of the election or thereafter. Similarly, a Certificateholder that makes
this election for a Certificate that is acquired at a premium will be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns
or acquires. See "-- REMIC Regular Certificates--Premium" herein. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Certificate is irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal
amount or, in the case of a REMIC Regular Certificate with OID, the adjusted
issue price (determined for this purpose as if the purchaser had purchased
such REMIC Regular Certificate from an original holder) over (ii) the price
for such REMIC Regular Certificate paid by the purchaser. A
Certificateholder that purchases a REMIC Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
amounts included in such certificate's stated redemption price at maturity.
In particular, under Section 1276 of the Code such a holder generally will be
required to allocate each such distribution first to accrued market discount
not previously included in income, and to recognize ordinary income to that
extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the
first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular
Certificate is less than 0.25% of such REMIC Regular Certificate's stated
redemption price at maturity multiplied by such REMIC Regular Certificate's
weighted average maturity remaining after the date of purchase. If market
discount on a REMIC Regular Certificate is considered to be zero under this
rule, the actual amount of market discount must be allocated to the remaining
principal payments on the REMIC Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment
is made. Treasury regulations implementing the market discount rules have
not yet been issued; therefore, investors should consult their own tax
advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis
of a constant interest method rate or according to one of the following
methods. For REMIC Regular Certificates issued with OID, the amount of
market discount that accrues during a period is equal to the product of (i)
the total remaining market discount and (ii) a fraction, the numerator of
which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the period. For REMIC Regular
Certificates issued without OID, the amount of market discount that accrues
during a period is equal to the product of (a) the total remaining market
discount and (b) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning of the
period. For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the REMIC Regular Certificates)
that provide for payments that may be accelerated by reason of prepayments of
other obligations securing such instruments, the same Prepayment Assumption
applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Certificate purchased with market discount. For these
purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during
such taxable year and is, in general, allowed as a deduction not later than
the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will
be considered to have purchased the REMIC Regular Certificate at a premium
and may elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that
such Certificateholder acquires during the year of the election or
thereafter. It is not clear whether the Prepayment Assumption would be taken
into account in determining the life of the REMIC Regular Certificate for
this purpose. However, the Legislative History states that the same rules
that apply to accrual of market discount (which rules require use of a
Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have OID)
will also apply in amortizing bond premium under Code Section 171. The Code
provides that amortizable bond premium will be allocated among the interest
payments on such REMIC Regular Certificates and will be applied as an offset
against such interest payment. On June 27, 1996, the IRS published in the
Federal Register proposed regulations on the amortization of bond premium.
The foregoing discussion is based in part on such proposed regulations. The
proposed regulations generally would be effective for Certificates acquired
on or after the date 60 days after the date they are published as final
regulations in the Federal Register. Certificateholders should consult their
tax advisors regarding the possibility of making an election to amortize any
such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such
Certificates prior to the time distributions of cash with respect to such
Deferred Interest are made. It is unclear, under the OID Regulations,
whether any of the interest on such Certificates will constitute qualified
stated interest or whether all or a portion of the interest payable on such
Certificates must be included in the stated redemption price at maturity of
the Certificates and accounted for as OID (which could accelerate such
inclusion). Interest on REMIC Regular Certificates must in any event be
accounted for under an accrual method by the holders of such Certificates
and, therefore, applying the latter analysis may result only in a slight
difference in the timing of the inclusion in income of interest on such REMIC
Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates
may contain one or more classes of Subordinated Certificates, and in the
event there are defaults or delinquencies on the Mortgage Assets, amounts
that would otherwise be distributed on the Subordinated Certificates may
instead be distributed on the Senior Certificates. Subordinated
Certificateholders nevertheless will be required to report income with
respect to such Certificates under an accrual method without giving effect to
delays and reductions in distributions on such Subordinated Certificates
attributable to defaults and delinquencies on the Mortgage Assets, except to
the extent that it can be established that such amounts are uncollectible.
As a result, the amount of income reported by a Subordinated
Certificateholder in any period could significantly exceed the amount of cash
distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to
the extent that the aggregate amount of distributions on the Subordinated
Certificate is reduced as a result of defaults and delinquencies on the
Mortgage Assets. Timing and characterization of such losses is discussed in
"--REMIC Regular Certificates--Treatment of Realized Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange,
redemption, or retirement and the seller's adjusted basis in the REMIC
Regular Certificate. Such adjusted basis generally will equal the cost of
the REMIC Regular Certificate to the seller, increased by any OID and market
discount included in the seller's gross income with respect to the REMIC
Regular Certificate, and reduced (but not below zero) by payments included in
the stated redemption price at maturity previously received by the seller and
by any amortized premium. Similarly, a holder who receives a payment that is
part of the stated redemption price at maturity of a REMIC Regular
Certificate will recognize gain equal to the excess, if any, of the amount of
the payment over the holder's adjusted basis in the REMIC Regular
Certificate. A REMIC Regular Certificateholder who receives a final payment
that is less than the holder's adjusted basis in the REMIC Regular
Certificate will generally recognize a loss. Except as provided in the
following paragraph and as provided under "--Market Discount" above, any such
gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income to
the extent that such gain does not exceed the excess, if any, of (i) the
amount that would have been includible in such holder's income with respect
to the REMIC Regular Certificate had income accrued thereon at a rate equal
to 110% of the AFR as defined in Code Section 1274(d) determined as of the
date of purchase of such REMIC Regular Certificate, over (ii) the amount
actually includible in such holder's income.
The Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
REMIC Regular Certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method
would require information relating to the holder's purchase price which the
REMIC may not have, it appears that the information reports will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of
interest based on a period that corresponds to the interval between
Distribution Dates but that ends prior to each such Distribution Date. The
period between the Closing Date for Payment Lag Certificates and their first
Distribution Date may or may not exceed such interval. Purchasers of Payment
Lag Certificates for which the period between the Closing Date and the first
Distribution Date does not exceed such interval could pay upon purchase of
the REMIC Regular Certificates accrued interest in excess of the accrued
interest that would be paid if the interest paid on the Distribution Date
were interest accrued from Distribution Date to Distribution Date. If a
portion of the initial purchase price of a REMIC Regular Certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest") and the REMIC Regular Certificate provides for a payment
of stated interest on the first payment date (and the first payment date is
within one year of the issue date) that equals or exceeds the amount of the
pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of pre-
issuance accrued interest, rather than as an amount payable on the REMIC
Regular Certificate. However, it is unclear under this method how the OID
Regulations treat interest on Payment Lag Certificates. Therefore, in the
case of a Payment Lag Certificate, the Trust Fund intends to include accrued
interest in the issue price and report interest payments made on the first
Distribution Date as interest to the extent such payments represent interest
for the number of days that the Certificateholder has held such Payment Lag
Certificate during the first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a
portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to those REMIC Regular
Certificateholders that are "pass-through interest holders."
Certificateholders that are pass-through interest holders should consult
their own tax advisors about the impact of these rules on an investment in
the REMIC Regular Certificates. See "Pass-Through of Non-Interest Expenses
of the REMIC" under "Taxation of Owners of REMIC Residual Certificates"
below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during
the taxable year on account of any such Certificates becoming wholly or
partially worthless, and that, in general, holders of Certificates that are
not corporations should be allowed to deduct as a short-term capital loss any
loss sustained during the taxable year on account of any such Certificates
becoming wholly worthless. Although the matter is not entirely clear, non-
corporate holders of Certificates may be allowed a bad debt deduction at such
time that the principal balance of any such Certificate is reduced to reflect
realized losses resulting from any liquidated Mortgage Assets. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect realized losses only after
all Mortgage Assets remaining in the related Trust Fund have been liquidated
or the Certificates of the related Series have been otherwise retired.
Potential investors and holders of the Certificates are urged to consult
their own tax advisors regarding the appropriate timing, amount and character
of any loss sustained with respect to such Certificates, including any loss
resulting from the failure to recover previously accrued interest or discount
income. Special loss rules are applicable to banks and thrift institutions,
including rules regarding reserves for bad debts. Such taxpayers are advised
to consult their tax advisors regarding the treatment of losses on
Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person and is not engaged
in a trade or business within the United States will not be subject to
federal withholding tax if (i) such REMIC Regular Certificateholder does not
actually or constructively own 10 percent or more of the combined voting
power of all classes of equity in the Issuer; (ii) such REMIC Regular
Certificateholder is not a controlled foreign corporation (within the meaning
of Code Section 957) related to the Issuer; and (iii) such REMIC Regular
Certificateholder complies with certain identification requirements
(including delivery of a statement, signed by the REMIC Regular
Certificateholder under penalties of perjury, certifying that such REMIC
Regular Certificateholder is a foreign person and providing the name and
address of such REMIC Regular Certificateholder). If a REMIC Regular
Certificateholder is not exempt from withholding, distributions of interest
to such holder, including distributions in respect of accrued OID, may be
subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate
of a non-resident alien individual and will not be subject to United States
estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates,
and holders of REMIC Residual Certificates (the "REMIC Residual
Certificateholder") and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates without consulting their
tax advisors as to the possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at
any time during such year, such information as may be deemed necessary or
desirable to assist REMIC Regular Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
REMIC Regular Certificates on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that
such person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be
required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New
regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
b. Taxation of Owners of REMIC Residual Certificates
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except
with respect to income from prohibited transactions and certain other
transactions. See "--Prohibited Transactions and Other Taxes" below.
Instead, each original holder of a REMIC Residual Certificate will report on
its federal income tax return, as ordinary income, its share of the taxable
income of the REMIC for each day during the taxable year on which such holder
owns any REMIC Residual Certificates. The taxable income of the REMIC for
each day will be determined by allocating the taxable income of the REMIC for
each calendar quarter ratably to each day in the quarter. Such a holder's
share of the taxable income of the REMIC for each day will be based on the
portion of the outstanding REMIC Residual Certificates that such holder owns
on that day. The taxable income of the REMIC will be determined under an
accrual method and will be taxable to the holders of REMIC Residual
Certificates without regard to the timing or amounts of cash distributions by
the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to the
limitations on the deductibility of "passive losses." As residual interests,
the REMIC Residual Certificates will be subject to tax rules, described
below, that differ from those that would apply if the REMIC Residual
Certificates were treated for federal income tax purposes as direct ownership
interests in the Certificates or as debt instruments issued by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such
a mismatching of income and cash distributions (that is, "phantom income").
This mismatching may be caused by the use of certain required tax accounting
methods by the REMIC, variations in the prepayment rate of the underlying
Mortgage Assets and certain other factors. Depending upon the structure of a
particular transaction, the aforementioned factors may significantly reduce
the after-tax yield of a REMIC Residual Certificate to a REMIC Residual
Certificateholder. Investors should consult their own tax advisors
concerning the federal income tax treatment of a REMIC Residual Certificate
and the impact of such tax treatment on the after-tax yield of a REMIC
Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would
equal the amounts that would have been reported for the same days by an
original REMIC Residual Certificateholder, as described above. The
Legislative History indicates that certain adjustments may be appropriate to
reduce (or increase) the income of a subsequent holder of a REMIC Residual
Certificate that purchased such REMIC Residual Certificate at a price greater
than (or less than) the adjusted basis such REMIC Residual Certificate would
have in the hands of an original REMIC Residual Certificateholder. See
"--Sale or Exchange of REMIC Residual Certificates" below. It is not clear,
however, whether such adjustments will in fact be permitted or required and,
if so, how they would be made. The REMIC Regulations do not provide for any
such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed
to the REMIC for interest and OID on the REMIC Regular Certificates and,
except as described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that
(i) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will
be deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC's gross income includes interest, original issue discount
income, and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income on
reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the REMIC Regular
Certificates. Note that the timing of cancellation of indebtedness income
recognized by REMIC Residual Certificateholders resulting from defaults and
delinquencies on Mortgage Assets may differ from the time of the actual loss
on the Mortgage Asset. The REMIC's deductions include interest and original
issue discount expense on the REMIC Regular Certificates, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC and realized
losses on the Mortgage Loans. The requirement that REMIC Residual
Certificateholders report their pro rata share of taxable income or net loss
of the REMIC will continue until there are no Certificates of any class of
the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue
prices of the REMIC Regular Certificates and the REMIC Residual Certificates
(or, if a class of Certificates is not sold initially, its fair market
value). Such aggregate basis will be allocated among the Mortgage Assets and
other assets of the REMIC in proportion to their respective fair market
value. A Mortgage Asset will be deemed to have been acquired with discount
or premium to the extent that the REMIC's basis therein is less than or
greater than its principal balance, respectively. Any such discount (whether
market discount or OID) will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under
a method similar to the method described above for accruing OID on the REMIC
Regular Certificates. The REMIC expects to elect under Code Section 171 to
amortize any premium on the Mortgage Assets. Premium on any Mortgage Asset
to which such election applies would be amortized under a constant yield
method. It is not clear whether the yield of a Mortgage Asset would be
calculated for this purpose based on scheduled payments or taking account of
the Prepayment Assumption. Additionally, such an election would not apply to
the yield with respect to any underlying mortgage loan originated on or
before September 27, 1985. Instead, premium with respect to such a mortgage
loan would be allocated among the principal payments thereon and would be
deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with
respect to REMIC Regular Certificates except that the 0.25% per annum de
minimis rule and adjustments for subsequent holders described therein will
not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC Residual
Certificates will be added to the issue price of the REMIC Regular
Certificates in determining the REMIC's initial basis in its assets. See "--
Sale or Exchange of REMIC Residual Certificates" below. For a discussion of
possible adjustments to income of a subsequent holder of a REMIC Residual
Certificate to reflect any difference between the actual cost of such REMIC
Residual Certificate to such holder and the adjusted basis such REMIC
Residual Certificate would have in the hands of an original REMIC Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the REMIC
Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net
loss would be allocated among the REMIC Residual Certificateholders in the
same manner as the REMIC's taxable income. The net loss allocable to any
REMIC Residual Certificate will not be deductible by the holder to the extent
that such net loss exceeds such holder's adjusted basis in such REMIC
Residual Certificate. Any net loss that is not currently deductible by
reason of this limitation may only be used by such REMIC Residual
Certificateholder to offset its share of the REMIC's taxable income in future
periods (but not otherwise). The ability of REMIC Residual
Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS recently finalized regulations (the
"Mark-to-Market Regulations") which provide that a REMIC Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-
Market Regulations replaced the temporary regulations which allowed a
Residual Certificate to be marked to market provided that it was not a
"negative value" residual interest and did not have the same economic effect
as a "negative value" residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders
of the REMIC Residual Certificates. In the case of a single class REMIC,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In general terms, a single class REMIC is one
that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC
will be allocated to holders of the related REMIC Residual Certificates in
their entirety and not to holders of the related REMIC Regular Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest
in a REMIC Regular Certificate or a REMIC Residual Certificate directly or
through a pass-through interest holder that is required to pass miscellaneous
itemized deductions through to its owners or beneficiaries (e.g. a
partnership, an S corporation or a grantor trust), such expenses will be
deductible under Code Section 67 only to the extent that such expenses, plus
other "miscellaneous itemized deductions" of the individual, exceed 2% of
such individual's adjusted gross income. In addition, Code Section 68
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a certain amount (the
"Applicable Amount") will be reduced by the lesser of (i) 3% of the excess of
the individual's adjusted gross income over the Applicable Amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable
year. The amount of additional taxable income recognized by REMIC Residual
Certificateholders who are subject to the limitations of either Code Section
67 or Code Section 68 may be substantial. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder"
generally refers to individuals, entities taxed as individuals and certain
pass-through entities, but does not include real estate investment trusts.
REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any
calendar quarter will be subject to federal income tax in all events. Thus,
for example, an excess inclusion (i) may not, except as described below, be
offset by any unrelated losses, deductions or loss carryovers of a REMIC
Residual Certificateholder; (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the REMIC Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income (see "--Tax-Exempt
Investors" below); and (iii) is not eligible for any reduction in the rate of
withholding tax in the case of a REMIC Residual Certificateholder that is a
foreign investor. See "--Non-U.S. Persons" below. The exception for thrift
institutions is available only to the institution holding the REMIC Residual
Certificate and not to any affiliate of the institution, unless the affiliate
is a subsidiary all the stock of which, and substantially all the
indebtedness of which, is held by the institution, and which is organized and
operated exclusively in connection with the organization and operation of one
or more REMICs.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar
quarter is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
all days during the calendar quarter on which the REMIC Residual
Certificateholder holds such REMIC Residual Certificate. For this purpose,
the daily accruals with respect to a REMIC Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of
the REMIC Residual Certificate at the beginning of the calendar quarter and
120 percent of the "Federal long-term rate" in effect at the time the REMIC
Residual Certificate is issued. For this purpose, the "adjusted issue price"
of a REMIC Residual Certificate at the beginning of any calendar quarter
equals the issue price of the REMIC Residual Certificate, increased by the
amount of daily accruals for all prior quarters, and decreased (but not below
zero) by the aggregate amount of payments made on the REMIC Residual
Certificate before the beginning of such quarter. The "federal long-term
rate" is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section
857(b)(2), excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder. Regulated investment companies, common trust
funds and certain cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, the amount of any alternative minimum tax net operating
loss deductions must be computed without regard to any excess inclusions.
Third, a residual holder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. The effect of this last
statutory amendment is to prevent the use of nonrefundable tax credits to
reduce a taxpayer's income tax below its tentative minimum tax computed only
on excess inclusions. These rules are effective for tax years beginning
after December 31, 1986, unless a residual holder elects to have such rules
apply only to tax years beginning after August 20, 1996.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual
Certificateholder's adjusted basis in such REMIC Residual Certificate. To
the extent a distribution exceeds such adjusted basis, it will be treated as
gain from the sale of the REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or
exchange and its adjusted basis in the REMIC Residual Certificate (except
that the recognition of loss may be limited under the "wash sale" rules
described below). A holder's adjusted basis in a REMIC Residual Certificate
generally equals the cost of such REMIC Residual Certificate to such REMIC
Residual Certificateholder, increased by the taxable income of the REMIC that
was included in the income of such REMIC Residual Certificateholder with
respect to such REMIC Residual Certificate, and decreased (but not below
zero) by the net losses that have been allowed as deductions to such REMIC
Residual Certificateholder with respect to such REMIC Residual Certificate
and by the distributions received thereon by such REMIC Residual
Certificateholder. In general, any such gain or loss will be capital gain or
loss provided the REMIC Residual Certificate is held as a capital asset.
However, REMIC Residual Certificates will be "evidences of indebtedness"
within the meaning of Code Section 582(c)(1), so that gain or loss recognized
from sale of a REMIC Residual Certificate by a bank or thrift institution to
which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool"
(as defined in Code Section 7701(i)) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Code Section 1091. In that event, any
loss realized by the REMIC Residual Certificateholder on the sale will not be
deductible, but, instead, will increase such REMIC Residual
Certificateholder's adjusted basis in the newly acquired asset.
c. Prohibited Transactions and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Asset, the receipt of income from a
source other than a Mortgage Asset or certain other permitted investments,
the receipt of compensation for services, or gain from the disposition of an
asset purchased with the payments on the Mortgage Assets for temporary
investment pending distribution on the Certificates. It is not anticipated
that the Trust Fund for any Series of Certificates will engage in any
prohibited transactions in which it would recognize a material amount of net
income.
In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day
on which such Trust Fund issues all of its interests could result in the
imposition of a tax on the Trust Fund equal to 100% of the value of the
contributed property (the "Contributions Tax"). No Trust Fund for any Series
of Certificates will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined
by reference to the rules applicable to real estate investment trusts. "Net
income from foreclosure property" generally means income from foreclosure
property other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax
that may be imposed on a REMIC relating to any Series of Certificates arises
out of or results from (i) a breach of the related Master Servicer's,
Trustee's or Asset Seller's obligations, as the case may be, under the
related Agreement for such Series, such tax will be borne by such Master
Servicer, Trustee or Asset Seller, as the case may be, out of its own funds
or (ii) the Asset Seller's obligation to repurchase a Mortgage Loan, such tax
will be borne by the Asset Seller. In the event that such Master Servicer,
Trustee or Asset Seller, as the case may be, fails to pay or is not required
to pay any such tax as provided above, such tax will be payable out of the
Trust Fund for such Series and will result in a reduction in amounts
available to be distributed to the Certificateholders of such Series.
d. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC will not be subject to any Prohibited
Transaction Tax, provided that the REMIC credits or distributes in
liquidation all of the sale proceeds plus its cash (other than the amounts
retained to meet claims) to holders of Regular and REMIC Residual
Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis
in the REMIC Residual Certificate exceeds the amount of cash distributed to
such REMIC Residual Certificateholder in final liquidation of its interest,
then it would appear that the REMIC Residual Certificateholder would be
entitled to a loss equal to the amount of such excess. It is unclear whether
such a loss, if allowed, will be a capital loss or an ordinary loss.
e. Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will
be furnished quarterly to each REMIC Residual Certificateholder who held a
REMIC Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC level. The REMIC does
not intend to register as a tax shelter pursuant to Code Section 6111 because
it is not anticipated that the REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to
furnish the REMIC, in a manner to be provided in Treasury regulations, with
the name and address of such person and other information.
f. Tax-Exempt Investors
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to
such tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" above.
g. Residual Certificate Payments--Non-U.S. Persons
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Amounts distributed to holders
of REMIC Residual Certificates should qualify as "portfolio interest,"
subject to the conditions described in "--Taxation of Owners of REMIC Regular
Certificates" above, but only to the extent that the underlying mortgage
loans were originated after July 18, 1984. Furthermore, the rate of
withholding on any income on a REMIC Residual Certificate that is excess
inclusion income will not be subject to reduction under any applicable tax
treaties. See "--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or
otherwise distributed (or when the REMIC Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have OID. The Code, however, grants the Treasury Department
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance
of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of REMIC Residual Certificates
- --Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding will not apply. Instead, the amounts paid to
such non-U.S. Person will be subject to U.S. federal income taxation at
regular graduated rates. For special restrictions on the transfer of REMIC
Residual Certificates, see "--Tax-Related Restrictions on Transfers of REMIC
Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their
tax advisors as to the possible adverse tax consequences of such acquisition.
Tax-Related Restrictions on Transfers of REMIC Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests
in such entity are not held by "disqualified organizations" (as defined
below). Further, a tax is imposed on the transfer of a residual interest in
a REMIC to a "disqualified organization." The amount of the tax equals the
product of (A) an amount (as determined under the REMIC Regulations) equal to
the present value of the total anticipated "excess inclusions" with respect
to such interest for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The tax is imposed on
the transferor unless the transfer is through an agent (including a broker or
other middleman) for a disqualified organization, in which event the tax is
imposed on the agent. The person otherwise liable for the tax shall be
relieved of liability for the tax if the transferee furnished to such person
an affidavit that the transferee is not a disqualified organization and, at
the time of the transfer, such person does not have actual knowledge that the
affidavit is false. A "disqualified organization" means (A) the United
States, any State, possession or political subdivision thereof, any foreign
government, any international organization or any agency or instrumentality
of any of the foregoing (provided that such term does not include an
instrumentality if all its activities are subject to tax and, except for
FHLMC, a majority of its board of directors is not selected by any such
governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of
(A) the amount of excess inclusions for the taxable year allocable to the
interest held by the disqualified organization and (B) the highest marginal
federal income tax rate applicable to corporations. The pass-through entity
otherwise liable for the tax, for any period during which the disqualified
organization is the record holder of an interest in such entity, will be
relieved of liability for the tax if such record holder furnishes to such
entity an affidavit that such record holder is not a disqualified
organization and, for such period, the pass-through entity does not have
actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means (i) a regulated investment company, real estate
investment trust or common trust fund, (ii) a partnership, trust or estate
and (iii) certain cooperatives. Except as may be provided in Treasury
regulations not yet issued, any person holding an interest in a pass-through
entity as a nominee for another will, with respect to such interest, be
treated as a pass-through entity. The tax on pass-through entities is
generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common
trust funds and publicly-traded partnerships the tax shall apply only to
taxable years of such entities beginning after December 31, 1988. Under
proposed legislation, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the
express written consent of the Master Servicer. The Master Servicer will
grant such consent to a proposed transfer only if it receives the following:
(i) an affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by
the proposed transferee to the effect that the proposed transferee agrees to
be bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic
REMIC Residual Certificate to a "U.S. Person," as defined above, unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A Noneconomic REMIC Residual Certificate is
any REMIC Residual Certificate (including a REMIC Residual Certificate with a
positive value at issuance) unless, at the time of transfer, taking into
account the Prepayment Assumption and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents, (i) the present value of the expected future distributions on the
REMIC Residual Certificate at least equals the product of the present value
of the anticipated excess inclusions and the highest corporate income tax
rate in effect for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC. A transferor is presumed not to
have such knowledge if (i) the transferor conducted a reasonable
investigation of the transferee and (ii) the transferee acknowledges to the
transferor that the residual interest may generate tax liabilities in excess
of the cash flow and the transferee represents that it intends to pay such
taxes associated with the residual interest as they become due. If a
transfer of a Noneconomic REMIC Residual Certificate is disregarded, the
transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion
of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule
appears to apply to a transferee who is not a U.S. Person unless such
transferee's income in respect of the REMIC Residual Certificate is
effectively connected with the conduct of a United Sates trade or business.
A REMIC Residual Certificate is deemed to have a tax avoidance potential
unless, at the time of transfer, the transferor reasonably expect that the
REMIC will distribute to the transferee amounts that will equal at least 30
percent of each excess inclusion, and that such amounts will be distributed
at or after the time the excess inclusion accrues and not later than the end
of the calendar year following the year of accrual. If the non-U.S. Person
transfers the REMIC Residual Certificate to a U.S. Person, the transfer will
be disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax
on accrued excess inclusions. The provisions in the REMIC Regulations
regarding transfers of REMIC Residual Certificates that have tax avoidance
potential to foreign persons are effective for all transfers after June 30,
1992. The Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with
a duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in
any purported transferee. Investors in REMIC Residual Certificates are
advised to consult their own tax advisors with respect to transfers of the
REMIC Residual Certificates and, in addition, pass-through entities are
advised to consult their own tax advisors with respect to any tax which may
be imposed on a pass-through entity.
Tax Characterization of a Trust Fund as a Partnership
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not
be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will
be complied with, and on counsel's conclusions that (1) the Trust Fund will
not have certain characteristics necessary for a business trust to be
classified as an association taxable as a corporation and (2) the nature of
the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its
taxable income. The Trust Fund's taxable income would include all its
income, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments
on the Notes and distributions on the Certificates, and Certificateholders
could be liable for any such tax that is unpaid by the Trust Fund.
a. Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Special counsel to the Depositor will,
except as otherwise provided in the related Prospectus Supplement, advise the
Depositor that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, etc. The discussion below assumes that all payments on the Notes
are denominated in U.S. dollars. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 1/4% of their principal amount multiplied
by the number of full years included in their term), all within the meaning
of the OID regulations. If these conditions are not satisfied with respect
to any given series of Notes, additional tax considerations with respect to
such Notes will be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder
of a Note issued with a de minimis amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the Note. It
is believed that any prepayment premium paid as a result of a mandatory
redemption will be taxable as contingent interest when it becomes fixed and
unconditionally payable. A purchaser who buys a Note for more or less than
its principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except
for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income
tax and withholding tax, if the interest is not effectively connected with
the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust or the Depositor (including a holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Asset Seller is a "related person"
within the meaning of the Code and (ii) provides the Owner Trustee or other
person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note
is a foreign person and providing the foreign person's name and address. If
a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however,
the signed statement must be accompanied by a Form W-8 or substitute form
provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income
and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted
that one or more of the Notes did not represent debt for federal income tax
purposes, the Notes might be treated as equity interests in the Trust Fund.
If so treated, the Trust Fund would likely be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain tax-exempt
entities (including pension funds) would be "unrelated business taxable
income", income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual holders
might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
b. Tax Consequences to Holder of the Certificates
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state
income tax, franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the Trust
Fund, the partners of the partnership being the Certificateholders, and the
Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the
Trust Fund and the Master Servicer is not clear because there is no authority
on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Mortgage Loans (including appropriate adjustments for market discount,
OID and bond premium) and any gain upon collection or disposition of Mortgage
Loans. The Trust Fund's deductions will consist primarily of interest
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such
month, including interest accruing at the Pass-Through Rate for such month
and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the
Mortgage Loans that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; (iii) prepayment premium payable
to the Certificateholders for such month; and (iv) any other amounts of
income payable to the Certificateholders for such month. Such allocation
will be reduced by any amortization by the Trust Fund of premium on Mortgage
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust Fund will
be allocated to the Company. Based on the economic arrangement of the
parties, this approach for allocating Trust Fund income should be permissible
under applicable treasury regulations, although no assurance can be given
that the IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through
Rate plus the other items described above even though the Trust Fund might
not have sufficient cash to make current cash distributions of such amount.
Thus, cash basis holders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable
for taxes on Trust Fund income even if they have not received cash from the
Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to
them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual
in whole or in part and might result in such holder being taxed on an amount
of income that exceeds the amount of cash actually distributed to such holder
over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Mortgage Loan,
the Trust Fund might be required to incur additional expense but it is
believed that there would not be a material adverse effect on
Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Mortgage Loans may be greater
or less than the remaining principal balance of the Loans at the time of
purchase. If so, the Loan will have been acquired at a premium or discount,
as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan by Mortgage Loan basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated
above, a portion of such market discount income or premium deduction may be
allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged
within a 12-month period. Pursuant to formal Treasury regulations issued May
8, 1997 under section 708 of the Code, if such a termination occurs, the
Trust Fund (the "old partnership") would be deemed to contribute its assets
to a new partnership (the "new partnership") in exchange for interests in the
new partnership. Such interests would be deemed distributed to the partners
of the old partnership in liquidation thereof, which would not constitute a
sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the holder's share of the Notes and other liabilities of the Trust Fund. A
holder acquiring Certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Mortgage Loans would generally
be treated as ordinary income to the holder and would give rise to special
tax reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result, a
holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records,
as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-1 information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information return filed
by the Trust Fund or be subject to penalties unless the holder notifies the
IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of
the Exchange Act is not required to furnish any such information statement to
the Trust Fund. The information referred to above for any calendar year must
be furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
Fund with the information described above may be subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the
income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or business in
the United States for such purposes, the Trust Fund will withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust Fund to change
its withholding procedures. In determining a holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be
entitled to file with the IRS a claim for refund with respect to taxes
withheld by the Trust Fund taking the position that no taxes were due because
the Trust Fund was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Trust Fund. If
these interest payments are properly characterized as guaranteed payments,
then the interest will not be considered "portfolio interest." As a result,
Certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a foreign holder would only
be enticed to claim a refund for that portion of the taxes in excess of the
taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New
regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
Tax Treatment of Certificates as Debt for Tax Purposes
a. Characterization of the Certificates as Indebtedness
If the related Prospectus Supplement indicates that the Certificates
will be treated as indebtedness for federal income tax purposes, then based
on the application of existing law to the facts as set forth in the Trust
Agreement and other relevant documents and assuming compliance with the terms
of the Trust Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Depositor ("Tax
Counsel"), will deliver its opinion that the Certificates will be treated as
debt instruments for federal income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related
Trust Agreement their intent that, for applicable tax purposes, the
Certificates will be indebtedness secured by the related Assets. The
Depositor and the Certificateholders, by accepting the Certificates, and each
Certificate Owner by its acquisition of a beneficial interest in a
Certificate, have agreed to treat the Certificates as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Depositor may treat this transaction as a sale of an interest in the related
Assets for financial accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured
by property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several
factors to be take into account in determining whether the substance of a
transaction is a sale of property or a secured loan, the primary factor in
making this determination is whether the transferee has assumed the risk of
loss or other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Tax Counsel will analyze and rely on several
factors in reaching its opinion that the weight of the benefits and burdens
of ownership of the Mortgage Loans will be retained by the Depositor and not
transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions of the documents
either accords with the characterization of the Certificates as debt or
otherwise makes the rationale of those cases inapplicable to this situation.
b. Taxation of Interest Income of Certificate Owners
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been
issued with OID if the interest were not treated as "unconditionally payable"
under the OID Regulations. If such regulations were to apply, all of the
taxable income to be recognized with respect to the Certificates would be
includible in income of Certificate owners as OID, but would not be
includible again when the interest is actually received.
c. Possible Classification of the Trust Fund as a Partnership or
Association Taxable as a Corporation
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as
a corporation. The opinion of Tax Counsel is not binding on the courts or
the IRS. It is possible that the IRS could assert that, for purposes of the
Code, the transaction contemplated by this Prospectus Supplement with respect
to the Certificates constitutes a sale of the Mortgage Loans (or an interest
therein) to the Certificate Owners and that the proper classification of the
legal relationship between the Depositor and the Certificate Owners resulting
form this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be
treated as indebtedness in the hands of the Certificateholders for U.S.
federal income tax purposes and that the entity constituted by the Trust will
not be a publicly traded partnership treated as a corporation or an
association taxable as a corporation, the Depositor will not attempt to
comply with U.S. federal income tax reporting requirements applicable to
partnerships or corporations as such requirements would apply if the
Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified
as a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be
treated as dividends for tax purposes to the extent of such corporation's
earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
d. Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any entity
(or portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Any
entity (or portion of any entity) will be a taxable mortgage pool if (i)
substantially all of its assets consist of debt instruments, more than 50% of
which are real estate mortgages, (ii) the entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the
entity's debt obligations (or an underlying arrangement), payments on such
debt obligations bear a relationship to the debt instruments held by the
entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that
all of the provisions of the Trust Agreement, as in effect on the date of
issuance, will be complied with, Tax Counsel will deliver its opinion that
the arrangement created by the Agreement will not be a taxable mortgage pool
under Section 7701(i) of the Code because only one class of indebtedness
secured by the Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Trust Agreement is a taxable mortgage
pool, such arrangement would be subject to U.S. federal corporate income tax
on its taxable income generated by ownership of the Mortgage Loans. Such a
tax might reduce amounts available for distributions to Certificate Owners.
The amount of such a tax would depend upon whether distributions to
Certificate Owners would be deductible as interest expense in computing the
taxable income of such an arrangement as a taxable mortgage pool.
e. Foreign Investors
In general, subject to certain exception, interest (including OID) paid
on a Certificate to a nonresident alien individual, foreign corporation or
other non-United States person is not subject to U.S. federal income tax,.
provided that such interest is not effectively connected with a trade or
business of the recipient in the United sates and the Certificate Owner
provides the required foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch
profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each
foreign partner would be credited against such foreign partner's U.S. income
tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an
applicable tax treaty.
f. Backup Withholding
Certain Certificate owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the
Certificate Owners, upon issuance of the Certificates, fail to supply the
Trustee or the Certificate Owners' brokers with their respective taxpayer
identification numbers, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to
provide the Trustee of the Certificate Owners' brokers with certified
statements, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S.
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only "Certificateholder" of record
is Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax
and other information including the amount of interest paid on the
Certificates owned from Participants and Indirect Participants rather than
from the Trustee. (The Trustee, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and
certain other persons to complete their reports.) Each non-exempt
Certificate Owner will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct
federal taxpayer identification number and a statement that he or she is not
to subject to backup withholding. Should a non-exempt Certificate Owner fail
to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income
tax liability.
g. New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been
issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
Securityholders. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series. The Prospectus
Supplement for each Series of Securities will indicate whether one or more
FASIT elections will be made for that Series and which Securities of such
Series will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interest in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated company as
defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool)
must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments
issued by the holder of the FASIT's ownership interest or by any person
related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements.
All of the interests in a FASIT must belong to either of the following: (i)
one or more classes of regular interests or (ii) a single class of ownership
interest that is held by a fully taxable domestic corporation. In the case
of Series that include FASIT Ownership Securities, the ownership interest
will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5%, and (vi) if
it pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average rates).
See "Certain Federal Income Tax Consequences--REMICS - Taxation of Owners of
REMIC Regular Certificates - Variable Rate REMIC Regulation Certificate.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security
consists of a specified portion of the interest payments on permitted assets
and that portion does not vary over the life of the Security, the Security
also will qualify as a High-Yield Interest. A High-Yield Interest may be
held only by domestic corporations that are fully subject to corporate income
tax ("Eligible Corporations"), other FASITs and dealers in securities who
acquire such interests as inventory, rather than for investment. In
addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Federal Income Tax
Consequences--FASIT Securities--Tax Treatment of FASIT Regular Securities--
Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may
be lost for that year and thereafter. If FASIT status is lost, the treatment
of the former FASIT and the interests therein for federal income tax purposes
is uncertain. The former FASIT might be treated as a grantor trust, as a
separate association taxed as a corporation, or as a partnership. The FASIT
Regular Securities could be treated as debt instruments for federal income
tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for a
period of time in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of holders of
REMIC Regular Securities, holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or
accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Securityholder and a principal payment on such Security will be
treated as a return of capital to the extent that the Securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will
treat interest and principal payments on such Securities in the same manner
described for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences--REMIC Taxation of Owners of REMIC Regular Certificates--
"Original Issue Discount and Premium" and "--Market Discounts" above. High-
Yield Securities may be held only by fully taxable domestic corporations,
other FASITs, and certain securities dealers. Holders of High-Yield
Securities are subject to limitations on their ability to use current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption." In addition, if a FASIT Regular Security becomes
wholly or partially worthless as a result of Default and Delinquencies of the
underlying Assets, the holder of such Security should be allowed to deduct
the loss sustained (or alternatively be able to report a lesser amount of
income). See "Certain Federal Income Tax Consequences--REMIC--Taxation of
Owners of REMIC Regular Certificates"--Effects of Default and Delinquencies"
and "Treatment of Realized Losses."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular
Securities held by a Thrift Institution taxed as a "domestic building and
loan association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Securities would be so considered. See "Certain Federal
Income Tax Consequences--REMICs Securities--Status as Real Property Loans."
In addition, FASIT Regular Securities held by a financial institution to
which Section 585 of the Code applies will be treated as evidences of
indebtedness for purposes of Section 582(c)(1) of the Code. FASIT Securities
will not qualify as "Government Securities" for either REIT or RIC
qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield
Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities
backed by the FASIT Regular Security and that have the same features as High-
Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit
of a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security
must determine the amount of interest, original issue discount, market
discount and premium recognized with respect to the FASIT's assets and the
FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders
of FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
holders of High-Yield Interests. See "Federal Income Tax Securities--
Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition, the
seller of such Security acquires any other FASIT Ownership Security or, in
the case of a FASIT holding mortgage assets, any interest in a Taxable
Mortgage Pool that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT Ownership Security was required to be marked-to-
market under Code section 475 by such holder, then section 475 will continue
to apply to such securities, except that the amount realized under the mark-
to-market rules will be a greater of the securities' value under present law
or the securities' value after applying special valuation rules contained in
the FASIT provisions. Those special valuation rules generally require that
the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of
120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders
of REMIC Securities would be subject. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--
Information Reporting and Backup Withholding." For purposes of reporting and
tax administration, holders of record of FASIT Securities generally will be
treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Offered Securities. State and local income
tax law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences
of an investment in the Offered Securities.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election
has been made under Section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the
Securities without regard to the ERISA considerations described below,
subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Section 401(a) of the
Code and exempt from taxation under Section 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Prohibited Transactions
General
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions involving a Plan and its assets
unless a statutory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA) on parties
in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining
what constitutes the assets of a Plan. This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity investment" will be deemed for purposes of ERISA to be assets of the
Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans or Contracts and
any other assets held by the Trust Fund. In such an event, the Asset Seller,
the Master Servicer, the Trustee, any insurer of the Assets and other
persons, in providing services with respect to the assets of the Trust Fund,
may be parties in interest, subject to the fiduciary responsibility
provisions of Title I of ERISA, including the prohibited transaction
provisions of Section 406 of ERISA (and of Section 4975 of the Code), with
respect to transactions involving such assets unless such transactions are
subject to a statutory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity
participation in the entity will be significant if immediately after any
acquisition of any equity interest in the entity, "benefit plan investors" in
the aggregate, own at least 25% of the value of any class of equity interest.
---------
"Benefit plan investors" are defined as Plans as well as employee benefit
plans not subject to ERISA (e.g., governmental plans). The 25% limitation
must be met with respect to each class of certificates, regardless of the
portion of total equity value represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided
ownership interest in property and a beneficial ownership interest in a trust
are deemed to be "equity interest" under the final regulation. If Notes of a
particular Series were deemed to be indebtedness under applicable local law
without any substantial equity features, an investing Plan's assets would
include such Notes, but not, by reason of such purchase, the underlying
assets of the Trust Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the "Exemption") which exempts from the application
of the prohibited transaction rules transactions relating to: (1) the
acquisition, sale and holding by Plans of certain certificates representing
an undivided interest in certain asset-backed pass-through trusts, with
respect to which Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of
its affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of
such asset-backed pass-through trusts, provided that the general conditions
and certain other conditions set forth in the Exemption are satisfied. With
respect to a series of Notes, the related Prospectus Supplement will discuss
whether the Exemption may be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates
or a transaction in connection with the servicing, operation and management
of the Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Inc., Fitch Investors
Service, Inc., Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group.
(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Mortgage Assets, any
borrower whose obligations under one or more Assets constitute more than
5% of the aggregate unamortized principal balance of the assets in the
Trust Fund, or any of their respective affiliates (the "Restricted
Group");
(5) The sum of all payments made to and retained by the Underwriter
in connection with the distribution of the Certificates represents not
more than reasonable compensation for underwriting such Certificates;
the sum of all payments made to and retained by the Asset Seller
pursuant to the sale of the Assets to the Trust Fund represents not more
than the fair market value of such Assets; the sum of all payments made
to and retained by the Master Servicer represent not more than
reasonable compensation for the Master Servicer's services under the
Agreement and reimbursement of the Master Servicer's reasonable expenses
in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of
the Exemption and (b) that the specific and general conditions set forth in
the Exemption and the other requirements set forth in the Exemption would be
satisfied.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of
ERISA and the Code to such investment. Among other things, before purchasing
any Securities, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to
the availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions. In
particular, in connection with a contemplated purchase of Securities
representing a beneficial ownership interest in a pool of single family
residential first mortgage loans, such Plan fiduciary should consider the
availability of the Exemption or Prohibited Transaction Class Exemption 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement with respect to a series of Securities may
contain additional information regarding the application of the Exemption,
PTCE 83-1, or any other exemption, with respect to the Securities offered
thereby. PTCE 83-1 is not applicable to manufactured housing contract pool
investment trusts or multifamily mortgage pool investment trusts.
Purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust & Savings Bank (decided December 13,
1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to make purchases of the
Securities. In particular, such an insurance company should consider the
exemptive relief granted by Labor for transactions involving insurance
company general accounts in Prohibited Transactions Exemption 95-60, 60 Fed.
Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance
in one of the four highest rating categories by at least one Rating Agency.
The related Prospectus Supplement will specify which classes of the
Securities, if any, will constitute "mortgage related securities" ("SMMEA
Securities") for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). SMMEA Securities will constitute legal investments for
persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance
companies, as well as trustees and state government employee retirement
systems) created pursuant to or existing under the laws of the United States
or of any state (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North
Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia enacted
legislation before the October 4, 1991 cutoff established by SMMEA for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in mortgage related securities, in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Investors affected by such legislation will be
authorized to invest in SMMEA Certificates only to the extent provided in
such legislation. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe. In this
connection, federal credit unions should review the National Credit Union
Administration ("NCUA") Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities, and
the NCUA's regulation "Investment and Deposit Activities" (12 C.F.R. Part
703), which sets forth certain restrictions on investment by federal credit
unions in mortgage related securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be
subject to restrictions on investment in certain classes of Offered
Securities. Any financial institution which is subject to the jurisdiction
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation ("FDIC"), the
Office of Thrift Supervision ("OTS"), the NCUA or other federal or state
agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing any Offered Security. The
Federal Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement") setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC, the OTS and the NCUA (with certain modifications),
with respect to the depository institutions that they regulate. The Policy
Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a
standard fixed rate thirty-year mortgage security. According to the Policy
Statement, prior to purchase, a depository institution will be required to
determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce
the institution's overall interest rate risk. Reliance on analysis and
documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There
can be no assurance that any classes of Offered Securities will not be
treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for
the investment by savings institutions in certain "high-risk" mortgage
derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According
to the bulletin, such "high-risk" mortgage derivative securities include
securities having certain specified characteristics, which may include
certain classes of Securities. In accordance with Section 402 of the
Financial Institutions Reform, Recovery and Enhancement Act of 1989, the
foregoing bulletin will remain in effect unless and until modified,
terminated, set aside or superseded by the FDIC. Similar policy statements
have been issued by regulators having jurisdiction over the types of
depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth
model investment guidelines for the insurance industry. Institutions subject
to insurance regulatory authorities may be subject to restrictions on
investment similar to those set forth in the Model Law and other
restrictions.
If specified in the related Prospectus Supplement, other classes of
Offered Securities offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization
of this Offered Security under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase such
Offered Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or
financial institution regulatory purposes, or as to the ability of particular
investors to purchase any Offered Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Securities) may
adversely affect the liquidity of the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or
to purchase Offered Securities representing more than a specified percentage
of the investor's assets. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Offered Securities of any class constitute legal investments or are subject
to investment, capital or other restrictions, and, if applicable, whether
SMMEA has been overridden in any jurisdiction relevant to such investor.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may
be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. If so specified in the related Prospectus Supplement, the Offered
Securities will be distributed in a firm commitment underwriting, subject to
the terms and conditions of the underwriting agreement, by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") acting as underwriter
with other underwriters, if any, named therein. Merrill Lynch is an affiliate
of the Depositor. In such event, the Prospectus Supplement may also specify
that the underwriters will not be obligated to pay for any Offered Securities
agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of Offered
Certificates, underwriters may receive compensation from the Depositor or
from purchasers of Offered Securities in the form of discounts, concessions
or commissions. The Prospectus Supplement will describe any such compensation
paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with
respect to Offered Securities that it has previously purchased or agreed to
purchase. If Merrill Lynch or such persons act as agents in the sale of
Offered Securities, they will receive a selling commission with respect to
such Offered Securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance or notional amount of such
Offered Securities as of the Cut-off Date. The exact percentage for each
series of Securities will be disclosed in the related Prospectus Supplement.
To the extent that Merrill Lynch or such persons elect to purchase Offered
Securities as principal, they may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Offered
Securities of such series.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may
be required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor or
Asset Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by
such investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the Depositor
or the Underwriter will promptly deliver, or cause to be delivered, without
charge, a paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including
certain federal income tax consequences, will be passed upon for the
Depositor by Brown & Wood LLP, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of
the guarantor, if any. Ratings on asset backed securities do not represent
any assessment of the likelihood of principal prepayments by borrowers or of
the degree by which such prepayments might differ from those originally
anticipated. As a result, securityholders might suffer a lower than
anticipated yield, and, in addition, holders of stripped interest
certificates in extreme cases might fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
INDEX OF PRINCIPAL DEFINITIONS
Page(s) on which
term is defined
Terms in the Prospectus
1986 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78, 82
Accrual Securities . . . . . . . . . . . . . . . . . . . . . . . . . 10, 30
Accrued Security Interest . . . . . . . . . . . . . . . . . . . . . . . . 32
adjusted issue price . . . . . . . . . . . . . . . . . . . . . . 79, 92, 93
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
an accrual period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Applicable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
ARM Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 78
Asset Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6, 19
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . . 31
Balloon Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . 18
benefit plan investors . . . . . . . . . . . . . . . . . . . . . . . . . 108
Book-Entry Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Buydown Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . 28
Buydown Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
capital asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 87
Cash Flow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 37
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
clearing agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
clearing corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Collection Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Contract Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 30
Contract Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 23
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 16, 19
Contributions Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Covered Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 57
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Credit Support . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 8, 24
Crime Control Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
daily accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Deferred Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Definitive Securities . . . . . . . . . . . . . . . . . . . . . . . . 30, 37
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 20
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
disqualified organization . . . . . . . . . . . . . . . . . . . . . . . . 96
disqualified organizations . . . . . . . . . . . . . . . . . . . . . . . 96
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 36
Due Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
equity of redemption . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 107
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
excess inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
excess servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
FASIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42, 111
Federal long-term rate . . . . . . . . . . . . . . . . . . . . . . . . . 93
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
foreign person . . . . . . . . . . . . . . . . . . . . . . . . . . . 97, 99
Government Securities . . . . . . . . . . . . . . . . . . . . . 1, 8, 19, 81
Grantor Trust Certificates . . . . . . . . . . . . . . . . . . . . . . . 12
Holder-in-Due-Course . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Home Equity Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 21
Home Improvement Contracts . . . . . . . . . . . . . . . . . . . . . . 7, 21
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 38
Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Indirect Participants . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
L/C Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 20, 23
Manufactured Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
manufactured housing contracts . . . . . . . . . . . . . . . . . . . . . 16
Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . . . . . 91
Master REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6, 19
MBS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
MBS Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
MBS Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
MBS Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Merrill Lynch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Model Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Mortgage Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 20
Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Mortgage Loan Group . . . . . . . . . . . . . . . . . . . . . . . . . 10, 30
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6, 19
Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mortgage Participations . . . . . . . . . . . . . . . . . . . . . . 1, 6, 19
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 21
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 59
mortgagor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
NCUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Nonrecoverable Advance . . . . . . . . . . . . . . . . . . . . . . . . . 34
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Offered Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73, 75
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
pass-through entity . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
pass-through interest holder . . . . . . . . . . . . . . . . . . . . . . 92
pass-through interest holders . . . . . . . . . . . . . . . . . . . . . . 88
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 32
passive losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Payment Lag Certificates . . . . . . . . . . . . . . . . . . . . . . . . 88
Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 42
phantom income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . 38
portfolio income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
portfolio interest . . . . . . . . . . . . . . . . . . . . . . . 95, 99, 103
Pre-Funded Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
pre-issuance accrued interest . . . . . . . . . . . . . . . . . . . . . . 88
prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Prohibited Transactions Tax . . . . . . . . . . . . . . . . . . . . . . . 94
PTCE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
qualified mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
qualified stated interest . . . . . . . . . . . . . . . . . . . . . . . . 83
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Real estate assets . . . . . . . . . . . . . . . . . . . . . 74, 78, 81, 82
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Refinance Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Related Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68, 71
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
REMIC Regular Certificateholders . . . . . . . . . . . . . . . . . . . . 82
REMIC Regular Certificates . . . . . . . . . . . . . . . . . . . . . 12, 81
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
REMIC Residual Certificateholder . . . . . . . . . . . . . . . . . . . . 89
REMIC Residual Certificates . . . . . . . . . . . . . . . . . . . . . 12, 81
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Retained Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
RICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Security Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 32
Security Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Securityholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 19
senior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 30
Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Servicing Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Short-Term Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Single Family Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . 20
Single Family Properties . . . . . . . . . . . . . . . . . . . . . . . . . 7
Single Family Property . . . . . . . . . . . . . . . . . . . . . . . . . 20
single family residences . . . . . . . . . . . . . . . . . . . . . . . . 82
single-class REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Small Business Job Protection Act of 1996 . . . . . . . . . . . . . . . . 107
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 110
SMMEA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
SPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Stripped ARM Obligations . . . . . . . . . . . . . . . . . . . . . . . . 79
Stripped Bond Certificates . . . . . . . . . . . . . . . . . . . . . . . 76
stripped bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 74, 76
Stripped Coupon Certificates . . . . . . . . . . . . . . . . . . . . . . 77
stripped coupons . . . . . . . . . . . . . . . . . . . . . . . . . . 74, 76
Stripped Interest Certificates . . . . . . . . . . . . . . . . . . . . . . 9
Stripped Interest Securities . . . . . . . . . . . . . . . . . . . . . . 30
Stripped Principal Securities . . . . . . . . . . . . . . . . . . . . . 9, 30
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Sub-Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 46
Subordinate Securities . . . . . . . . . . . . . . . . . . . . . . . . 9, 30
Subsequent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Super-Premium Certificates . . . . . . . . . . . . . . . . . . . . . . . 83
tax avoidance potential . . . . . . . . . . . . . . . . . . . . . . . . . 97
Tax Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
taxable mortgage pool . . . . . . . . . . . . . . . . . . . . . . . . 94, 105
thrift institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67, 72
Title VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
U.S. Person, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 69
Underlying MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Underlying Mortgage Loans. . . . . . . . . . . . . . . . . . . . . . . . 19
United States Department of Labor . . . . . . . . . . . . . . . . . . . . 108
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Warranting Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Whole Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus supplement and the prospectus to which it
relates 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.
(MOBs)
PROSPECTUS
- --------
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(Issuable in Series)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
Depositor
________
The Asset Backed Certificates (the "Certificates") and Asset Backed
Notes (the "Notes" and, together with the Certificates, the "Securities")
offered hereby and by Supplements to this Prospectus (the "Offered
Securities") will be offered from time to time in one or more series. Each
series of Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (with respect to any series, the "Trust
Fund") consisting of one or more segregated pools of various types of
manufactured housing installment sale contracts or installment loan
agreements ("Contracts"), asset-backed securities supported by Contracts
("ABS") or certain direct obligations of the United States, agencies thereof
or agencies created thereby (the "Government Securities") (with respect to
any series, collectively, "Assets"). If a series of Securities includes
Notes, such Notes will be issued and secured pursuant to an indenture and
will represent indebtedness of the Trust Fund. If so specified in the
related Prospectus Supplement, the Trust Fund for a series of Securities may
include letters of credit, insurance policies, guarantees, reserve funds or
other types of credit support, or any combination thereof (with respect to
any series, collectively, "Credit Support"), and currency or interest rate
exchange agreements and other financial assets or derivative instruments, or
any combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Securities" and "Description of Credit Support."
Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be
entitled to interest distributions, with disproportionately low, nominal or
no principal distributions; (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events, such as
the retirement of one or more other classes of Securities of such series;
(vi) provide for distributions of principal as described in the related
Prospectus Supplement; and/or (vii) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available
funds, in each case as described in the related Prospectus Supplement.
Any such classes may include classes of Offered Securities. See "Description
of the Securities."
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Securities of any series will be made only from the assets of the related
Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, any Master Servicer, any Sub-Servicer or any of their
respective affiliates, except to the limited extent described herein and in
the related Prospectus Supplement. Neither the Securities nor any assets in
the related Trust Fund will be guaranteed or insured by any governmental
agency or instrumentality or by any other person, unless otherwise provided
in the related Prospectus Supplement. The assets in each Trust Fund will be
held in trust for the benefit of the holders of the related series of
Certificates pursuant to a Pooling and Servicing Agreement or a Trust
Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the
timing of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement.
Prospective investors should review the information appearing under the
caption "Risk Factors" herein and such information as may be set forth under
the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Security.
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" for federal income tax
purposes. See also "Material Federal Income Tax Consequences" herein.
________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________
Prior to issuance there will have been no market for the Securities of
any series and there can be no assurance that a secondary market for any
Offered Securities will develop or that, if it does develop, it will
continue. This Prospectus may not be used to consummate sales of the Offered
Securities of any series unless accompanied by the Prospectus Supplement for
such series.
Offers of the Offered Securities may be made through one or more
different methods, including offerings through underwriters, as more fully
described under "Plan of Distribution" herein and in the related Prospectus
Supplement.
________
MERRILL LYNCH & CO.
The date of this Prospectus is ______, 199_.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Securities of each series will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities, the payment provisions with respect to
each such class and the Pass-Through Rate or interest rate or method of
determining the Pass-Through Rate or interest rate with respect to each such
class; (ii) the aggregate principal amount and distribution dates relating to
such series and, if applicable, the initial and final scheduled distribution
dates for each class; (iii) information as to the assets comprising the Trust
Fund, including the general characteristics of the assets included therein,
including the Assets and any Credit Support and Cash Flow Agreements (with
respect to the Securities of any series, the "Trust Assets"); (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) additional information with respect to the method of
distribution of such Certificates; (vi) whether one or more REMIC elections
will be made and designation of the regular interests and residual interests;
(vii) the aggregate original percentage ownership interest in the Trust Fund
to be evidenced by each class of Securities; (viii) information as to any
Master Servicer, any Sub-Servicer and the Trustee, as applicable;
(ix) information as to the nature and extent of subordination with respect to
any class of Securities that is subordinate in right of payment to any other
class; and (x) whether such Securities will be initially issued in definitive
or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Offered Securities. This Prospectus and the Prospectus
Supplement relating to each series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement
pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the
exhibits thereto. Such Registration Statement and exhibits can be inspected
and copied at prescribed rates at the public reference facilities maintained
by the Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048. The Commission maintains
a Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the
Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Offered Securities or an offer of the Offered Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus and any Prospectus Supplement hereto at any time
does not imply that information herein is correct as of any time subsequent
to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Securities, pursuant to the applicable Agreement. Such reports may be
available to holders of interests in the Securities (the "Securityholders")
upon request to their respective DTC participants. See "Description of the
Securities--Reports to Securityholders" and "Description of the Agreements--
Evidence as to Compliance." The Depositor will file or cause to be filed with
the Commission such periodic reports with respect to each Trust Fund as are
required under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the rules and regulations of the Commission thereunder, as interpreted
by the staff of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to
the termination of an offering of Offered Securities evidencing interests
therein. Upon request, the Depositor will provide or cause to be provided
without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Offered Securities, a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of
such classes of such Offered Securities, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed in writing to
Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial
Center - North Tower, 10th Floor, New York, New York 10281-1310, Attention:
Secretary, or by telephone at (212) 449-0357. The Depositor has determined
that its financial statements are not material to the offering of any Offered
Securities.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 3
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . 4
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . 6
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DESCRIPTION OF THE TRUST FUNDS . . . . . . . . . . . . . . . . . . . . . 17
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
YIELD CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 20
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DESCRIPTION OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . 24
DESCRIPTION OF THE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . 32
DESCRIPTION OF CREDIT SUPPORT . . . . . . . . . . . . . . . . . . . . . . 48
CERTAIN LEGAL ASPECTS OF THE CONTRACTS . . . . . . . . . . . . . . . . . 51
MATERIAL FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . 59
STATE TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 95
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 96
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 100
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 101
RATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
INDEX OF PRINCIPAL DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 102
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing
elsewhere in this Prospectus and by reference to the information with respect
to each series of Securities contained in the Prospectus Supplement to be
prepared and delivered in connection with the offering of such series. An
Index of Principal Definitions is included at the end of this Prospectus.
Title of Securities........ Asset-Backed Certificates (the "Certificates")
and Asset Backed Notes (the "Notes" and,
together with the Certificates, the
"Securities"), issuable in series.
Issuer..................... With respect to each series, the trust fund
(the "Trust Fund") formed to issue the
Securities of that series.
Depositor.................. Merrill Lynch Mortgage Investors, Inc. (the
"Depositor"), a wholly owned subsidiary of
Merrill Lynch Mortgage Capital, Inc., which is
a wholly-owned indirect subsidiary of Merrill
Lynch & Co., Inc. The Depositor is an
affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Neither Merrill Lynch &
Co., Inc. nor any of its affiliates, including
the Depositor and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, will insure or guarantee
the Securities or the Contracts or be otherwise
obligated in respect thereof.
Master Servicer............ The master servicer or master servicers (each,
a "Master Servicer"), if any, or a servicer for
substantially all the Contracts for each series
of Securities, which servicer or master
servicer(s) may be affiliates of the Depositor,
will be named in the related Prospectus
Supplement. See "Description of the Agreements-
-General" and "--Collection and Other Servicing
Procedures."
Trustee.................... The trustee (the "Trustee") for each series of
Certificates will be named in the related
Prospectus Supplement. See "Description of the
Agreements--The Trustee."
The Trust Assets........... Each series of Certificates will represent in
the aggregate the entire beneficial ownership
interest in a Trust Fund. If a series of
Securities includes Notes, such Notes will
represent indebtedness of the Trust Fund and
will be secured by a security interest in the
Assets of the Trust Fund. A Trust Fund will
consist primarily of any of the following
assets (the Contracts, ABS and Government
Securities may be referred to collectively or
individually as "Assets"):
(a) Contracts and ABS.. The Contracts with respect to a series of
Securities will consist of manufactured housing
installment sale contracts and installment loan
agreements secured by a security interest in a
new or used manufactured home (each, a
"Manufactured Home"), and, to the extent, if
any, indicated in the related Prospectus
Supplement, by real property. The Contracts
will not be insured or guaranteed by the
Depositor or any of its affiliates or, unless
otherwise specified in the related Prospectus
Supplement, by any governmental agency or
instrumentality or any other person. The
Manufactured Homes may be located in any of the
fifty states or any other jurisdiction
specified in the related Prospectus Supplement.
All Contracts will have been originated by
persons other than the Depositor, and all
Contracts will have been purchased, either
directly or indirectly, by the Depositor on or
before the date of initial issuance of the
related series of Securities. The related
Prospectus Supplement will indicate if any such
persons are affiliates of the Depositor. Each
Contract may provide for an annual percentage
rate thereon (a "Contract Rate") that is fixed
over its term or that adjusts as described in
the related Prospectus Supplement. The manner
of determining scheduled payments due on the
Contract will be described in the Prospectus
Supplement. The Prospectus Supplement will
describe the minimum principal balance of the
Contracts at origination and the maximum
original term to maturity of the Contracts.
Each Contract may provide for scheduled
payments to maturity, payments that adjust from
time to time to accommodate changes in the
Contract Rate or to reflect the occurrence of
certain events, and may provide for negative
amortization or accelerated amortization, in
each case as described in the related
Prospectus Supplement. Each Contract may be
fully amortizing or require a balloon payment
due on its stated maturity date, in each case
as described in the related Prospectus
Supplement. A Contract may provide for payments
of principal, interest or both, on due dates
that occur monthly, quarterly, semi-annually or
at such other interval as is specified in the
related Prospectus Supplement. See "Description
of the Trust Funds--Assets." A Trust Fund may
also consist of asset-backed securities
supported by Contracts ("ABS") or any
combination of Contracts and ABS.
(b) Government Securities... If so provided in the related Prospectus
Supplement, the Trust Fund may include, in
addition to Contracts and ABS, certain
direct obligations of the United States,
agencies thereof or agencies created
thereby which provide for payment of
interest and/or principal (collectively,
"Government Securities").
(c) Collection Accounts..Each Trust Fund will include one or more
accounts established and maintained on behalf
of the Securityholders into which the person or
persons designated in the related Prospectus
Supplement will, to the extent described herein
and in such Prospectus Supplement, deposit all
payments and collections received or advanced
with respect to the Assets and other assets in
the Trust Fund. Such an account may be
maintained as an interest bearing or a non-
interest bearing account, and funds held
therein may be held as cash or invested in
certain short-term, investment grade
obligations, in each case as described in the
related Prospectus Supplement. See "Description
of the Agreements--Collection Account and
Related Accounts."
(d) Credit Support..... If so provided in the related Prospectus
Supplement, partial or full protection against
certain defaults and losses on the Assets in
the related Trust Fund may be provided to one
or more classes of Securities of the related
series in the form of subordination of one or
more other classes of Securities of such
series, which other classes may include one or
more classes of Offered Securities, or by one
or more other types of credit support, such as
a letter of credit, insurance policy,
guarantee, reserve fund or another type of
credit support, or a combination thereof (any
such coverage with respect to the Securities of
any series, "Credit Support"). The amount and
types of coverage, the identification of the
entity providing the coverage (if applicable)
and related information with respect to each
type of Credit Support, if any, will be
described in the Prospectus Supplement for a
series of Securities. The Prospectus
Supplement for any series of Securities
evidencing an interest in a Trust Fund that
includes ABS will describe any similar forms of
credit support that are provided by or with
respect to, or are included as part of the
trust fund evidenced by or providing security
for, such ABS. See "Risk Factors--Credit
Support Limitations" and "Description of Credit
Support."
(e) 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, other swaps and derivative
instruments or other financial assets. The
principal terms of any such agreement (any such
agreement, a "Cash Flow Agreement"), including,
without limitation, provisions relating to the
timing, manner and amount of payments
thereunder and provisions relating to the
termination thereof, will be described in the
Prospectus Supplement for the related series.
In addition, the related Prospectus Supplement
will provide certain information with respect
to the obligor under any such Cash Flow
Agreement. The Prospectus Supplement for any
series of Securities evidencing an interest in
a Trust Fund that includes ABS will describe
any cash flow agreements that are included as
part of the trust fund evidenced by or
providing security for such ABS. See
"Description of the Trust Funds-Cash Flow
Agreements."
(f) Pre-Funding Account To the extent provided in a Prospectus
Supplement, the Depositor will be obligated
(subject only to the availability thereof) to
sell at a predetermined price, and the Trust
Fund for the related series of Securities will
be obligated to purchase (subject to the
satisfaction of certain conditions described in
the applicable Agreement), additional Assets
(the "Subsequent Assets") from time to time (as
frequently as daily) within the number of
months specified in the Prospectus Supplement
after the issuance of such series of Securities
having an aggregate principal balance
approximately equal to the amount on deposit in
the Pre-Funding Account (the "Pre-Funded
Amount") for such series on date of such
issuance.
Description of Securities... Each series of Certificates will evidence an
interest in the related Trust Fund and will be
issued pursuant to a pooling and servicing
agreement or a trust agreement. Pooling and
servicing agreements and trust agreements are
referred to herein as the "Agreements." If a
series of Securities includes Notes, such Notes
will represent indebtedness of the related
Trust Fund and will be secured by a security
interest in the Assets of the Trust Fund (or a
specified group thereof) pursuant to an
indenture.
Each series of Securities will include one or
more classes. Each class of Securities (other
than certain Stripped Interest Securities, as
defined below) will have a stated principal
amount (a "Security Balance") and except for
certain Stripped Principal Securities, as
defined below, will accrue interest thereon
based on a fixed, variable or adjustable
interest rate (in the case of Certificates, a
"Pass-Through Rate"). The related Prospectus
Supplement will specify the Security Balance,
if any, and the Pass-Through Rate or interest
rate for each class of Securities or, in the
case of a variable or adjustable Pass-Through
Rate or interest rate, the method for
determining the Pass-Through Rate or interest
rate.
Distributions on Securities.. Each series of Securities will consist of one
or more classes of Securities that may
(i) provide for the accrual of interest thereon
based on fixed, variable or adjustable rates;
(ii) be senior (collectively, "Senior
Securities") or subordinate (collectively,
"Subordinate Securities") to one or more other
classes of Securities in respect of certain
distributions on the Securities; (iii) be
entitled to principal distributions, with
disproportionately low, nominal or no interest
distributions (collectively, "Stripped
Principal Securities"); (iv) be entitled to
interest distributions, with disproportionately
low, nominal or no principal distributions
(collectively, "Stripped Interest Securities");
(v) provide for distributions of accrued
interest thereon commencing only following the
occurrence of certain events, such as the
retirement of one or more other classes of
Securities of such series (collectively,
"Accrual Securities"); (vi) provide for
distributions of principal as described in the
related Prospectus Supplement;
and/or (vii) provide for distributions based on
a combination of two or more components thereof
with one or more of the characteristics
described in this paragraph, including a
Stripped Principal Security component and a
Stripped Interest Security component, to the
extent of available funds, in each case as
described in the related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, distributions on one or more
classes of a series of Securities may be
limited to collections from a designated
portion of the Contracts in the related
Contract Pool (each such portion of the
Contracts, a "Contract Group"). See
"Description of the Securities--General." Any
such classes may include classes of Offered
Securities. With respect to Securities with
two or more components, references herein to
Security Balance, notional amount and Pass-
Through Rate or interest rate refer to the
principal balance, if any, notional amount, if
any, and the Pass-Through Rate or interest
rate, if any, for any such component.
The Securities will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person, unless
otherwise provided in the related Prospectus
Supplement. See "Risk Factors--Limited Assets"
and "Description of the Securities."
(a) Interest........... Interest on each class of Offered Securities
(other than Stripped Principal Securities and
certain classes of Stripped Interest
Securities) of each series will accrue at the
applicable Pass-Through Rate or interest rate
on the outstanding Security Balance thereof and
will be distributed to Securityholders as
provided in the related Prospectus Supplement.
The specified date on which distributions are
to be made is a "Distribution Date."
Distributions with respect to interest on
Stripped Interest Securities may be made on
each Distribution Date on the basis of a
notional amount as described in the related
Prospectus Supplement. Distributions of
interest with respect to one or more classes of
Securities may be reduced to the extent of
certain delinquencies, losses, prepayment
interest shortfalls, and other contingencies
described herein and in the related Prospectus
Supplement. See "Risk Factors--Average Life of
Securities; Prepayments; Yields," "Yield
Considerations" and "Description of the
Securities--Distributions of Interest on the
Securities."
(b) Principal......... The Securities of each series initially will
have an aggregate Security Balance no greater
than the outstanding principal balance of the
Assets as of, unless the related Prospectus
Supplement provides otherwise, the close of
business on the first day of the month of
formation of the related Trust Fund (the "Cut-
off Date"), after application of scheduled
payments due on or before such date, whether or
not received. The Security Balance of a
Security outstanding from time to time
represents the maximum amount that the holder
thereof is then entitled to receive in respect
of principal from future cash flow on the
assets in the related Trust Fund. Unless
otherwise provided in the related Prospectus
Supplement, distributions of principal will be
made on each Distribution Date to the class or
classes of Securities entitled thereto until
the Security Balances of such Securities have
been reduced to zero. Unless otherwise
specified in the related Prospectus Supplement,
distributions of principal of any class of
Securities will be made on a pro rata basis
among all of the Securities of such class or by
random selection, as described in the related
Prospectus Supplement or otherwise established
by the related Trustee. Stripped Interest
Securities with no Security Balance will not
receive distributions in respect of principal.
See "Description of the Securities--
Distributions of Principal of the Securities."
Risk Factors............... There are risk factors to be considered in
investing in the Securities. See "Risk
Factors" herein and, if applicable, in the
related Prospectus Supplement.
Advances................... Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will
be obligated as part of its servicing
responsibilities to make certain advances that
in its good faith judgment it deems recoverable
with respect to delinquent scheduled payments
on the Contracts in such Trust Fund. Neither
the Depositor nor any of its affiliates will
have any responsibility to make such advances.
Advances made by a Master Servicer are
reimbursable generally from subsequent
recoveries in respect of such Contracts and
otherwise to the extent described herein and in
the related Prospectus Supplement. If and to
the extent provided in the Prospectus
Supplement for any series, the Master Servicer
will be entitled to receive interest on its
outstanding advances, payable from amounts in
the related Trust Fund. The Prospectus
Supplement for any series of Securities
evidencing an interest in a Trust Fund that
includes ABS will describe any corresponding
advancing obligation of any person in
connection with such ABS. See "Description of
the Securities--Advances in Respect of
Delinquencies."
Termination................ If so specified in the related Prospectus
Supplement, a series of Securities may be
subject to optional early termination through
the repurchase of the Assets in the related
Trust Fund by the party specified therein,
under the circumstances and in the manner set
forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of
the Security Balance of a specified class or
classes of Securities to a specified percentage
or amount or on and after a date specified in
such Prospectus Supplement, the party specified
therein will solicit bids for the purchase of
all of the Assets of the Trust Fund, or of a
sufficient portion of such Assets to retire
such class or classes, or purchase such Assets
at a price set forth in the related Prospectus
Supplement. In addition, if so provided in the
related Prospectus Supplement, certain classes
of Securities may be purchased subject to
similar conditions. See "Description of the
Securities--Termination."
Registration of Securities.. If so provided in the related Prospectus
Supplement, one or more classes of the Offered
Securities will initially be represented by one
or more certificates or notes, as applicable,
registered in the name of Cede & Co., as the
nominee of DTC. No person acquiring an interest
in Offered Securities so registered will be
entitled to receive a definitive certificate or
note, as applicable, representing such person's
interest except in the event that definitive
certificates or notes, as applicable, are
issued under the limited circumstances
described herein. See "Risk Factors--Book-Entry
Registration" and "Description of the
Securities--Book-Entry Registration and
Definitive Securities."
Tax Status of the Certificates... The Certificates of each series will
constitute, as specified in the related
Prospectus Supplement, either (i) "regular
interests" ("REMIC Regular Certificates")
and "residual interests" ("REMIC Residual
Certificates") in a Trust Fund treated as
a real estate mortgage investment conduit
("REMIC") under Sections 860A through 860G
of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) interests
("Grantor Trust Certificates") in a Trust
Fund treated as a grantor trust under
applicable provisions of the Code, (iii)
an interest in a Trust Fund treated as a
partnership for purposes of federal and
state income tax or (iv) indebtedness of
the Trust Fund for federal income tax
purposes.
(a) REMIC.............. REMIC Regular Certificates generally will be
treated as debt obligations of the applicable
REMIC for federal income tax purposes. Certain
REMIC Regular Certificates may be issued with
original issue discount for federal income tax
purposes. See "Material Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement.
(b) Grantor Trust...... If the related Prospectus Supplement specifies
that the related Trust Fund will be a grantor
trust, the Trust Fund will be classified as a
grantor trust and not as an association taxable
as a corporation for federal income tax
purposes, and therefore holders of Certificates
will be treated as the owners of undivided pro
rata interests in the Assets held by the Trust
Fund.
(c) Partnership........ If so specified in a Prospectus Supplement, the
related Trust Fund will be treated as a
partnership for purposes of federal and state
income tax, and each Certificateholder, by the
acceptance of a Certificate of such Trust Fund,
will agree to treat the Trust Fund as a
partnership in which such Certificateholder is
a partner for federal income and state tax
purposes. Alternative characterizations of
such Trust Fund and such Certificates are
possible, but would not result in materially
adverse tax consequences to Certificateholders.
(d) Indebtedness....... If so specified in the related Prospectus
Supplement, the Certificates of a series will
be treated as indebtedness for federal income
tax purposes and the Certificateholder, in
accepting the Certificate, will agree to treat
such Certificate as indebtedness.
Investors are advised to consult their tax
advisors and to review "Material Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
Tax Status of Notes......... Unless otherwise specified in the related
Prospectus Supplement, Notes of a series will
be treated as indebtedness for federal and
state income tax purposes and the Noteholder,
in accepting the Note, will agree to treat such
Note as indebtedness. See "Material Federal
Income Tax Consequences" herein and in such
Prospectus Supplement.
Investors are advised to consult their tax
advisors and to review "Material Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
ERISA Considerations........ A fiduciary of an employee benefit plan and
certain other retirement plans and
arrangements, including individual retirement
accounts, annuities, Keogh plans, and
collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that is
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code should carefully
review with its legal advisors whether the
purchase or holding of Offered Securities could
give rise to a transaction that is prohibited
or is not otherwise permissible either under
ERISA or Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement. Certain classes of
Securities may not be transferred unless the
Trustee and the Depositor are furnished with a
letter of representations or an opinion of
counsel to the effect that such transfer will
not result in a violation of the prohibited
transaction provisions of ERISA and the Code
and will not subject the Trustee, the Depositor
or the Master Servicer to additional
obligations. See "Description of the
Securities--General" and "ERISA
Considerations".
Legal Investment............ Each Prospectus Supplement will specify which
class or classes of Offered Securities, if any,
will constitute "mortgage-related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Institutions whose investment activities are
subject to legal investment laws and
regulations or review by certain regulatory
authorities may be subject to restrictions on
investment in certain classes of the Offered
Securities. See "Legal Investment" herein and
in the related Prospectus Supplement.
Rating..................... At the date of issuance, as to each series,
each class of Offered Securities will be rated
not lower than investment grade by one or more
nationally recognized statistical rating
agencies (each, a "Rating Agency"). See
"Rating" herein and in the related Prospectus
Supplement.
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and additional risk
factors, if any, listed under "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the
Offered Securities, but has no obligation to do so. There can be no
assurance that a secondary market for the Securities of any series will
develop or, if it does develop, that it will provide holders with liquidity
of investment or will continue while Securities of such series remain
outstanding.
LIMITED ASSETS AND RISK THAT SUCH ASSETS WILL NOT BE SUFFICIENT TO PAY
SECURITIES IN FULL
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only
obligations with respect to the Securities or the Assets will be the
obligations (if any) of the Warranting Party (as defined herein) pursuant to
certain limited representations and warranties made with respect to the
Contracts, the Master Servicer's and any Sub-Servicer's servicing obligations
under the related Agreement (including the limited obligation to make certain
advances in the event of delinquencies on the Contracts, but only to the
extent deemed recoverable) upon conversion to a fixed rate or a different
index. Since certain representations and warranties with respect to the
Contracts may have been made and/or assigned in connection with transfers of
such Contracts prior to the Closing Date, the rights of the Trustee and the
Securityholders with respect to such representations or warranties will be
limited to their rights as an assignee thereof. Unless otherwise specified in
the related Prospectus Supplement, none of the Depositor, the Master Servicer
or any affiliate thereof will have any obligation with respect to
representations or warranties made by any other entity. Unless otherwise
specified in the related Prospectus Supplement, neither the Securities nor
the underlying Assets will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, any Sub-
Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Fund for each series of Securities (including the Assets and
any form of credit enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Depositor or any other
entity in the event that such proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a
series of Securities will not have any claim against or security interest in
the Trust Funds for any other series. If the related Trust Fund is
insufficient to make payments on such Securities, no other assets will be
available for payment of the deficiency. Additionally, certain amounts
remaining in certain funds or accounts, including the Collection Account and
any accounts maintained as Credit Support, may be withdrawn under certain
conditions, as described in the related Prospectus Supplement. In the event
of such withdrawal, such amounts will not be available for future payment of
principal of or interest on the Securities. If so provided in the Prospectus
Supplement for a series of Securities consisting of one or more classes of
Subordinate Securities, on any Distribution Date in respect of which losses
or shortfalls in collections on the Assets have been incurred, the amount of
such losses or shortfalls will be borne first by one or more classes of the
Subordinate Securities, and, thereafter, by the remaining classes of
Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
See "Description of the Trust Funds".
RISK THAT PREPAYMENTS WILL ADVERSELY AFFECT AVERAGE LIFE AND YIELDS OF
SECURITIES
Prepayments (including those caused by defaults) on the Assets in any
Trust Fund generally will result in a faster rate of principal payments on
one or more classes of the related Securities than if payments on such Assets
were made as scheduled. Thus, the prepayment experience on the Assets may
affect the average life of each class of related Securities. The rate of
principal payments on pools of manufactured housing contracts varies between
pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax, legal and other factors. There can be
no assurance as to the rate of prepayment on the Assets in any Trust Fund or
that the rate of payments will conform to any model described herein or in
any Prospectus Supplement. If prevailing interest rates fall significantly
below the applicable Contract Rates, principal prepayments are likely to be
higher than if prevailing rates remain at or above the rates borne by the
Contracts underlying or comprising the Assets in any Trust Fund. As a
result, the actual maturity of any class of Securities could occur
significantly earlier than expected. However, because the monthly payments
due on manufactured housing contracts are generally lower than monthly
payments on mortgage loans secured by site-built houses, the effect of a
change in interest rates on manufactured housing contracts may be smaller.
A series of Securities may include one or more classes of Securities
with priorities of payment and, as a result, yields on other classes of
Securities, including classes of Offered Securities, of such series may be
more sensitive to prepayments on Assets. A series of Securities may include
one or more classes offered at a significant premium or discount. Yields on
such classes of Securities will be sensitive, and in some cases extremely
sensitive, to prepayments on Assets and, where the amount of interest payable
with respect to a class is disproportionately high, as compared to the amount
of principal, as with certain classes of Stripped Interest Securities, a
holder might, in some prepayment scenarios, fail to recoup its original
investment. A series of Securities may include one or more classes of
Securities, including classes of Offered Securities, that provide for
distribution of principal thereof from amounts attributable to interest
accrued but not currently distributable on one or more classes of Accrual
Securities and, as a result, yields on such Securities will be sensitive to
(a) the provisions of such Accrual Securities relating to the timing of
distributions of interest thereon and (b) if such Accrual Securities accrue
interest at a variable or adjustable Pass-Through Rate or interest rate,
changes in such rate.
See "Yield Considerations" herein and, if applicable, in the related
Prospectus Supplement.
CONTRACTS AND MANUFACTURED HOMES IN GENERAL -- RISK THAT DEPRECIATION IN
VALUE OF MANUFACTURED HOME WILL RESULT IN LOSSES
An investment in Securities may be affected by, among other things, a
downturn in national, regional or local economic conditions. The geographic
location of the Manufactured Homes in any Contract Pool at origination of the
related Contract will be set forth in the related Prospectus Supplement under
"The Contract Pool". Regional and local economic conditions are often
volatile and, historically, regional and local economic conditions, as well
as national economic conditions, have affected the delinquency, loan loss and
repossession experience of manufactured housing installment sales contracts
and/or installment loan contracts (hereinafter generally referred to as
"contracts" or "manufactured housing contracts"). Moreover, regardless of
its location, manufactured housing generally depreciates in value. Thus,
such Securityholders should expect that, as a general matter, the market
value of any Manufactured Home will be lower than the outstanding principal
balance of the related Contract. Sufficiently high delinquencies and
liquidation losses on the Contracts in an Contract Pool will have the effect
of reducing, and could eliminate, the protection against loss afforded by any
credit enhancement supporting any class of the related Securities. If such
protection is eliminated with respect to a class of Securities, the holders
of such Securities will bear all risk of loss on the related Contracts and
will have to rely on the value of the related Manufactured Homes for recovery
of the outstanding principal of and unpaid interest on any defaulted
Contracts in the related Contract Pool. See "Description of Credit Support."
SECURITY INTERESTS AND CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS -- RISK
THAT SECURITY INTEREST IN FAVOR OF TRUSTEE WILL NOT BE EFFECTIVE; EFFECT OF
VIOLATING CONSUMER PROTECTION LAWS
The Asset Seller in respect of a Contract will represent that such
Contract is secured by a security interest in a Manufactured Home.
Perfection of security interests in the Manufactured Homes and enforcement of
rights to realize upon the value of the Manufactured Homes as collateral for
the Contracts are subject to a number of Federal and state laws, including
the Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the security
interest in a Manufactured Home will vary from state to state. Because of
the expense and administrative inconvenience involved, the Master Servicer
will not amend any certificates of title to change the lienholder specified
therein from the Asset Seller to the Trustee and will not deliver any
certificate of title to the Trustee or note thereon the Trustee's interest.
Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home
may not be effective or such security interest may not be perfected and, in
the absence of such notation or delivery to the Trustee, the assignment of
the security interest in the Manufactured Home may not be effective against
creditors of the Asset Seller or a trustee in bankruptcy of the Asset Seller.
In addition, numerous Federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment
loan agreements such as the Contracts, and the failure by the lender or
seller of goods to comply with such requirements could give rise to
liabilities of assignees for amounts due under such agreements and claims by
such assignees may be subject to set-off as result of such lender's or
seller's noncompliance. These laws would apply to the Trustee as assignee of
the Contracts. The Asset Seller of the Contracts to the Depositor will
warrant that each Contracts complies with all requirements of law and will
make certain warranties relating to the validity, subsistence, perfection and
priority of the security interest in each Manufactured Home securing a
Contract. A breach of any such warranty that materially adversely affects
any Contract would create an obligation of the Asset Seller to repurchase
such Contract unless such breach is cured. If the Credit Support is
exhausted and recovery of amounts due on the Contracts is dependent on
repossession and resale of Manufactured Homes securing Contracts that are in
default, certain other factors may limit the ability of the
Certificateholders to realize upon the Manufactured Home or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of
the Contracts".
CREDIT SUPPORT LIMITATIONS -- RISK THAT CREDIT SUPPORT WILL NOT COVER ALL
LOSSES
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of
credit support, or combinations thereof. Use of Credit Support will be
subject to the conditions and limitations described herein and in the related
Prospectus Supplement. Moreover, such Credit Support may not cover all
potential losses or risks; for example, Credit Support may or may not cover
fraud or negligence by a contract originator or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce
the risk to holders of Senior Securities of delinquent distributions or
ultimate losses, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Securities of a series are made in a specified order of
priority, any limits with respect to the aggregate amount of claims under any
related Credit Support may be exhausted before the principal of the lower
priority classes of Securities of such series has been repaid. As a result,
the impact of significant losses and shortfalls on the Assets may fall
primarily upon those classes of Securities having a lower priority of
payment. Moreover, if a form of Credit Support covers more than one series of
Securities (each, a "Covered Trust"), holders of Securities evidencing an
interest in a Covered Trust will be subject to the risk that such Credit
Support will be exhausted by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Securities, including the subordination of one or more
classes of Securities, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Securities based on
an assumed level of defaults, delinquencies, other losses or other factors.
There can, however, be no assurance that the loss experience on the related
Assets will not exceed such assumed levels.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer will generally be permitted to reduce, terminate or substitute all
or a portion of the credit enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Securities by any
applicable Rating Agency may be lowered following the initial issuance
thereof as a result of the downgrading of the obligations of any applicable
Credit Support provider, or as a result of losses on the related Assets
substantially in excess of the levels contemplated by such Rating Agency at
the time of its initial rating analysis. None of the Depositor, the Master
Servicer or any of their affiliates will have any obligation to replace or
supplement any Credit Support or to take any other action to maintain any
rating of any series of Securities.
See "--Limited Nature of Ratings," "Description of the Securities" and
"Description of Credit Support."
SUBORDINATION OF THE SUBORDINATE SECURITIES; EFFECT OF LOSSES ON THE
SUBORDINATE SECURITIES
The rights of Subordinate Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Master Servicer (to the extent that the
Master Servicer is paid its servicing fee, including any unpaid servicing
fees with respect to one or more prior Due Periods, and is reimbursed for
certain unreimbursed advances and unreimbursed liquidation expenses) and the
Senior Securityholders to the extent described in the related Prospectus
Supplement. As a result of the foregoing, investors must be prepared to bear
the risk that they may be subject to delays in payment and may not recover
their initial investments in the Subordinate Securities. See "Description of
the Securities--General" and "--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to
the loss experience of the Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate
and amount of such losses assumed by an investor, the yields to maturity on
the Subordinate Securities may be lower than anticipated.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of
the taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a
taxable year in excess of the cash received during such period. Individual
holders of REMIC Residual Certificates may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. In addition, REMIC
Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the
taxable income arising in a given year on a REMIC Residual Certificate will
not be equal to the taxable income associated with investment in a corporate
bond or stripped instrument having similar cash flow characteristics and
pre-tax yield. Therefore, the after-tax yield on the REMIC Residual
Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics. Additionally,
prospective purchasers of a REMIC Residual Certificate should be aware that
recently issued temporary regulations provide restrictions on the ability to
mark-to-market certain "negative value" REMIC residual interests. See
"Material Federal Income Tax Consequences-REMICs."
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Securities of such class will receive payments to which such
Securityholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Assets will be made, the
degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
series of Securities. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an
investor purchasing a Security at a significant premium might fail to recoup
its initial investment under certain prepayment scenarios. Each Prospectus
Supplement will identify any payment to which holders of Offered Securities
of the related series are entitled that is not covered by the applicable
rating. See "Rating".
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be
registered in the names of the Securityholders or their nominees. Because of
this, unless and until Definitive Securities are issued, Securityholders will
not be recognized by the Trustee as "Securityholders" (as that term is to be
used in the related Agreement). Hence, until such time, Securityholders will
be able to exercise the rights of Securityholders only indirectly through DTC
and its participating organizations. See "Description of the Securities--
Book-Entry Registration and Definitive Securities.
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include
(i) manufactured housing installment sale contracts and installment loan
agreements (the "Contracts"), (ii) asset-backed securities supported by
Contracts ("ABS") or (iii) direct obligations of the United States, agencies
thereof or agencies created thereby which are (a) interest-bearing
securities, (b) non-interest-bearing securities, (c) originally interest-
bearing securities from which coupons representing the right to payment of
interest have been removed, or (d) interest-bearing securities from which the
right to payment of principal has been removed (the "Government Securities").
Any pass-through certificates or other asset-backed securities in which an
ABS evidences an interest or which secure an ABS are sometimes referred to
herein also as ABS or as "Underlying ABS." The Assets will not be guaranteed
or insured by Merrill Lynch Mortgage Investors, Inc. (the "Depositor") or any
of its affiliates or, unless otherwise provided in the Prospectus Supplement,
by any governmental agency or instrumentality or by any other person. Each
Asset will be selected by the Depositor for inclusion in a Trust Fund from
among those purchased, either directly or indirectly, from a prior holder
thereof (an "Asset Seller"), which may be an affiliate of the Depositor and,
with respect to Assets, which prior holder may or may not be the originator
of such Contract or the issuer of such ABS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of
any other trust fund established by the Depositor. If specified in the
related Prospectus Supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets.
CONTRACTS
General
Unless otherwise specified in the related Prospectus Supplement, each
Contract will be secured by a security interest in a new or used Manufactured
Home. Such Prospectus Supplement will specify the states or other
jurisdictions in which the Manufactured Homes are located as of the related
Cut-off Date. The method of computing the "Loan-to-Value Ratio" of a
Contract will be described in the related Prospectus Supplement.
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the
dates specified in such Prospectus Supplement and to the extent then
applicable and specifically known to the Depositor, with respect to the
Contracts, including (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Contracts
as of the applicable Cut-off Date, (ii) whether the Manufactured Homes were
new or used as of the origination of the related Contracts, (iii) the
weighted average (by principal balance) of the original and remaining terms
to maturity of the Contracts, (iv) the earliest and latest origination date
and maturity date of the Contracts, (v) the range of the Loan-to-Value Ratios
at origination of the Contracts, (vi) the Contract Rates or range of Contract
Rates and the weighted average Contract Rate borne by the Contracts, (vii)
the state or states in which most of the Manufactured Homes are located at
origination, (viii) information with respect to the prepayment provisions, if
any, of the Contracts, (ix) with respect to Contracts with adjustable
Contract Rates ("ARM Contracts"), the index, the frequency of the adjustment
dates, and the maximum Contract Rate or monthly payment variation at the time
of any adjustment thereof and over the life of the ARM Contract, and (x)
information regarding the payment characteristics of the Contracts. If
specific information respecting the Contracts is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance
thereof and will be filed as part of a Current Report on Form 8-K with the
Securities and Exchange Commission after such initial issuance.
Payment Provisions of the Contracts
Unless otherwise specified in the related Prospectus Supplement, all of
the Contracts will (i) have individual principal balances at origination of
not less than $1,000, (ii) have original terms to maturity of not more than
40 years and (iii) provide for payments of principal, interest or both, on
due dates that occur monthly or at such other interval as is specified in the
related Prospectus Supplement. Each Contract may provide for no accrual of
interest or for accrual of interest thereon at an annual percentage rate (a
"Contract Rate") that is fixed over its term or that adjusts from time to
time, or as otherwise specified in the related Prospectus Supplement. Each
Contract may provide for scheduled payments to maturity or payments that
adjust from time to time to accommodate changes in the Contract Rate as
otherwise described in the related Prospectus Supplement. A Contract may
provide for scheduled payments to maturity or payments that adjust from time
to time to accommodate changes in the Contract Rate or to reflect the
occurrence of certain events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
A Contract may be fully amortizing or require a balloon payment due on its
stated maturity date, in each case as described in the related Prospectus
Supplement. A contract may provide for scheduled payments to maturity or
payment that adjust from time to time to accommodate changes in the Contract
Rate or to reflect the occurence of certain events or that adjust on the
basis of otehr Methodologies, and may provide for negative amortization or
accelerated amoortization, in each case as described in the related
Prospectus Supplement. A Contract may be fully amortizing or require a
balloon payment due on its stated maturity date, in each case as described in
the related Prospectus Supplement.
ABS
Any ABS will have been issued pursuant to a pooling and servicing
agreement, a trust agreement, an indenture or similar agreement (an "ABS
Agreement"). A seller (the "ABS Issuer") and/or servicer (the "ABS Servicer")
of the underlying Contracts (or Underlying ABS) will have entered into the
ABS Agreement with a trustee or a custodian under the ABS Agreement (the "ABS
Trustee"), if any, or with the original purchaser of the interest in the
underlying Contracts or ABS evidenced by the ABS.
Distributions of any principal or interest, as applicable, will be made
on ABS on the dates specified in the related Prospectus Supplement. The ABS
may be issued in one or more classes with characteristics similar to the
classes of Securities described in this Prospectus. Any principal or interest
distributions will be made on the ABS by the ABS Trustee or the ABS Servicer.
The ABS Issuer or the ABS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the ABS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms
of credit support similar to that described for the Securities under
"Description of Credit Support" may be provided with respect to the ABS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Underlying Contracts or Underlying
ABS evidenced by or securing such ABS and other factors and generally will
have been established for the ABS on the basis of requirements of either any
Rating Agency that may have assigned a rating to the ABS or the initial
purchasers of the ABS.
The Prospectus Supplement for a series of Securities evidencing
interests in Assets that include ABS will specify, to the extent available to
the Depositor, (i) the aggregate approximate initial and outstanding
principal amount or notional amount, as applicable, and type of the ABS to be
included in the Trust Fund, (ii) the original and remaining term to stated
maturity of the ABS, if applicable, (iii) whether such ABS is entitled only
to interest payments, only to principal payments or to both, (iv) the
pass-through or bond rate of the ABS or formula for determining such rates,
if any, (v) the applicable payment provisions for the ABS, including, but not
limited to, any priorities, payment schedules and subordination features,
(vi) the ABS Issuer, ABS Servicer and ABS Trustee, as applicable,
(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related Underlying Contracts, the Underlying ABS
or directly to such ABS, (viii) the terms on which the related Underlying
Contracts or Underlying ABS for such ABS or the ABS may, or are required to,
be purchased prior to their maturity, (ix) the terms on which Contracts or
Underlying ABS may be substituted for those originally underlying the ABS,
(x) the servicing fees payable under the ABS Agreement, (xi) the
characteristics of any cash flow agreements that are included as part of the
trust fund evidenced or secured by the ABS and (xii) whether the ABS is in
certificated form or held through a depository such as The Depository Trust
Company or the Participants Trust Company.
Each ABS will be either (i) an exempted security, (ii) a security that
has been previously registered under the Securities Act or (iii) a security
that is eligible for sale under Rule 144(k) under the Securities Act. In the
case of clauses (ii) and (iii), such security will be acquired in a secondary
market transaction not from the issuer thereof or an affiliate of such
issuer.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing
interests in Assets of a Trust Fund that include Government Securities will
specify, to the extent available, (i) the aggregate approximate initial and
outstanding principal amounts or notional amounts, as applicable, and types
of the Government Securities to be included in the Trust Fund, (ii) the
original and remaining terms to stated maturity of the Government Securities,
(iii) whether such Government Securities are entitled only to interest
payments, only to principal payments or to both, (iv) the interest rates of
the Government Securities or the formula to determine such rates, if any, (v)
the applicable payment provisions for the Government Securities and (vi) to
what extent, if any, the obligation evidenced thereby is backed by the full
faith and credit of the United States.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of Securities
will be obligated to purchase (subject to the satisfaction of certain
conditions described in the applicable Agreement), additional Assets (the
"Subsequent Assets") from time to time (as frequently as daily) within the
number of months specified in the related Prospectus Supplement after the
issuance of such series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
"Pre-Funded Amount") for such series on date of such issuance.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreement--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the
related series in the form of subordination of one or more other classes of
Securities in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee, reserve fund or
another type of credit support, or a combination thereof (any such coverage
with respect to the Securities of any series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "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, other swaps and derivative
instruments or other financial assets. The principal terms of any such
agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be
described in the Prospectus Supplement for the related series. In addition,
the related Prospectus Supplement will provide certain information with
respect to the obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing
and amount of offerings of Securities will depend on a number of factors,
including the volume of Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the
weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be
based upon the interest rates borne by the Assets in the related Trust Fund.
The Prospectus Supplement with respect to any series of Securities will
specify the Pass-Through Rate or interest rate for each class of such
Securities or, in the case of a variable or adjustable Pass-Through Rate or
interest rate, the method of determining the Pass-Through Rate or interest
rate; the effect, if any, of the prepayment of any Asset on the Pass-Through
Rate or interest rate of one or more classes of Securities; and whether the
distributions of interest on the Securities of any class will be dependent,
in whole or in part, on the performance of any obligor under a Cash Flow
Agreement.
If so specified in the related Prospectus Supplement, the effective
yield to maturity to each holder of Securities entitled to payments of
interest will be below that otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price of such Security because, while
interest may accrue on each Asset during a certain period, the distribution
of such interest will be made on a day which may be several days, weeks or
months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution
Date. As indicated above under "--Pass-Through Rate and Interest Rate," if
the Interest Accrual Period ends on a date other than the day before a
Distribution Date for the related series, the yield realized by the holders
of such Securities may be lower than the yield that would result if the
Interest Accrual Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on
Contracts resulting from both voluntary prepayments by the borrowers and
involuntary liquidations). The rate at which principal prepayments occur on
the Contracts will be affected by a variety of factors, including, without
limitation, the terms of the Contracts, the level of prevailing interest
rates, the availability of housing credit and economic, demographic,
geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the Contract Rates on the Contracts
comprising or underlying the Assets in a particular Trust Fund, such
Contracts are likely to be the subject of higher principal prepayments than
if prevailing rates remain at or above the rates borne by such Contracts. In
this regard, it should be noted that certain Assets may consist of Contracts
with different Contract Rates and the stated pass-through or pay-through
interest rate of certain ABS may be a number of percentage points higher or
lower than certain of the Underlying Contracts. The rate of principal
payments on some or all of the classes of Securities of a series will
correspond to the rate of principal payments on the Assets in the related
Trust Fund and is likely to be affected by the existence of prepayment
premium provisions of the Contracts underlying or comprising such Assets, and
by the extent to which the servicer of any such Contract is able to enforce
such provisions. Contracts with a prepayment premium provision, to the
extent enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical Contracts without such
provisions, or with lower prepayment premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal
amounts of manufactured housing contracts are generally shorter and smaller
than the terms and principal amounts of mortgage loans secured by site-built
homes, changes in interest rates have a correspondingly smaller effect on the
amount of the monthly payments on manufactured housing contracts than on the
amount of the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and certain of the other factors mentioned above may play
a larger role in the prepayment behavior of manufactured housing contracts
than they do in the prepayment behavior of loans secured by mortgages on
site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Security offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. In either
case, if so provided in the Prospectus Supplement for a series of Securities,
the effect on yield on one or more classes of the Securities of such series
of prepayments of the Assets in the related Trust Fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to such classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Contract, the obligor is charged interest on the
principal amount of the Contract so prepaid for the number of days in the
month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of Securities entitled to payments of interest because interest on
the principal amount of any Contract so prepaid will be paid only to the date
of prepayment rather than for a full month. Unless otherwise specified in
the related Prospectus Supplement, a partial prepayment of principal is
applied so as to reduce the outstanding principal balance of the related
Contract as of the Due Date in the month in which such partial prepayment is
received.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Assets and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by
the investor during a given period may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are
made from any Credit Support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Contracts comprising or
underlying the Assets in a particular Trust Fund will generally accelerate
the rate at which principal is paid on some or all of the classes of the
Securities of the related series.
If so provided in the Prospectus Supplement for a series of Securities,
one or more classes of Securities may have a final scheduled Distribution
Date, which is the date on or prior to which the Security Balance thereof is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Securities of a series will be influenced by the rate at which
principal on the Contracts comprising or underlying the Assets is paid to
such class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Contracts comprising or underlying the
Assets in a Trust Fund. If any Contracts comprising or underlying the Assets
in a particular Trust Fund have actual terms to maturity less than those
assumed in calculating final scheduled Distribution Dates for the classes of
Securities of the related series, one or more classes of such Securities may
be fully paid prior to their respective final scheduled Distribution Dates,
even in the absence of prepayments. Accordingly, the prepayment experience of
the Assets will, to some extent, be a function of the mix of Contract Rates
and maturities of the Contracts comprising or underlying such Assets. See
"Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Securities of such series and the percentage of
the initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such
Prospectus Supplement, including assumptions that prepayments on the
Contracts comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR, SPA or such other standard
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Securities to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual
weighted average life of the Securities. It is unlikely that prepayment of
any Contracts comprising or underlying the Assets for any series will conform
to any particular level of CPR, SPA or any other rate specified in the
related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Contract
With respect to certain Contracts, the Contract Rate may be "stepped up"
during its term or may otherwise vary or be adjusted. Under the applicable
underwriting standards, the obligor under each Contract generally will be
qualified on the basis of the Contract Rate in effect at origination. The
repayment of any such Contract may thus be dependent on the ability of the
mortgagor or obligor to make larger level monthly payments following the
adjustment of the Contract Rate.
Defaults
The rate of defaults on the Contracts will also affect the rate, timing
and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on contracts are expected to occur with
greater frequency in their early years. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Contracts will be affected by
the general economic condition of the region of the country in which the
related Manufactured Homes are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
Repossessions
The number of repossessions and the principal amount of the Contracts
comprising or underlying the Assets that are repossessed in relation to the
number and principal amount of Contracts that are repaid in accordance with
their terms will affect the weighted average life of the Contracts comprising
or underlying the Assets and that of the related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Contract in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the
same property. In the event of such a refinancing, the new loan would not be
included in the related Trust Fund and, therefore, such refinancing would
have the same effect as a prepayment in full of the related Contract. A Sub-
Servicer or the Master Servicer may, from time to time, implement programs
designed to encourage refinancing. Such programs may include, without
limitation, modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. In addition, Sub-
Servicers may encourage the refinancing of Contracts, including defaulted
Contracts, that would permit creditworthy borrowers to assume the outstanding
indebtedness of such Contracts.
Due-on-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement, the
Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified
in the related Prospectus Supplement, it is expected that the Master Servicer
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession of the
Manufactured Home. In the case of a transfer of a Manufactured Home after
which the Master Servicer desires to accelerate the maturity of the related
Contract, the Master Servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale" clause. See "Certain
Legal Aspects of the Contracts - Transfers of Manufactured Homes; Due-on-Sale
Clauses."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310.
Its telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it
expected in the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the
related Trust Fund and will be issued and secured pursuant to an indenture
(an "Indenture"). Each series of Securities will consist of one or more
classes of Securities that may (i) provide for the accrual of interest
thereon based on fixed, variable or adjustable rates; (ii) be senior
(collectively, "Senior Securities") or subordinate (collectively,
"Subordinate Securities") to one or more other classes of Securities in
respect of certain distributions on the Securities; (iii) be entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions (collectively, "Stripped Principal Securities"); (iv) be
entitled to interest distributions, with disproportionately low, nominal or
no principal distributions (collectively, "Stripped Interest Securities");
(v) provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of one or
more other classes of Securities of such series (collectively, "Accrual
Securities"); (vi) provide for payments of principal as described in the
related Prospectus Supplement, from all or only a portion of the Assets in
such Trust Fund, to the extent of available funds, in each case as described
in the related Prospectus Supplement; and/or (vii) provide for distributions
based on a combination of two or more components thereof with one or more of
the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If
so specified in the related Prospectus Supplement, a Trust Fund may include
(i) additional Mortgage Loans (or certain balances thereof) that will be
transferred to the Trust from time to time and/or (ii) in the case of
revolving Home Equity loans or certain balances thereof, any additional
balances advanced to the borrowers under the revolving Home Equity loans
during certain periods. If so specified in the related Prospectus Supplement,
distributions on one or more classes of a series of Securities may be limited
to collections from a designated portion of Contracts in the related Contract
Pool (each such portion of Contracts, a "Contract Group"). Any such classes
may include classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in
the related Prospectus Supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge.
One or more classes of Securities of a series may be issued in definitive
form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus Supplement. See "Risk
Factors--Book-Entry Registration" and "Description of the Securities--
Book-Entry Registration and Definitive Securities." Definitive Securities
will be exchangeable for other Securities of the same class and series of a
like aggregate Security Balance, notional amount or percentage interest but
of different authorized denominations. See "Risk Factors--Limited Liquidity"
and "--Limited Assets."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made to the persons in whose names the Securities are registered at the
close of business on the last business day of the month preceding the month
in which the Distribution Date occurs (the "Record Date"), and the amount of
each distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date").
All distributions with respect to each class of Securities on each
Distribution Date will be allocated pro rata among the outstanding Securities
in such class or by random selection, as described in the related Prospectus
Supplement or otherwise established by the related Trustee. Payments will be
made either by wire transfer in immediately available funds to the account of
a Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or other person
required to make such payments no later than the date specified in the
related Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or
by check mailed to the address of the person entitled thereto as it appears
on the Security Register; provided, however, that the final distribution in
retirement of the Securities (whether Definitive Securities or Book-Entry
Securities) will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement.
Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period"
with respect to any Distribution Date will commence on the second
day of the month in which the immediately preceding Distribution
Date occurs, or the day after the Cut-off Date in the case of the
first Due Period, and will end on the first day of the month of the
related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest
thereon and related Prepayment Premiums, Liquidation Proceeds,
Insurance Proceeds and other unscheduled recoveries received
subsequent to the related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified
in the related Prospectus Supplement or that are payable in respect
of certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so provides,
amounts paid by a Master Servicer or any other entity as specified in
the related Prospectus Supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
(v) unless the related Prospectus Supplement provides otherwise, to the
extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or
in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not
offered hereby) on each Distribution Date, and accordingly will be released
from the Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a
different Pass-Through Rate or interest rate, which will be a fixed, variable
or adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable
Pass-Through Rate or interest rate, the method for determining the
Pass-Through Rate or interest rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Securities will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will
be made on each Distribution Date (other than any class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances,
specified in the related Prospectus Supplement, and any class of Stripped
Principal Securities that are not entitled to any distributions of interest)
based on the Accrued Security Interest for such class and such Distribution
Date, subject to the sufficiency of the portion of the Available Distribution
Amount allocable to such class on such Distribution Date. Prior to the time
interest is distributable on any class of Accrual Securities, the amount of
Accrued Security Interest otherwise distributable on such class will be added
to the Security Balance thereof on each Distribution Date. With respect to
each class of Securities and each Distribution Date (other than certain
classes of Stripped Interest Securities), "Accrued Security Interest" will be
equal to interest accrued for a specified period on the outstanding Security
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. Unless
otherwise provided in the Prospectus Supplement, Accrued Security Interest on
Stripped Interest Securities will be equal to interest accrued for a
specified period on the outstanding notional amount thereof immediately prior
to each Distribution Date, at the applicable Pass-Through Rate or interest
rate, reduced as described below. The method of determining the notional
amount for any class of Stripped Interest Securities will be described in the
related Prospectus Supplement. Reference to notional amount is solely for
convenience in certain calculations and does not represent the right to
receive any distributions of principal. Unless otherwise provided in the
related Prospectus Supplement, the Accrued Security Interest on a series of
Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on
the Contracts comprising or underlying the Assets in the Trust Fund for such
series. The particular manner in which such shortfalls are to be allocated
among some or all of the classes of Securities of that series will be
specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Contracts comprising or underlying the Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement,
any reduction in the amount of Accrued Security Interest otherwise
distributable on a class of Securities by reason of the allocation to such
class of a portion of any deferred interest on the Contracts comprising or
underlying the Assets in the related Trust Fund will result in a
corresponding increase in the Security Balance of such class. See "Risk
Factors--Average Life of Securities; Prepayments; Yields" and "Yield
Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other
assets included in the related Trust Fund. The outstanding Security Balance
of a Security will be reduced to the extent of distributions of principal
thereon from time to time and, if and to the extent so provided in the
related Prospectus Supplement, by the amount of losses incurred in respect of
the related Assets, may be increased in respect of deferred interest on the
related Contracts to the extent provided in the related Prospectus Supplement
and, in the case of Accrual Securities prior to the Distribution Date on
which distributions of interest are required to commence, will be increased
by any related Accrued Security Interest. Unless otherwise provided in the
related Prospectus Supplement, the initial aggregate Security Balance of all
classes of Securities of a series will not be greater than the outstanding
aggregate principal balance of the related Assets as of the applicable
Cut-off Date. The initial aggregate Security Balance of a series and each
class thereof will be specified in the related Prospectus Supplement. Unless
otherwise provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or classes of
Securities entitled thereto in accordance with the provisions described in
such Prospectus Supplement until the Security Balance of such class has been
reduced to zero. Stripped Interest Securities with no Security Balance are
not entitled to any distributions of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such
extent, the descriptions set forth under "--Distributions of Interests on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference
in such sections to Security Balance and Pass-Through Rate or interest rate
refer to the principal balance, if any, of any such component and the Pass-
Through Rate or interest rate, if any, on any such component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will
be borne first by a class of Subordinate Securities in the priority and
manner and subject to the limitations specified in such Prospectus
Supplement. See "Description of Credit Support" for a description of the
types of protection that may be included in a Trust Fund against losses and
shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer or another entity described therein will be required as
part of its servicing responsibilities to advance on or before each
Distribution Date its own funds or funds held in the Collection Account that
are not included in the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of payments of principal (other
than any balloon payments) and interest (net of related servicing fees and
Retained Interest) that were due on the Contracts in such Trust Fund during
the related Due Period and were delinquent on the related Determination Date,
subject to the Master Servicer's (or another entity's) good faith
determination that such advances will be reimbursable from Related Proceeds
(as defined below). In the case of a series of Securities that includes one
or more classes of Subordinate Securities and if so provided in the related
Prospectus Supplement, the Master Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary
to make the required distributions on one or more classes of Senior
Securities and/or may be subject to the Master Servicer's (or another
entity's) good faith determination that such advances will be reimbursable
not only from Related Proceeds but also from collections on other Assets
otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the
Master Servicer's (or another entity's) funds will be reimbursable only out
of related recoveries on the Contracts (including amounts received under any
form of Credit Support) respecting which such advances were made (as to any
Contract, "Related Proceeds") and, if so provided in the Prospectus
Supplement, out of any amounts otherwise distributable on one or more classes
of Subordinate Securities of such series; provided, however, that any such
advance will be reimbursable from any amounts in the Collection Account prior
to any distributions being made on the Securities to the extent that the
Master Servicer (or such other entity) shall determine in good faith that
such advance (a "Nonrecoverable Advance") is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets
otherwise distributable on such Subordinate Securities. If advances have been
made by the Master Servicer from excess funds in the Collection Account, the
Master Servicer is required to replace such funds in the Collection Account
on any future Distribution Date to the extent that funds in the Collection
Account on such Distribution Date are less than payments required to be made
to Securityholders on such date. If so specified in the related Prospectus
Supplement, the obligations of the Master Servicer (or another entity) to
make advances may be secured by a cash advance reserve fund, a surety bond, a
letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer (or another entity) will be entitled to receive interest
at the rate specified therein on its outstanding advances and will be
entitled to pay itself such interest periodically from general collections on
the Assets prior to any payment to Securityholders or as otherwise provided
in the related Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes ABS will describe any corresponding
advancing obligation of any person in connection with such ABS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement,
will forward or cause to be forwarded to each such holder, to the Depositor
and to such other parties as may be specified in the related Agreement, a
statement setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Contracts in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are delinquent
and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Contract liquidated during the related Due
Period, (a) the portion of such liquidation proceeds payable or reimbursable
to the Master Servicer (or any other entity) in respect of such Contract and
(b) the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Contract and
included in the Trust Fund as of the end of the related Due Period, (a) the
loan number of the related Contract and (b) the date of acquisition;
(x) with respect to each REO Property relating to a Contract and
included in the Trust Fund as of the end of the related Due Period, (a) the
book value, (b) the principal balance of the related Contract immediately
following such Distribution Date (calculated as if such Contract were still
outstanding taking into account certain limited modifications to the terms
thereof specified in the Agreement), (c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on related
servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Contract and (c) the amount of any loss to
Securityholders in respect of the related Contract;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been added
to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding Distribution
Date, as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xii), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Securities. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any ABS. The Prospectus Supplement for each
series of Offered Securities will describe any additional information to be
included in reports to the holders of such Securities.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the extent that substantially comparable information shall
be provided by the Master Servicer or the Trustee pursuant to any
requirements of the Code as are from time to time in force. See "Description
of the Securities--Registration and Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Contract subject thereto and
(ii) the purchase of all of the assets of the Trust Fund by the party
entitled to effect such termination, under the circumstances and in the
manner set forth in the related Prospectus Supplement. In no event, however,
will the trust created by the Agreement continue beyond the date specified in
the related Prospectus Supplement. Written notice of termination of the
Agreement will be given to each Securityholder, and the final distribution
will be made only upon presentation and surrender of the Securities at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by the party specified
therein, under the circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the reduction of the
Security Balance of a specified class or classes of Securities by a specified
percentage or amount, the party specified therein will solicit bids for the
purchase of all assets of the Trust Fund, or of a sufficient portion of such
assets to retire such class or classes or purchase such class or classes at a
price set forth in the related Prospectus Supplement, in each case, under the
circumstances and in the manner set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes
of the Offered Securities of any series will be issued as Book-Entry
Securities, and each such class will be represented by one or more single
Securities registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also
is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive
all distributions on the Book-Entry Securities through DTC and its
Participants. Under a book-entry format, Security Owners will receive
payments after the related Distribution Date because, while payments are
required to be forwarded to Cede & Co., as nominee for DTC ("Cede"), on each
such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus
Supplement, the only "Securityholder" (as such term is used in the Agreement)
will be Cede, as nominee of DTC, and the Security Owners will not be
recognized by the Trustee as Securityholders under the Agreement. Security
Owners will be permitted to exercise the rights of Securityholders under the
related Agreement, Trust Agreement or Indenture, as applicable, only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry
Securities and is required to receive and transmit distributions of principal
of and interest on the Book-Entry Securities. Participants and Indirect
Participants with which Security Owners have accounts with respect to the
Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Security
Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in the Book-Entry Securities, may be limited due
to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Securityholder under an Agreement only at the direction of one
or more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Unless otherwise specified in the related Prospectus Supplement,
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees
("Definitive Securities"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or
able to properly discharge its responsibilities as depository with respect to
the Securities and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Securities, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Security Owners identified
in such instructions the Definitive Securities to which they are entitled,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax
purposes will be issued, and the related Trust Fund will be created, pursuant
to a pooling and servicing agreement (a "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer and the Trustee. The Assets of such
Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with the terms of the Pooling and Servicing Agreement. In the
context of the conveyance and servicing of the related Assets, the Pooling
and Servicing Agreement may be referred to herein as the "Agreement".
Notwithstanding the foregoing, if the Assets of the Trust Fund for such a
series consists only of Government Securities or ABS, such Assets will be
conveyed to the Trust Fund and administered pursuant to a trust agreement
between the Depositor and the Trustee (a "Trust Agreement"), which may also
be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and Notes.
Certificates that are partnership interests for tax purposes will be issued,
and the related Trust Fund will be created, pursuant to a Trust Agreement
between the Depositor and the Trustee. The Assets of the related Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a "Servicing Agreement") between the Depositor,
the Servicer and the Trustee. In the context of the conveyance and servicing
of the related Assets, a Servicing may be referred to herein as the
"Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist
only of ABS or Government Securities, such Assets will be conveyed to the
Trust Fund and administered in accordance with the terms of the Trust
Agreement, which in such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series
of Securities will be named in the related Prospectus Supplement. In any
series of Securities for which there are multiple Master Servicers, there may
also be multiple Contract Groups, each corresponding to a particular Master
Servicer; and, if the related Prospectus Supplement so specifies, the
servicing obligations of each such Master Servicer will be limited to the
Contracts in the corresponding Contract Group. In lieu of appointing a
Master Servicer, a servicer may be appointed pursuant to the Agreement for
any Trust Fund. Such servicer will service all or a significant number of
Contracts directly without a Sub-Servicer. Unless otherwise specified in the
related Prospectus Supplement, the obligations of any such servicer shall be
commensurate with those of the Master Servicer described herein. References
in this Prospectus to Master Servicer and its rights and obligations, unless
otherwise specified in the related Prospectus Supplement, shall be deemed to
also be references to any servicer servicing Contracts directly. A manager
or administrator may be appointed pursuant to the Trust Agreement for any
Trust Fund to administer such Trust Fund. The provisions of each Agreement
will vary depending upon the nature of the Securities to be issued thereunder
and the nature of the related Trust Fund. Forms of a Pooling and Servicing
Agreement, a Sale and Servicing Agreement and a Trust Agreement have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
The following summaries describe certain provisions that may appear in
each Agreement. The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that
materially differs from the description thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Security" refers to all of the Securities of that series, whether or
not offered hereby and by the related Prospectus Supplement, unless the
context otherwise requires. The Depositor will provide a copy of the
Agreement (without exhibits) relating to any series of Securities without
charge upon written request of a holder of a Security of such series
addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest
to be received on or with respect to such Assets after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date and other
than any Retained Interest. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Depositor in exchange for the
Assets and the other assets comprising the Trust Fund for such series. Each
Asset will be identified in a schedule appearing as an exhibit to the related
Agreement. Unless otherwise provided in the related Prospectus Supplement,
such schedule will include detailed information (i) in respect of each
Contract included in the related Trust Fund, the Contract number, the
outstanding principal amount and the Contract Rate; and (ii) in respect of
each ABS included in the related Trust Fund, including without limitation,
the ABS Issuer, ABS Servicer and ABS Trustee, the pass-through or bond rate
or formula for determining such rate, the issue date and original and
remaining term to maturity, if applicable, the original and outstanding
principal amount and payment provisions, if applicable.
With respect to each Contract, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer (which may also be the Asset
Seller) will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest
in the Manufactured Home securing each Contract. In order to give notice of
the right, title and interest of the Trustee in the Contracts, the Depositor
will cause UCC-1 financing statements to be executed by the related Asset
Seller identifying the Depositor as secured party and by the Depositor
identifying the Trustee as the secured party and, in each case, identifying
all Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or otherwise marked
to reflect their assignment from the Company to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the interest of the Trustee in the Contracts could be defeated. See "Certain
Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Master Servicer, if the Master Servicer finds that any such document is
missing or defective in any material respect, the Master Servicer shall
immediately notify the Depositor and the relevant Asset Seller. If the Asset
Seller cannot cure the omission or defect within a specified number of days
after receipt of such notice, then unless otherwise specified in the related
Prospectus Supplement, the Asset Seller will be obligated, within a specified
number of days of receipt of such notice, to repurchase the related Contract
from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller will fulfill this repurchase
or substitution obligation, and neither the Master Servicer nor the Depositor
will be obligated to repurchase or substitute for such Contract if the asset
Seller defaults on its obligation. Unless otherwise specified in the related
Prospectus Supplement, this repurchase or substitution obligation constitutes
the sole remedy available to the Certificateholders or the Trustee for
omission of, or a material defect in, a constituent document. To the extent
specified in the related Prospectus Supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller may agree to cover any losses suffered by the Trust
Fund as a result of such breach or defect.
With respect to each Government Security or ABS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or ABS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or ABS, as applicable, to the Trustee for the benefit of
the Certificateholders. With respect to each Government Security or ABS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or ABS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name
of the Trustee for the benefit of the Securityholders. Unless otherwise
provided in the related Prospectus Supplement, the related Agreement will
require that either the Depositor or the Trustee promptly cause any ABS and
Government Securities in certificated form not registered in the name of the
Trustee to be re-registered, with the applicable persons, in the name of the
Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Contract, assign certain representations
and warranties, as of a specified date (the person making such
representations and warranties, the "Warranting Party") covering, by way of
example, the following types of matters: (i) the accuracy of the information
set forth for such Contract on the schedule of Assets appearing as an exhibit
to the related Agreement; (ii) in the case of a Contract, that the Contract
creates a valid first security interest in or lien on the related
Manufactured Home; (iii) the authority of the Warranting Party to sell the
Contract; (iv) the payment status of the Contract; and (v) the existence of
hazard and extended perils insurance coverage on the Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Contract may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Contract. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Contract as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made,
the Warranting Party will have a reimbursement, cure, repurchase or
substitution obligation in connection with a breach of such a representation
and warranty only if the relevant event that causes such breach occurs prior
to such date. Such party would have no such obligations if the relevant event
that causes such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Warranting Party of any breach of
any representation or warranty made by it in respect of a Contract that
materially and adversely affects the value of such Contract or the interests
therein of the Securityholders. If such Warranting Party cannot cure such
breach within a specified period following the date on which such party was
notified of such breach, then such Warranting Party will be obligated to
repurchase such Contract from the Trustee within a specified period from the
date on which the Warranting Party was notified of such breach, at the
Purchase Price therefor. As to any Contract, unless otherwise specified in
the related Prospectus Supplement, the "Purchase Price" is equal to the sum
of the unpaid principal balance thereof, plus unpaid accrued interest thereon
at the Contract Rate from the date as to which interest was last paid to the
due date in the Due Period in which the relevant purchase is to occur, plus
certain servicing expenses that are reimbursable to the Master Servicer. If
so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase a Contract as to which a breach has occurred, will
have the option, within a specified period after initial issuance of such
series of Certificates, to cause the removal of such Contract from the Trust
Fund and substitute in its place one or more other Contracts, as applicable,
in accordance with the standards described in the related Prospectus
Supplement. If so provided in the Prospectus Supplement for a series, a
Warranting Party, rather than repurchase or substitute a Contract as to which
a breach has occurred, will have the option to reimburse the Trust Fund or
the Securityholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement,
repurchase or substitution obligation will constitute the sole remedy
available to holders of Securities or the Trustee for a breach of
representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute
for a Contract if a Warranting Party defaults on its obligation to do so, and
no assurance can be given that Warranting Parties will carry out such
obligations with respect to Contracts.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or ABS, make or assign certain representations or warranties, as
of a specified date, with respect to such Government Securities or ABS,
covering (i) the accuracy of the information set forth therefor on the
schedule of Assets appearing as an exhibit to the related Agreement and (ii)
the authority of the Warranting Party to sell such Assets. The related
Prospectus Supplement will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Certificateholders and which continues unremedied for the number of
days specified in the Agreement after the giving of written notice of such
breach to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights (unless otherwise specified
in the related Prospectus Supplement), will constitute an Event of Default
under such Pooling and Servicing Agreement. See "Events of Default" and
"Rights Upon Event of Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and the
uninsured deposits in which are otherwise secured such that the Trustee have
a claim with respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing such funds
that is superior to the claims of any other depositors or general creditors
of the institution with which the Collection Account is maintained or
(ii) otherwise maintained with a bank or trust company, and in a manner,
satisfactory to the Rating Agency or Agencies rating any class of Securities
of such series. The collateral eligible to secure amounts in the Collection
Account is limited to United States government securities and other
investment grade obligations specified in the Agreement ("Permitted
Investments"). A Collection Account may be maintained as an interest bearing
or a non-interest bearing account and the funds held therein may be invested
pending each succeeding Distribution Date in certain short-term Permitted
Investments. Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in the Collection Account will
be paid to a Master Servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution
that is an affiliate of the Master Servicer, if applicable, provided that
such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in
the related Prospectus Supplement, a Collection Account may contain funds
relating to more than one series of pass-through certificates and may contain
other funds respecting payments on contracts or mortgage loans belonging to
the Master Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis,
unless otherwise provided in the related Agreement, the following payments
and collections received, or advances made, by the Master Servicer or the
Trustee or on its behalf subsequent to the Cut-off Date (other than payments
due on or before the Cut-off Date, and exclusive of any amounts representing
a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof retained
by a Master Servicer or a Sub-Servicer as its servicing compensation and net
of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Manufactured Home securing a Contract in the Trust Fund
(to the extent such proceeds are not applied to the restoration of the
property or released to the obligor in accordance with the normal servicing
procedures of a Master Servicer or the related Sub-Servicer, subject to the
terms and conditions of the related obligor) (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection with the
liquidation of defaulted Contracts in the Trust Fund, by foreclosure or
otherwise ("Liquidation Proceeds"), together with the net proceeds on a
monthly basis with respect to any Manufactured Home repossessed for the
benefit of Securityholders;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as described
under "Description of Credit Support";
(v) any advances made as described under "Description of the Securities
- --Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Asset and all proceeds of any Asset
purchased as described under "Description of the Securities--Termination"
(also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain
interest shortfalls arising out of the prepayment of Contracts in the Trust
Fund as described under "Description of the Agreements--Retained Interest;
Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment Premiums
on the Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit of
the Master Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise specified in the related Prospectus Supplement or the related
Agreement, make withdrawals from the Collection Account for each Trust Fund
for any of the following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Contracts with respect to which the advances were
made or out of amounts drawn under any form of Credit Support with respect to
such Contracts;
(iii) to reimburse a Master Servicer for unpaid servicing fees
earned and certain unreimbursed servicing expenses incurred with respect to
Contracts and properties acquired in respect thereof, such reimbursement to
be made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Contracts and properties, and net income
collected on the particular properties, with respect to which such fees were
earned or such expenses were incurred or out of amounts drawn under any form
of Credit Support with respect to such Contracts and properties;
(iv) to reimburse a Master Servicer for any advances described in clause
(ii) above and any servicing expenses described in clause (iii) above which,
in the Master Servicer's good faith judgment, will not be recoverable from
the amounts described in clauses (ii) and (iii), respectively, such
reimbursement to be made from amounts collected on other Assets or, if and to
the extent so provided by the related Agreement and described in the related
Prospectus Supplement, just from that portion of amounts collected on other
Assets that is otherwise distributable on one or more classes of Subordinate
Securities, if any, remain outstanding, and otherwise any outstanding class
of Securities, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in clause
(iii) above while such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "Certain Matters Regarding a Master Servicer and the
Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
(ix) unless otherwise provided in the related Prospectus Supplement, to
pay a Master Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer as
recoveries of Retained Interest;
(xi) 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 "Material Federal Income Tax Consequences--REMICS--
Prohibited Transactions Tax and Other Taxes";
(xii) 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 a property acquired in respect thereof in connection with the
liquidation of such property;
(xiii) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xiv) to pay for the costs of recording the related Agreement if
such recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xv) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or substitution
as contemplated by "Assignment of Assets; Repurchase" and "Representations
and Warranties; Repurchases" or otherwise;
(xvi) to make any other withdrawals permitted by the related
Agreement; and
(xvii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by
a time specified in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, any amounts which could be
withdrawn from the Collection Account as described under "--Withdrawals"
above, may also be withdrawn from any such collection account. The
Prospectus Supplement will set forth any restrictions with respect to any
such collection account, including investment restrictions and any
restrictions with respect to financial institutions with which any such
collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to
make reasonable efforts to collect all scheduled payments under the Contracts
and will follow or cause to be followed such collection procedures as it
would follow with respect to loans that are comparable to the manufactured
housing contracts comparable to the Contracts and held for its own account,
provided such procedures are consistent with (i) the terms of the related
Agreement and any related hazard insurance policy or instrument of Credit
Support, if any, included in the related Trust Fund described herein or under
"Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no
such standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard"). In connection therewith, the Master Servicer
will be permitted in its discretion to waive any late payment charge or
penalty interest in respect of a late payment on a Contract.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to a Contract; processing
assumptions or substitutions in those cases where the Master Servicer has
determined not to enforce any applicable due-on-sale clause; attempting to
cure delinquencies; supervising foreclosures or repossessions; inspecting and
managing Manufactured Homes under certain circumstances; and maintaining
accounting records relating to the Contracts. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be responsible
for filing and settling claims in respect of particular Contracts under any
applicable instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Contract in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Contract or (ii) in
its judgment, materially impair the security for the Contract or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Contract if, unless otherwise
provided in the related Prospectus Supplement, (i) in its judgment, a
material default on the Contract has occurred or a payment default is
imminent and (ii) in its judgment, such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the Contract
on a present value basis than would liquidation. The Master Servicer is
required to notify the Trustee in the event of any modification, waiver or
amendment of any Contract.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Contracts to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for
the related series of Securities is no longer acting in such capacity, the
Trustee or any successor Master Servicer may assume the Master Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub- Servicer may be entitled to a Retained Interest in certain Contracts.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest; Servicing
Compensation and Payment of Expenses."
REALIZATION UPON DEFAULTED WHOLE LOANS OR CONTRACTS
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Contract which is in default,
initiate corrective action in cooperation with the obligor if cure is likely,
inspect the Manufactured Home and take such other actions as are consistent
with the Servicing Standard. A significant period of time may elapse before
the Master Servicer is able to assess the success of such corrective action
or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Contracts may grant
to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Contract as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to
the holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such
right granted to any person if the predetermined purchase price is less than
the Purchase Price described under "Representations and Warranties;
Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any such offering be made in a commercially reasonable manner
for a specified period and that the Master Servicer accept the highest cash
bid received from any person (including itself, an affiliate of the Master
Servicer or any Securityholder) that constitutes a fair price for such
defaulted Contract. In the absence of any bid determined in accordance with
the related Agreement to be fair, the Master Servicer shall proceed with
respect to such defaulted Contract as described below. Any bid in an amount
at least equal to the Purchase Price described under "Representations and
Warranties; Repurchases" will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time repossess
and realize upon any Manufactured Home, if such action is consistent with the
Servicing Standard and a default on such Contract has occurred or, in the
Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title
to a Manufactured Home 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 Manufactured Home within three years of
acquisition, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
Trust Fund subsequent to three 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 Security is
outstanding. Subject to the foregoing, the Master Servicer will be required
to (i) solicit bids for any Manufactured Home so acquired in such a manner as
will be reasonably likely to realize a fair price for such property and
(ii) accept the first (and, if multiple bids are contemporaneously received,
the highest) cash bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Manufactured Home
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered.
If recovery on a defaulted Contract under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Contract. If the proceeds of any liquidation of the property securing the
defaulted Contract are less than the outstanding principal balance of the
defaulted Contract plus interest accrued thereon at the Contract Rate, as
applicable, plus the aggregate amount of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Contract, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Contract, unreimbursed servicing expenses
incurred with respect to the Contract and any unreimbursed advances of
delinquent payments made with respect to the Contract.
If any property securing a defaulted Contract is damaged, the Master
Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to Securityholders on liquidation of the Contract after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
As servicer of the Contracts, a Master Servicer, on behalf of itself,
the Trustee and the Securityholders, will present claims to the obligor under
each instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Contracts.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Contract, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from
the Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Contract, unreimbursed servicing expenses incurred with respect to the
Contract and any unreimbursed advances of delinquent payments made with
respect to the Contract. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Contracts
Except as otherwise specified in the related Prospectus Supplement, the
terms of the Agreement for a Trust Fund comprised of Contracts will require
the Master Servicer to cause to be maintained with respect to each Contract
one or more hazard insurance policies which provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that
is customary for manufactured housing, issued by a company authorized to
issue such policies in the state in which the Manufactured Home is located,
and in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the
related Contract, whichever is less; provided, however, that the amount of
coverage provided by each such hazard insurance policy shall be sufficient to
avoid the application of any co-insurance clause contained therein. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the Master
Servicer shall cause such flood insurance to be maintained, which coverage
shall be at least equal to the minimum amount specified in the preceding
sentence or such lesser amount as may be available under the federal flood
insurance program. Each hazard insurance policy caused to be maintained by
the Master Servicer shall contain a standard loss payee clause in favor of
the Master Servicer and its successors and assigns. If any obligor is in
default in the payment of premiums on its hazard insurance policy or
policies, the Master Servicer shall pay such premiums out of its own funds,
and may add separately such premium to the Obligor's obligation as provided
by the Contract, but may not add such premium to the remaining principal
balance of the Contract.
The Master Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home,
and shall maintain, to the extent that the related Contract does not require
the Obligor to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on
the obligor's interest in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies. The Master Servicer
shall pay the premium for such blanket policy on the basis described therein
and shall pay any deductible amount with respect to claims under such policy
relating to the Contracts.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees
and agents of the Master Servicer. The related Agreement will allow the
Master Servicer to self-insure against loss occasioned by the errors and
omissions of the officers, employees and agents of the Master Servicer so
long as certain criteria set forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Contracts may contain clauses requiring the consent of the obligee
to any sale or other transfer of the related Manufactured Home, or
due-on-sale clauses entitling the obligee to accelerate payment of the
Contract upon any sale, transfer or conveyance of the related Manufactured
Home. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will permit such transfer so long as the transferee satisfies
the Master Servicer's then applicable underwriting standards. The purpose of
such transfers is often to avoid a default by the transferring obligor. See
"Certain Legal Aspects of the Contracts--Transfers of Manufactured Homes;
Enforceability of Due-on-Sale Clauses". Unless otherwise specified in the
related Prospectus Supplement, any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by
or on behalf of the Master Servicer as additional servicing compensation.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion
of the interest payable thereon. The Retained Interest will be deducted from
obligor payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Securities will come from the periodic payment to it
of a portion of the interest payment on each Asset. Since any Retained
Interest and a Master Servicer's primary compensation are percentages of the
principal balance of each Asset, such amounts will decrease in accordance
with the amortization of the Assets. The Prospectus Supplement with respect
to a series of Securities evidencing interests in a Trust Fund that includes
Contracts may provide that, as additional compensation, the Master Servicer
or the Sub-Servicers may retain all or a portion of assumption fees,
modification fees, late payment charges or Prepayment Premiums collected from
obligors and any interest or other income which may be earned on funds held
in the Collection Account or any account established by a Sub-Servicer
pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets,
including, without limitation, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in
connection with distributions and reports to Securityholders, and payment of
any other expenses described in the related Prospectus Supplement. Certain
other expenses, including certain expenses relating to defaults and
liquidations on the Contracts and, to the extent so provided in the related
Prospectus Supplement, interest thereon at the rate specified therein may be
borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Contracts
in the related Trust Fund during such period prior to their respective due
dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Contracts will provide
that on or before a specified date in each year, beginning with the first
such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with the audit or attestation program used by the
Master Servicer, the servicing by or on behalf of the Master Servicer of
loans under agreements substantially similar to each other (including the
related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, such program requires it to report.
In rendering its statement such firm may rely, as to matters relating to the
direct servicing of loans by Sub-Servicers, upon comparable statements for
examinations conducted substantially in compliance with the audit or
attestation program used by such Sub-Servicer (rendered within one year of
such statement) of firms of independent public accountants with respect to
the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding
calendar year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus
Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the
Contracts under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may
be an affiliate of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. Reference
herein to the Master Servicer shall be deemed to be to the servicer of
substantially all of the Contracts, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Master Servicer so causing such
a conflict being of a type and nature carried on by the Master Servicer at
the date of the Agreement. No such resignation will become effective until
the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the
Depositor nor any director, officer, employee, or agent of a Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Security holders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be
protected against any breach of a representation, warranty or covenant made
in such Agreement, or against any liability specifically imposed thereby, or
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations
or duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Unless otherwise specified in the related Prospectus
Supplement, each Agreement will further provide that any Master Servicer, the
Depositor and any director, officer, employee or agent of a Master Servicer
or the Depositor will be entitled to indemnification by the related Trust
Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
Securities; provided, however, that such indemnification will not extend to
any loss, liability or expense (i) specifically imposed by such Agreement or
otherwise incidental to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of an
enforcement action in respect of any specific Contract or Contracts (except
as any such loss, liability or expense shall be otherwise reimbursable
pursuant to such Agreement); (ii) incurred in connection with any breach of a
representation, warranty or covenant made in such Agreement; (iii) incurred
by reason of misfeasance, bad faith or gross negligence in the performance of
obligations or duties thereunder, or by reason of reckless disregard of such
obligations or duties; (iv) incurred in connection with any violation of any
state or federal securities law; or (v) imposed by any taxing authority if
such loss, liability or expense is not specifically reimbursable pursuant to
the terms of the related Agreement. In addition, each Agreement will provide
that neither any Master Servicer nor the Depositor will be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which
in its opinion may involve it in any expense or liability. Any such Master
Servicer or the Depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties thereto and the interests of the
Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Securityholders, and the Master Servicer or the Depositor,
as the case may be, will be entitled to be reimbursed therefor and to charge
the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged
or consolidated, or any person resulting from any merger or consolidation to
which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be
the successor of the Master Servicer or the Depositor, as the case may be,
under the related Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a
Trust Fund that includes Contracts, Events of Default under the related
Agreement will include (i) any failure by the Master Servicer to distribute
or cause to be distributed to Securityholders, or to remit to the Trustee or
Indenture Trustee, as applicable, for distribution to Securityholders, any
required payment that continues after a grace period, if any; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the Agreement which
continues unremedied for thirty days after written notice of such failure has
been given to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Securities
evidencing not less than 25% of the Voting Rights; (iii) any breach of a
representation or warranty made by the Master Servicer under the Agreement
which materially and adversely affects the interests of Securityholders and
which continues unremedied for thirty days (or such longer period specified
in the related Prospectus Supplement) after written notice of such breach has
been given to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Securities
evidencing not less than 25% of the Voting Rights; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by or on behalf of the Master
Servicer indicating its insolvency or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Trustee shall, not later than the later of 60 days
after the occurrence of any event which constitutes or, with notice or lapse
of time or both, would constitute an Event of Default and five days after
certain officers of the Trustee become aware of the occurrence of such an
event, transmit by mail to the Depositor and all Securityholders of the
applicable series notice of such occurrence, unless such default shall have
been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities evidencing not less than 51% (or such other percentage specified
in the related Prospectus Supplement) of the Voting Rights, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer
under the Agreement and in and to the Contracts (other than as a
Securityholder or as the owner of any Retained Interest), whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities
of the Master Servicer under the Agreement (except that if the Trustee is
prohibited by law from obligating itself to make advances regarding
delinquent Contracts, or if the related Prospectus Supplement so specifies,
then the Trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. Unless otherwise specified in
the related Prospectus Supplement, in the event that the Trustee is unwilling
or unable so to act, it may or, at the written request of the holders of
Securities entitled to at least 51% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights, it shall appoint, or
petition a court of competent jurisdiction for the appointment of, a loan
servicing institution acceptable to the Rating Agency with a net worth at the
time of such appointment of at least $15,000,000 (or such other amount
specified in the related Prospectus Supplement) to act as successor to the
Master Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and any such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation payable to the Master Servicer under the
Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights
allocated to the respective classes of Securities affected by any Event of
Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default involving a failure to distribute a required payment
to Securityholders described in clause (i) under "Events of Default" may be
waived only by all of the Securityholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given
to the Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the
Trustee for sixty days (or such other number of days specified in the related
Prospectus Supplement) has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of
the trusts or powers vested in it by any Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the holders of Securities covered by such Agreement,
unless such Securityholders have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Securities covered by the Agreement, (i) to
cure any ambiguity or mistake, (ii) to correct, modify or supplement any
provision therein which may be inconsistent with any other provision therein
or with the related Prospectus Supplement, (iii) to make any other provisions
with respect to matters or questions arising under the Agreement which are
not materially inconsistent with the provisions thereof, or (iv) to comply
with any requirements imposed by the Code; provided that, in the case of
clause (iii), such amendment will not (as evidenced by an opinion of counsel
to such effect) adversely affect in any material respect the interests of any
holder of Securities covered by the Agreement. Unless otherwise specified in
the related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer, if any, and the Trustee, with the consent of
the holders of Securities affected thereby evidencing not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, for any purpose; provided, however, that unless otherwise
specified in the related Prospectus Supplement, no such amendment may
(i) reduce in any manner the amount of or delay the timing of, payments
received or advanced on Contracts which are required to be distributed on any
Security without the consent of the holder of such Security or (ii) reduce
the consent percentages described in this paragraph without the consent of
the holders of all Securities covered by such Agreement then outstanding.
However, with respect to any series of Securities as to which a REMIC
election is to be made, the Trustee will not consent to any amendment of the
Agreement unless it shall first have received an opinion of counsel to the
effect that such amendment will not 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 Securities are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have
a banking relationship with the Depositor and its affiliates and with any
Master Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of any Agreement or Trust Agreement, the Securities or any Asset
or related document and is not accountable for the use or application by or
on behalf of any Master Servicer of any funds paid to the Master Servicer or
its designee in respect of the Securities or the Assets, or deposited into or
withdrawn from the Collection Account or any other account by or on behalf of
the Master Servicer. If no Event of Default has occurred and is continuing,
the Trustee is required to perform only those duties specifically required
under the related Agreement or Trust Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement or Trust
Agreement, as applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the Trustee's (i) enforcing its
rights and remedies and protecting the interests, of the Securityholders
during the continuance of an Event of Default, (ii) defending or prosecuting
any legal action in respect of the related Agreement or series of Securities,
or (iii) acting or refraining from acting in good faith at the direction of
the holders of the related series of Securities entitled to not less than 25%
(or such other percentage as is specified in the related Agreement with
respect to any particular matter) of the Voting Rights for such series;
provided, however, that such indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the Trustee
pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the
part of the Trustee in the performance of its obligations and duties
thereunder, or by reason of its reckless disregard of such obligations or
duties, or as may arise from a breach of any representation, warranty or
covenant of the Trustee made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, or if
a change in the financial condition of the Trustee has adversely affected or
will adversely affect the rating on any class of the Securities, then the
Depositor may remove the Trustee and appoint a successor trustee acceptable
to the Master Servicer, if any. Holders of the Securities of any series
entitled to at least 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series may at any time
remove the Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any
principal of or interest on any Note of such series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
series having been incorrect in a material respect as of the time made, and
such breach is not cured within sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or
the holders of a majority of the then aggregate outstanding amount of the
Notes of such series may declare the principal amount (or, if the Notes of
that series are Accrual Securities, such portion of the principal amount as
may be specified in the terms of that series, as provided in the related
Prospectus Supplement) of all the Notes of such series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of a majority in aggregate outstanding amount of
the Notes of such series.
If, following an Event of Default with respect to any series of Notes,
the Notes of such series have been declared to be due and payable, the
Indenture Trustee may, in its discretion, notwithstanding such acceleration,
elect to maintain possession of the collateral securing the Notes of such
series and to continue to apply distributions on such collateral as if there
had been no declaration of acceleration if such collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of such series as they would have become due if there had not been such
a declaration. In addition, the Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an Event of
Default, other than a default in the payment of any principal or interest on
any Note of such series for thirty (30) days or more, unless (a) the holders
of 100% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such series at the date of such sale or
(c) the Indenture Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of
662/3% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days
(or such other number of days specified in the related Prospectus Supplement)
or more in the payment of principal of or interest on the Notes of a series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for distribution to the Noteholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless
such holders offered to the Indenture Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities which might be
incurred by it in complying with such request or direction. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority of the then aggregate outstanding amount
of the Notes of such series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Notes of such series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such series
may, in certain cases, waive any default with respect thereto, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of such series
affected thereby.
Discharge of the Indenture. The Indenture will be discharged with
respect to a series of Notes (except with respect to certain continuing
rights specified in the Indenture) upon the delivery to the Indenture Trustee
for cancellation of all the Notes of such series or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for
the payment in full of all of the Notes of such series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such series, to replace stolen, lost or mutilated Notes of
such series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the
Notes of such series on the maturity date for such Notes and any installment
of interest on such Notes in accordance with the terms of the Indenture and
the Notes of such series. In the event of any such defeasance and discharge
of Notes of such series, holders of Notes of such series would be able to
look only to such money and/or direct obligations for payment of principal
and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each
series of Notes will be required to mail each year to all related Noteholders
a brief report relating to its eligibility and qualification to continue as
Indenture Trustee under the related Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by such Indenture
Trustee as such and any action taken by it that materially affects such Notes
and that has not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will
be specified in the related Prospectus Supplement. The Indenture Trustee for
any series may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee for such series. The Depositor may
also remove any such Indenture Trustee if such Indenture Trustee ceases to be
eligible to continue as such under the related Indenture or if such Indenture
Trustee becomes insolvent. In such circumstances the Depositor will be
obligated to appoint a successor trustee for the applicable series of Notes.
Any resignation or removal of the Indenture Trustee and appointment of a
successor trustee for any series of Notes does not become effective until
acceptance of the appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates or the
Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect
to one or more classes thereof or the related Assets. Credit Support may be
in the form of the subordination of one or more classes of Securities,
letters of credit, insurance policies, guarantees, the establishment of one
or more reserve funds or another method of Credit Support described in the
related Prospectus Supplement, or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of Credit Support may
be structured so as to be drawn upon by more than one series to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Securities the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Security
Balance of the Securities and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Securityholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities (each, a "Covered Trust"), holders of Securities
evidencing interests in any of such Covered Trusts will be subject to the
risk that such Credit Support will be exhausted by the claims of other
Covered Trusts prior to such Covered Trust receiving any of its intended
share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of
coverage under such Credit Support, (b) any conditions to payment thereunder
not otherwise described herein, (c) the conditions (if any) under which the
amount of coverage under such Credit Support may be reduced and under which
such Credit Support may be terminated or replaced and (d) the material
provisions relating to such Credit Support. Additionally, the related
Prospectus Supplement will set forth certain information with respect to the
obligor under any instrument of Credit Support, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of
its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See "Risk Factors--Credit Support Limitations--Risk
That Credit Support Will Not Cover All Losses."
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Securities to receive distributions of principal and
interest from the Collection Account on any Distribution Date will be
subordinated to such rights of the holders of Senior Securities. If so
provided in the related Prospectus Supplement, the subordination of a class
may apply only in the event of (or may be limited to) certain types of losses
or shortfalls. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a class or classes of Subordinate
Securities in a series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of subordination will
be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group
of Assets prior to distributions on Subordinate Securities evidencing
interests in a different group of 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
If so provided in the Prospectus Supplement for a series of Securities,
the Contracts in the related Trust Fund will be covered for various default
risks by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the
"L/C Bank"). Under a letter of credit, the L/C Bank will be obligated to
honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified
in the related Prospectus Supplement of the aggregate principal balance of
the Assets on the related Cut-off Date or of the initial aggregate Security
Balance of one or more classes of Securities. If so specified in the related
Prospectus Supplement, the letter of credit may permit draws in the event of
only certain types of losses and shortfalls. The amount available under the
letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Securities will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Securities of the related
series, timely distributions of interest and/or full distributions of
principal on the basis of a schedule of principal distributions set forth in
or determined in the manner specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by one or more reserve funds in which cash, a
letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Certificates. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide limited protection against only certain types of
losses and shortfalls. Following each Distribution Date amounts in a reserve
fund in excess of any amount required to be maintained therein may be
released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement and will not be available for
further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund
may be applied to make distributions to Securityholders and use of investment
earnings from the Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO ABS
If so provided in the Prospectus Supplement for a series of Securities,
the ABS in the related Trust Fund and/or the Contracts underlying such ABS
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 THE CONTRACTS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Contracts. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete nor to
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Contracts is situated. The summaries
are qualified in their entirety by reference to the appropriate laws of the
states in which Contracts may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the
Trustee will succeed collectively to all of the rights (including the right
to receive payment on the Contracts) of the obligee under the Contracts.
Each Contract evidences both (a) the obligation of the obligor to repay the
loan evidenced thereby, and (b) the grant of a security interest in the
Manufactured Home to secure repayment of such loan. Certain aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel
paper is treated in a manner similar to perfection of a security interest in
chattel paper. Under the Agreement, the Master Servicer will transfer
physical possession of the Contracts to the Trustee or its custodian or may
retain possession of the Contracts as custodian for the Trustee. In
addition, the Master Servicer will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Trustee's
ownership of the Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or marked otherwise
to reflect their assignment from the Company to the Trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the Trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. The Asset
Seller may effect such notation or delivery of the required documents and
fees, and obtain possession of the certificate of title, as appropriate under
the laws of the state in which any manufactured home securing a manufactured
housing conditional sales contract is registered. In the event the Asset
Seller fails, due to clerical error, to effect such notation or delivery, or
files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Asset
Seller may not have a first priority security interest in the Manufactured
Home securing a Contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention to move
them, courts in many states have held that manufactured homes, under certain
circumstances, may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the
home under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate
records office of the county where the home is located. Substantially all of
the Contracts contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. So long as the borrower does
not violate this agreement, a security interest in the Manufactured Home will
be governed by the certificate of title laws or the UCC, and the notation of
the security interest on the certificate of title or the filing of a UCC
financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home
is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect
to a Series of Certificates and if so described in the related Prospectus
Supplement, the Master Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. The
Warranting Party will represent that as of the date of the sale to the
Depositor it has obtained a perfected first priority security interest by
proper notation or delivery of the required documents and fees with respect
to substantially all of the Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured
Homes to be assigned to the Trustee on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Depositor nor the Trustee will amend the certificates of title (or file UCC-3
statements) to identify the Trustee as the new secured party, and neither the
Depositor nor the Master Servicer will deliver the certificates of title to
the Trustee or note thereon the interest of the Trustee. Accordingly, the
Asset Seller (or other originator of the Contracts) will continue to be named
as the secured party on the certificates of title relating to the
Manufactured Homes. In some states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on
the related certificate of title and the new secured party succeeds to Master
Servicer's rights as the secured party. However, in some states, in the
absence of an amendment to the certificate of title (or the filing of a UCC-3
statement), such assignment of the security interest in the Manufactured Home
may not be held effective or such security interests may not be perfected and
in the absence of such notation or delivery to the Trustee, the assignment of
the security interest in the Manufactured Home may not be effective against
creditors of the Asset Seller (or such other originator of the Contracts) or
a trustee in bankruptcy of the Asset Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien
of the Asset Seller (or other originator of the Contracts) on the certificate
of title or delivery of the required documents and fees will be sufficient to
protect the Certificateholders against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
security interest assigned to the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee as the new secured
party on the certificate of title that, through fraud or negligence, the
security interest of the Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another
state and not re-register the Manufactured Home in such state, and if steps
are not taken to re-perfect the Trustee's security interest in such state,
the security interest in the Manufactured Home would cease to be perfected.
A majority of states generally require surrender of a certificate of title to
re-register a Manufactured Home; accordingly, the Master Servicer must
surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Asset Seller (or other originator)
would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require
a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing
the manufactured housing contracts, the Master Servicer takes steps to effect
such re-perfection upon receipt of notice of re-registration or information
from the obligor as to relocation. Similarly, when an obligor under a
manufactured housing contract sells a manufactured home, the Master Servicer
must surrender possession of the certificate of title or, if it is noted as
lienholder on the certificate of title, will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under the Agreement, the Master Servicer is
obligated to take such steps, at the Master Servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even
over a perfected security interest. The Warranting Party will represent in
the Agreement that it has no knowledge of any such liens with respect to any
Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Master Servicer on behalf of the Trustee, to the extent required by
the related Agreement, may take action to enforce the Trustee's security
interest with respect to Contracts in default by repossession and resale of
the Manufactured Homes securing such Defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a Contract
must give the debtor a number of days' notice, which varies from 10 to 30
days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the unit so that the debtor may redeem at or before such resale. In the
event of such repossession and resale of a Manufactured Home, the Trustee
would be entitled to be paid out of the sale proceeds before such proceeds
could be applied to the payment of the claims of unsecured creditors or the
holders of subsequently perfected security interests or, thereafter, to the
debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such debtor's loan. However,
some states impose prohibitions or limitations on deficiency judgments, and
in many cases the defaulting borrower would have no assets with which to pay
a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Under the terms of the federal Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), an Obligor who enters military
service after the origination of such Obligor's Contract (including an
Obligor who is a member of the National Guard or is in reserve status at the
time of the origination of the Contract and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of
such Obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Contracts.
Any shortfall in interest collections resulting from the application of the
Relief Act, to the extent not covered by the subordination of a Class of
Subordinated Certificates, could result in losses to the holders of a Series
of Certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the Master Servicer to foreclose on an affected
Contract during the Obligor's period of active duty status. Thus, in the
event that such a Contract goes into default, there may be delays and losses
occasioned by the inability to realize upon the Manufactured Home in a timely
fashion.
LAND-AND-HOME CONTRACTS
If so specified in the related Prospectus Supplement, certain Contracts
("Land-and-Home Contracts") may be secured by a lien on the real property on
which the related Manufactured Home is located.
General Security instruments granting a security interest in real
property on which a Manufactured Home is located may be mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the prevailing
practice and law in the state in which the real property is located.
Mortgages, deeds of trust and deeds to secure debt are herein collectively
referred to as "mortgages." Any of the foregoing types of mortgages will
create a lien upon, or grant a title interest in, the subject property, the
priority of which will depend on the terms of the particular security
instrument, as well as separate, recorded, contractual arrangements with
others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording
does not generally establish priority over governmental claims for real
estate taxes and assessments and other charges imposed under governmental
police powers.
Types of Mortgage Instruments A mortgage either creates a lien against
or constitutes a conveyance of real property between two parties--a mortgagor
(the borrower and usually the owner of the subject property) and a mortgagee
(the lender). In contrast, a deed of trust is a three-party instrument, among
a trustor (the equivalent of a mortgagor), a trustee to whom the mortgaged
property is conveyed, and a beneficiary (the lender) for whose benefit the
conveyance is made. As used in this Prospectus, unless the context otherwise
requires, "mortgagor" includes the trustor under a deed of trust and a
grantor under a security deed or a deed to secure debt. Under a deed of
trust, the mortgagor grants the property, irrevocably until the debt is paid,
in trust, generally with a power of sale as security for the indebtedness
evidenced by the related note. A deed to secure debt typically has two
parties. By executing a deed to secure debt, the grantor conveys title to, as
opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid, generally with a power of
sale as security for the indebtedness evidenced by the related mortgage note.
In case the mortgagor under a mortgage is a land trust, there would be an
additional party because legal title to the property is held by a land
trustee under a land trust agreement for the benefit of the mortgagor. At
origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the
express provisions of the mortgage, the law of the state in which the real
property is located, certain federal laws (including, without limitation, the
Soldiers' and Sailors' Civil Relief Act of 1940) and, in some cases, in deed
of trust transactions, the directions of the beneficiary.
Interest in Real Property The real property covered by a mortgage, deed
of trust, security deed or deed to secure debt is most often the fee estate
in land and improvements. However, such an instrument may encumber other
interests in real property such as a tenant's interest in a lease of land or
improvements, or both, and the leasehold estate created by such lease. An
instrument covering an interest in real property other than the fee estate
requires special provisions in the instrument creating such interest or in
the mortgage, deed of trust, security deed or deed to secure debt, to protect
the mortgagee against termination of such interest before the mortgage, deed
of trust, security deed or deed to secure debt is paid. Unless otherwise
specified in the Prospectus Supplement, the Depositor or the Asset Seller
will make certain representations and warranties in the Agreement with
respect to any Contracts that are secured by an interest in a leasehold
estate. Such representation and warranties, if applicable, will be set forth
in the Prospectus Supplement.
Foreclosure-General Foreclosure is a legal procedure that allows the
mortgagee to recover its mortgage debt by enforcing its rights and available
legal remedies under the mortgage. If the mortgagor defaults in payment or
performance of its obligations under the note or mortgage, the mortgagee has
the right to institute foreclosure proceedings to sell the mortgaged property
at public auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, the
action is initiated by the service of legal pleadings upon all parties having
an interest of record in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating defendants.
When the lender's right to foreclose is contested, the legal proceedings can
be time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged
property, the proceeds of which are used to satisfy the judgment. Such sales
are made in accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions United
States courts have traditionally imposed general equitable principles to
limit the remedies available to a mortgagee in connection with foreclosure.
These equitable principles are generally designed to relieve the mortgagor
from the legal effect of mortgage defaults, to the extent that such effect is
perceived as harsh or unfair. Relying on such principles, a court may alter
the specific terms of a loan to the extent it considers necessary to prevent
or remedy an injustice, undue oppression or overreaching, or may require the
lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able
to reinstate the loan. In some cases, courts have substituted their judgment
for the lender's and have required that lenders reinstate loans or recast
payment schedules in order to accommodate mortgagors who are suffering from a
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage is not monetary,
e.g., the mortgagor failed to maintain the mortgaged property adequately or
the mortgagor executed a junior mortgage on the mortgaged property. The
exercise by the court of its equity powers will depend on the individual
circumstances of each case presented to it. Finally, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that a mortgagor
receive notice in addition to statutorily-prescribed minimum notice. For the
most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford
constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale Foreclosure of a deed of trust
is generally accomplished by a non-judicial trustee's sale pursuant to the
power of sale granted in the deed of trust. A power of sale is typically
granted in a deed of trust. It may also be contained in any other type of
mortgage instrument. A power of sale allows a non-judicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon any default by the mortgagor under the
terms of the mortgage note or the mortgage instrument and after notice of
sale is given in accordance with the terms of the mortgage instrument, as
well as applicable state law. In some states, prior to such sale, the trustee
under a deed of trust must record a notice of default and notice of sale and
send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A
notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. The
mortgagor or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying
the entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the mortgagor or the
junior lienholder is not provided a period to reinstate the loan, but has
only the right to pay off the entire debt to prevent the foreclosure sale.
Generally, the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods are governed by state
law and vary among the states. Foreclosure of a deed to secure debt is also
generally accomplished by a non-judicial sale similar to that required by a
deed of trust, except that the lender or its agent, rather than a trustee, is
typically empowered to perform the sale in accordance with the terms of the
deed to secure debt and applicable law.
Public Sale A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the value
of such property at the time of sale, due to, among other things, redemption
rights which may exist and the possibility of physical deterioration of the
property during the foreclosure proceedings. For these reasons, it is common
for the lender to purchase the mortgaged property for an amount equal to or
less than the underlying debt and accrued and unpaid interest plus the
expenses of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses which may be recovered by a lender.
Thereafter, subject to the mortgagor's right in some states to remain in
possession during a redemption period, if applicable, the lender will become
the owner of the property and have both the benefits and burdens of ownership
of the mortgaged property. For example, the lender will become obligated to
pay taxes, obtain casualty insurance and to make such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property. Moreover, a lender
commonly incurs substantial legal fees and court costs in acquiring a
mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure
expenses and costs, including attorneys' fees, that may be recovered by a
lender.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage under which the sale
was conducted. Any proceeds remaining after satisfaction of senior mortgage
debt are generally payable to the holders of junior mortgages and other liens
and claims in order of their priority, whether or not the mortgagor is in
default. Any additional proceeds are generally payable to the mortgagor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgage or a subsequent ancillary
proceeding or may require the institution of separate legal proceedings by
such holders.
Rights of Redemption The purposes of a foreclosure action are to enable the
mortgagee to realize upon its security and to bar the mortgagor, and all
persons who have an interest in the property which is subordinate to the
mortgage being foreclosed, from exercise of their "equity of redemption."
The doctrine of equity of redemption provides that, until the property
covered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having an interest which is
subordinate to that of the foreclosing mortgagee have an equity of redemption
and may redeem the property by paying the entire debt with interest. In
addition, in some states, when a foreclosure action has been commenced, the
redeeming party must pay certain costs of such action. Those having an equity
of redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be authorized if the former mortgagor
pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser from a foreclosure sale or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund
or a part thereof as a REMIC, the Agreement will permit foreclosed property
to be held for more than three years if the Internal Revenue Service grants
an extension of time within which to sell such property or independent
counsel renders an opinion to the effect that holding such property for such
additional period is permissible under the REMIC Provisions.
Anti-Deficiency Legislation and Other Limitations on Lenders Statutes in
some states limit the right of a beneficiary under a deed of trust or a
mortgagee under a mortgage to obtain a deficiency judgment against the
mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to
the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Some states require the
lender to exhaust the security afforded under a mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against
the mortgagor. In certain other states, the lender has the option of
bringing a personal action against the mortgagor on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the mortgagor. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor following a judicial sale to
the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally
to prevent a lender from obtaining a large deficiency judgment against the
former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere
with or affect the ability of the secured mortgage lender to realize upon
collateral or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 rehabilitative
plan to cure a monetary default in respect of a mortgage loan on a debtor's
residence by paying arrearages within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the
lender accelerated the mortgage loan and final judgment of foreclosure had
been entered in state court (provided no sale of the residence had yet
occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing the lender's
security interest to the value of the residence, thus leaving the lender a
general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to
mortgage payment arrearages, which may be cured within a reasonable time
period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose
specific statutory liabilities upon lenders who originate mortgage loans and
who fail to comply with the provisions of the law. In some cases this
liability may affect assignees of the mortgage loans.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over
all subsequent liens on the property and, in certain of these states, will
have priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party that takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or becomes involved in
the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a lender (such as a Trust Fund) secured by
residential real property. In the event that title to real property securing
a Contract in a Trust Fund was acquired by the Trust Fund and cleanup costs
were incurred in respect of the Mortgaged Property, the holders of the
related series of Securities might realize a loss if such costs were required
to be paid by the Trust Fund.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of
this rule is to subject the assignee of such a contract to all claims and
defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Contract;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trustee against such
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
Contracts, including the Truth in Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure
to comply with their provisions may affect the enforceability of the related
Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified
in the related Prospectus Supplement, the Master Servicer expects that it
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Master
Servicer desires to accelerate the maturity of the related Contract, the
Master Servicer's ability to do so will depend on the enforceability under
state law of the "due-on-sale" clause. The Garn-St Germain Depositary
Institutions Act of 1982 preempts, subject to certain exceptions and
conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the Manufactured Homes. Consequently, in some states the
Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The related Asset Seller will represent that all of the
Contracts comply with applicable usury law.
Usury statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the obligor may cancel the indebtedness and security
interest upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in
the invalidation of the transaction, thereby permitting the obligor to cancel
the recorded mortgage or deed of trust without any payment or prohibiting the
lender from foreclosing.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its security interest was executed and recorded before
commission of the crime upon which the forfeiture is based, or (ii) the
lender was, at the time of execution of the security interest, "reasonably
without cause to believe" that the property was used in, or purchased with
the proceeds of, illegal drug or RICO activities.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered
Certificates is based on the advice of Brown & Wood LLP, counsel to the
Depositor. This summary is based on laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations)
proposed, all of which are subject to change either prospectively or
retroactively. This summary does not address the federal income tax
consequences of an investment in Securities applicable to all categories of
investors, some of which (for example, banks and insurance companies) may be
subject to special rules. Prospective investors should consult their tax
advisors regarding the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of Securities.
The term "U.S. 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 (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations), or an estate whose income is subject to
U.S. federal income tax regardless of its source of income, or a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States person have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996 and treated as United States person prior to
such date that elect to continue to be treated as United States person shall
be considered U.S. persons as well.
GENERAL
The federal income tax consequences to Securityholders will vary
depending on whether an election is made to treat the Trust Fund relating to
a particular Series of Securities as a REMIC under the Code. The Prospectus
Supplement for each Series of Securities will specify whether a REMIC
election will be made.
GRANTOR TRUST FUNDS
If the related Prospectus Supplement indicates that the Trust Fund will
be treated as a grantor trust, then Brown & Wood LLP will deliver its opinion
that the Trust Fund will not be classified as an association taxable as a
corporation and that each such Trust Fund will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
owners of Certificates will be treated for federal income tax purposes as
owners of a portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust
Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust Fund represented
by the Grantor Trust Certificates and will be considered the equitable owner
of a pro rata undivided interest in each of the Assets in the Pool. Any
amounts received by a Grantor Trust Certificateholder in lieu of amounts due
with respect to any Asset because of a default or delinquency in payment will
be treated for federal income tax purposes as having the same character as
the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections
162 or 212 each Grantor Trust Certificateholder will be entitled to deduct
its pro rata share of servicing fees, prepayment fees, assumption fees, any
loss recognized upon an assumption and late payment charges retained by the
Master Servicer, provided that such amounts are reasonable compensation for
services rendered to the Trust Fund. Grantor Trust Certificateholders that
are individuals, estates or trusts will be entitled to deduct their share of
expenses as itemized deductions only to the extent such expenses plus all
other Code Section 212 expenses exceed two percent of its adjusted gross
income. In addition, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds
the applicable amount (which amount will be adjusted for inflation) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over
the applicable amount and (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year. A Grantor Trust Certificateholder
using the cash method of accounting must take into account its pro rata share
of income and deductions as and when collected by or paid to the Master
Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions
as they become due or are paid to the Master Servicer, whichever is earlier.
If the servicing fees paid to the Master Servicer are deemed to exceed
reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Assets. The
Assets would then be subject to the "coupon stripping" rules of the Code
discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to
each Series of Certificates evidencing an interest in a Trust Fund comprised
of Contracts, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19)
representing principal and interest payments on Contracts that satisfy
the applicable sentence in the following paragraph will be considered to
represent "loans . . . secured by an interest in real property which
is . . . residential property" within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the Assets represented by that
Grantor Trust Certificate are of a type described in such Code section;
and
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent "real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest income on the Contracts that satisfy the
applicable sentence in the following paragraph will be considered
"interest on obligations secured by mortgages on real property" within
the meaning of Code Section 856(c)(3)(B), to the extent that the Assets
represented by that Grantor Trust Certificate are of a type described in
such Code section.
Under Code Section 7701(a)(19)(C)(v), "loans secured by an interest in
real property" include loans secured by mobile homes not used on a transient
basis. The Treasury regulations under Code Section 856 state that the local
law definitions are not controlling in determining the meaning of the term
"real property" for purposes of Code Section 856, and the Internal Revenue
Service ("IRS") has ruled that obligations secured by permanently installed
mobile home units qualify as "real estate assets" under this provision.
Entities affected by the foregoing Code provisions that are considering the
purchase of Certificates evidencing interests in Trust Fund comprised of
Contracts should consult their tax advisors regarding such provisions.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons"
as those terms are defined in section 1286 of the Code, and, as a result,
such assets would be subject to the stripped bond provisions of the Code.
Under these rules, such Government Securities are treated as having original
issue discount based on the purchase price and the stated redemption price at
maturity of each Security. As such, Grantor Trust Certificateholders would
be required to include in income their pro rata share of the original issue
discount on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the
Grantor Trust Certificateholder in any taxable year may exceed amounts
actually received during such year.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Asset based on
each Asset's relative fair market value, so that such holder's undivided
interest in each Asset will have its own tax basis. A Grantor Trust
Certificateholder that acquires an interest in Assets at a premium may elect
to amortize such premium under a constant interest method, provided that the
underlying mortgage loans with respect to such Assets were originated after
September 27, 1985. Premium allocable to mortgage loans originated on or
before September 27, 1985 should be allocated among the principal payments on
such mortgage loans and allowed as an ordinary deduction as principal
payments are made. Amortizable bond premium will be treated as an offset to
interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable
premium is applied to offset interest payments. It is not clear whether a
reasonable prepayment assumption should be used in computing amortization of
premium allowable under Code Section 171. A Certificateholder that makes
this election for a Certificate that is acquired at a premium will be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Certificateholder
acquires during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at
a premium should recognize a loss if a Contract (or an underlying Contract
with respect to an ABS) prepays in full, equal to the difference between the
portion of the prepaid principal amount of such Contract (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Contract (or
underlying Contract). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would
be required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Securities. Absent further guidance
from the IRS, the Trustee intends to account for amortizable bond premium in
the manner described above. Prospective purchasers of the Securities should
consult their tax advisors regarding the possible application of the
Amortizable Bond Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to original issue discount ("OID") (currently Code Sections
1271 through 1273 and 1275) and Treasury regulations issued on January 27,
1994, as amended on June 11, 1996, under such Sections (the "OID
Regulations"), will be applicable to a Grantor Trust Certificateholder's
interest in those Assets meeting the conditions necessary for these sections
to apply. Rules regarding periodic inclusion of OID income are applicable to
mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1,
1982, and mortgages of individuals originated after March 2, 1984. Such OID
could arise by the financing of points or other charges by the originator of
the mortgages in an amount greater than a statutory de minimis exception to
the extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. OID generally
must be reported as ordinary gross income as it accrues under a constant
interest method. See "--Multiple Classes of Grantor Trust Certificates--
Accrual of Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Assets may be subject to the market discount rules of
Code Sections 1276 through 1278 to the extent an undivided interest in an
Asset is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the
portion of the principal amount of such Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than
0.25% of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have
not yet been issued; therefore, investors should consult their own tax
advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the
holder of a market discount bond may elect to accrue market discount either
on the basis of a constant interest rate or according to one of the following
methods. If a Grantor Trust Certificate is issued with OID, the amount of
market discount that accrues during any accrual period would be equal to the
product of (i) the total remaining market discount and (ii) a fraction, the
numerator of which is the OID accruing during the period and the denominator
of which is the total remaining OID at the beginning of the accrual period.
For Grantor Trust Certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of (i) the
total remaining market discount and (ii) a fraction, the numerator of which
is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period. For purposes of calculating
market discount under any of the above methods in the case of instruments
(such as the Grantor Trust Certificates) that provide for payments that may
be accelerated by reason of prepayments of other obligations securing such
instruments, the same prepayment assumption applicable to calculating the
accrual of OID will apply. Because the regulations described above have not
been issued, it is impossible to predict what effect those regulations might
have on the tax treatment of a Grantor Trust Certificate purchased at a
discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Grantor Trust Certificate purchased with market
discount. For these purposes, the de minimis rule referred above applies.
Any such deferred interest expense would not exceed the market discount that
accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includible in
income. If such holder elects to include market discount in income currently
as it accrues on all market discount instruments acquired by such holder in
that taxable year or thereafter, the interest deferral rule described above
will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April
4, 1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--Regular
Certificates--Premium" herein. The election to accrue interest, discount and
premium on a constant yield method with respect to a Certificate is
irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments
results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. For
purposes of Code Sections 1271 through 1288, Code Section 1286 treats a
stripped bond or a stripped coupon as an obligation issued on the date that
such stripped interest is created. If a Trust Fund is created with two
classes of Grantor Trust Certificates, one class of Grantor Trust
Certificates may represent the right to principal and interest, or principal
only, on all or a portion of the Assets (the "Stripped Bond Certificates"),
while the second class of Grantor Trust Certificates may represent the right
to some or all of the interest on such portion (the "Stripped Coupon
Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Asset
principal balance) or the Certificates are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Certificates should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on an Asset by Asset basis, which could result
in some Assets being treated as having more than 100 basis points of interest
stripped off. See "--Non-REMIC Certificates" and "Multiple Classes of
Grantor Trust Certificates--Stripped Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an in interest in Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if
the discount on an Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See "--
Non-REMIC Certificates" and "--Single Class of Grantor Trust Certificates--
Original Issue Discount" herein. However, a purchaser of a Stripped Bond
Certificate will be required to account for any discount on the Assets as
market discount rather than OID if either (i) the amount of OID with respect
to the Assets is treated as zero under the OID de minimis rule when the
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing fees in excess of reasonable servicing fees) is stripped
off of the Trust Fund's Assets. Pursuant to Revenue Procedure 91-49, issued
on August 8, 1991, purchasers of Stripped Bond Certificates using an
inconsistent method of accounting must change their method of accounting and
request the consent of the IRS to the change in their accounting method on a
statement attached to their first timely tax return filed after August 8,
1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that
OID computations be made for each payment from each Asset. However, based on
the recent IRS guidance, it appears that all payments from an Asset
underlying a Stripped Coupon Certificate should be treated as a single
installment obligation subject to the OID rules of the Code, in which case,
all payments from such Asset would be included in the Asset's stated
redemption price at maturity for purposes of calculating income on such
certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Assets
will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate
is treated as a single instrument (rather than an interest in discrete
mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Grantor Trust Certificate, it appears
that no loss will be available as a result of any particular prepayment
unless prepayments occur at a rate faster than the assumed prepayment rate.
However, if such Certificate is treated as an interest in discrete Assets, or
if no prepayment assumption is used, then when an Asset is prepaid, the
holder of such Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of such Certificate that is allocable to
such Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper
treatment of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Assets of the type that make up
the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of
the underlying Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID,
it is not clear whether such characterization would apply with regard to
these other Code sections. Although the issue is not free from doubt, based
on policy considerations, each class of Grantor Trust Certificates, unless
otherwise specified in the related Prospectus Supplement, should be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) and "loans . . . secured by, an interest in real
property which is . . . residential real property" within the meaning of
Code Section 7701(a)(19)(C)(v), and interest income attributable to Grantor
Trust Certificates should be considered to represent "interest on obligations
secured by mortgages on real property" within the meaning of Code Section
856(c)(3)(B), provided that in each case the underlying Assets and interest
on such Assets qualify for such treatment. Prospective purchasers to which
such characterization of an investment in Certificates is material should
consult their own tax advisors regarding the characterization of the Grantor
Trust Certificates and the income therefrom.
2. Grantor Trust Certificates Representing Interests in Loans Other
Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275
will be applicable to a Certificateholder's interest in those Assets as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Under the OID Regulations, such original issue discount could arise by
the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that
is currently deductible by the borrower under applicable Code provisions, or
under certain circumstances, by the presence of "teaser" rates on the Assets.
OID on each Grantor Trust Certificate must be included in the owner's
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
amount of OID required to be included in an owner's income in any taxable
year with respect to a Grantor Trust Certificate representing an interest in
Assets other than Assets with interest rates that adjust periodically ("ARM
Loans") likely will be computed as described below under "--Accrual of
Original Issue Discount." The following discussion is based in part on the
OID Regulations and in part on the provisions of the Tax Reform Act of 1986
(the "1986 Act"). The OID Regulations generally are effective for debt
instruments issued on or after April 4, 1994, but may be relied upon as
authority with respect to debt instruments, such as the Grantor Trust
Certificates, issued after December 21, 1992. Alternatively, proposed
Treasury regulations issued December 21, 1992 may be treated as authority for
debt instruments issued after December 21, 1992 and prior to April 4, 1994,
and proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issued date of the Assets should be used, or, in the case of
Stripped Bond Certificates or Stripped Coupon Certificates, the date such
Certificates are acquired. The holder of a Certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable securities.
Under the Code, the Assets underlying the Grantor Trust Certificate will
be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such Asset's stated redemption price at
maturity over its issue price. The issue price of an Asset is generally the
amount lent to the mortgagee, which may be adjusted to take into account
certain loan origination fees. The stated redemption price at maturity of an
Asset is the sum of all payments to be made on such Asset other than payments
that are treated as qualified stated interest payments. The accrual of this
OID, as described below under "--Accrual of Original Issue Discount," will,
unless otherwise specified in the related Prospectus Supplement, utilize the
original yield to maturity of the Grantor Trust Certificate calculated based
on a reasonable assumed prepayment rate for the mortgage loans underlying the
Grantor Trust Certificates (the "Prepayment Assumption"), and will take into
account events that occur during the calculation period. The Prepayment
Assumption will be determined in the manner prescribed by regulations that
have not yet been issued. The legislative history of the 1986 Act (the
"Legislative History") provides, however, that the regulations will require
that the Prepayment Assumption be the prepayment assumption that is used in
determining the offering price of such Certificate. No representation is
made that any Certificate will prepay at the Prepayment Assumption or at any
other rate. The prepayment assumption contained in the Code literally only
applies to debt instruments collateralized by other debt instruments that are
subject to prepayment rather than direct ownership interests in such debt
instruments, such as the Certificates represent. However, no other legal
authority provides guidance with regard to the proper method for accruing OID
on obligations that are subject to prepayment, and, until further guidance is
issued, the Master Servicer intends to calculate and report OID under the
method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily
portions," as defined below, of the OID on such Grantor Trust Certificate for
each day on which it owns such Certificate, including the date of purchase
but excluding the date of disposition. In the case of an original owner, the
daily portions of OID with respect to each component generally will be
determined as set forth under the OID Regulations. A calculation will be
made by the Master Servicer or such other entity specified in the related
Prospectus Supplement of the portion of OID that accrues during each
successive monthly accrual period (or shorter period from the date of
original issue) that ends on the day in the calendar year corresponding to
each of the Distribution Dates on the Grantor Trust Certificates (or the day
prior to each such date). This will be done, in the case of each full month
accrual period, by (i) adding (a) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to
maturity of the respective component under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption on the
respective component and (b) any payments included in the state redemption
price at maturity received during such accrual period, and (ii) subtracting
from that total the "adjusted issue price" of the respective component at the
beginning of such accrual period. The adjusted issue price of a Grantor
Trust Certificate at the beginning of the first accrual period is its issue
price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under any reasonable
method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received.
However, the amount of original issue discount includible in the income of a
holder of an obligation is reduced when the obligation is acquired after its
initial issuance at a price greater than the sum of the original issue price
and the previously accrued original issue discount, less prior payments of
principal. Accordingly, if such Assets acquired by a Certificateholder are
purchased at a price equal to the then unpaid principal amount of such Asset,
no original issue discount attributable to the difference between the issue
price and the original principal amount of such Asset (i.e., points) will be
includible by such holder. Other original issue discount on the Assets
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon
stripping rules with respect to such instruments. In the absence of any
authority, the Master Servicer will report OID on Grantor Trust Certificates
attributable to ARM Loans ("Stripped ARM Obligations") to holders in a manner
it believes is consistent with the rules described above under the heading "-
- -Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans" and with the OID Regulations. In general, application of these rules
may require inclusion of income on a Stripped ARM Obligation in advance of
the receipt of cash attributable to such income. Further, the addition of
interest deferred by reason of negative amortization ("Deferred Interest") to
the principal balance of an ARM Loan may require the inclusion of such amount
in the income of the Grantor Trust Certificateholder when such amount
accrues. Furthermore, the addition of Deferred Interest to the Grantor Trust
Certificate's principal balance will result in additional income (including
possibly OID income) to the Grantor Trust Certificateholder over the
remaining life of such Grantor Trust Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will
be includible with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the
amount received and the owner's adjusted basis in the Grantor Trust
Certificate. Such adjusted basis generally will equal the seller's purchase
price for the Grantor Trust Certificate, increased by the OID included in the
seller's gross income with respect to the Grantor Trust Certificate, and
reduced by principal payments on the Grantor Trust Certificate previously
received by the seller. Such gain or loss will be capital gain or loss to an
owner for which a Grantor Trust Certificate is a "capital asset" within the
meaning of Code Section 1221, and will be long-term or short-term depending
on whether the Grantor Trust Certificate has been owned for the long-term
capital gain holding period (generally more than one year).
The Taxpayer Relief Act of 1997 (the "Act") reduces the maximum rates on
long-term capital gains recognized on capital assets held by individual
taxpayers for more than eighteen months as of the date of disposition (and
would further reduce the maximum rates on such gains in the year 2001 and
thereafter for certain individual taxpayers who meet specified conditions).
The capital gains rate for capital assets held by individual taxpayers for
more than twelve months but less than eighteen months was not changed by the
Act ("mid-term rate"). The Act does not change the capital gain rates for
corporations. Prospective investors should consult their own tax advisors
concerning these tax law changes.
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from
the sale of a Grantor Trust Certificate by a bank or a thrift institution to
which such section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July
18, 1984, interest or OID paid by the person required to withhold tax under
Code Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as
defined below) or (ii) a Grantor Trust Certificateholder holding on behalf of
an owner that is not a U.S. Person will be subject to federal income tax,
collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued OID recognized by
the owner on the sale or exchange of such a Grantor Trust Certificate also
will be subject to federal income tax at the same rate. Generally, such
payments would not be subject to withholding to the extent that a Grantor
Trust Certificate evidences ownership in Assets issued after July 18, 1984,
by natural persons if such Grantor Trust Certificateholder complies with
certain identification requirements (including delivery of a statement,
signed by the Grantor Trust Certificateholder under penalties of perjury,
certifying that such Grantor Trust Certificateholder is not a U.S. Person and
providing the name and address of such Grantor Trust Certificateholder).
Additional restrictions apply to Assets of where the mortgagor is not a
natural person in order to qualify for the exemption from withholding.
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation or a partnership organized in or under the laws
of the United States or any political subdivision thereof, an estate, the
income of which from sources outside the United States is includible in gross
income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States, or a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States trustees have
authority to control all substantial decisions of the trust.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that
such person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be
required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
F. NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance
with certain conditions. Although a REMIC is not generally subject to
federal income tax (see, however "--Taxation of Owners of REMIC Residual
Certificates" and "--Prohibited Transactions" below), if a Trust Fund with
respect to which a REMIC election is made fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, including the implementation of restrictions on the purchase and
transfer of the residual interests in a REMIC as described below under
"Taxation of Owners of REMIC Residual Certificates," the Code provides that a
Trust Fund will not be treated as a REMIC for such year and thereafter. In
that event, such entity may be taxable as a separate corporation, and the
related Certificates (the "REMIC Certificates") may not be accorded the
status or given the tax treatment described below. While the Code authorizes
the Treasury Department to issue regulations providing relief in the event of
an inadvertent termination of the status of a trust fund as a REMIC, no such
regulations have been issued. Any such relief, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion
of the REMIC's income for the period in which the requirements for such
status are not satisfied. With respect to each Trust Fund that elects REMIC
status, Brown & Wood LLP will deliver its opinion generally to the effect
that, under then existing law and assuming compliance with all provisions of
the related Pooling and Servicing Agreement, such Trust Fund will qualify as
a REMIC, and the related Certificates will be considered to be regular
interests ("REMIC Regular Certificates") or a sole class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related
Prospectus Supplement for each Series of Certificates will indicate whether
the Trust Fund will make a REMIC election and whether a class of Certificates
will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) such Certificates held by a thrift institution
taxed as a "domestic building and loan association" will constitute assets
described in Code Section 7701(a)(19)(C) to the extent the underlying
Contracts constitute such assets; (ii) such Certificates held by a real
estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A) to the extent the underlying Contracts
constitute such assets; and (iii) interest on such Certificates held by a
real estate investment trust will be considered "interest on obligations
secured by mortgages on real property" within the meaning of Code Section
856(c)(3)(B) to the extent the underlying Contracts constitute such assets.
Under Code Section 7701(a)(19)(C)(v), "loans secured by an interest in real
property" include loans secured by mobile homes not used on a transient
basis. The Treasury regulations under Code Section 856 state that the local
law definitions are not controlling in determining the meaning of the term
"real property" for purposes of Section 856, and the IRS has ruled that
obligations secured by permanently installed mobile home units qualify as
"real estate assets" under this provision. Entities affected by the
foregoing Code provisions that are considering the purchase of Certificates
evidencing interests in a Trust Fund comprised of Contracts should consult
their tax advisors regarding such provisions. If less than 95% of the
REMIC's assets are assets qualifying under any of the foregoing Code
sections, the Certificates will be qualifying assets only to the extent that
the REMIC's assets are qualifying assets. In addition, payments on Mortgage
Assets held pending distribution on the REMIC Certificates will be considered
to be real estate assets for purposes of Code Section 856(c). The Small
Business Job Protection Act of 1996, as part of the repeal of the bad debt
reserve method for thrift institutions, repealed the application of Code
Section 593(d) to any taxable year beginning after December 31, 1995.
In some instances the Assets may not be treated entirely as assets
described in the foregoing sections. REMIC Certificates held by a real
estate investment trust will not constitute "Government Securities" within
the meaning of Code Section 856(c)(4)(A), and REMIC Certificates held by a
regulated investment company will not constitute "Government Securities"
within the meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held
by certain financial institutions will constitute "evidences of indebtedness"
within the meaning of Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally
secured by an interest in real property and that is transferred to the REMIC
within a prescribed time period in exchange for regular or residual interests
in the REMIC. The REMIC Regulations provide that manufactured housing or
mobile homes (not including recreational vehicles, campers or similar
vehicles) that are "single family residences" under Code Section 25(e)(10)
will qualify as real property without regard to state law classifications.
Under Code Section 25(e)(10), a single family residence includes any
manufactured home that has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and that is of a kind customarily used
at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two
separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of any such
Series of Certificates, Brown & Wood LLP, counsel to the Depositor, will
deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Agreement, the Master REMIC as well as any
Subsidiary REMIC will each qualify as a REMIC, and the REMIC Certificates
issued by the Master REMIC and the Subsidiary REMIC, respectively, will be
considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
provisions.
Only REMIC Certificates, other than the residual interest in the
Subsidiary REMIC, issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code; (ii)
"loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code; and (iii) whether the income on such Certificates is interest
described in Section 856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC
or its assets. Moreover, holders of REMIC Regular Certificates that
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Original Issue Discount and Premium. The REMIC Regular Certificates may
be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular
Certificate and its "issue price." Holders of any class of Certificates
issued with OID will be required to include such OID in gross income for
federal income tax purposes as it accrues, in accordance with a constant
interest method based on the compounding of interest as it accrues rather
than in accordance with receipt of the interest payments. The following
discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). Holders of REMIC
Regular Certificates (the "REMIC Regular Certificateholders") should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the REMIC Regular
Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated
reinvestment rate, if any, relating to the REMIC Regular Certificates and
prescribe a method for adjusting the amount and rate of accrual of such
discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in
the manner prescribed by regulations, which regulations have not yet been
issued. The Legislative History provides, however, that Congress intended
the regulations to require that the Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such
REMIC Regular Certificates. The Prospectus Supplement for each Series of
REMIC Regular Certificates will specify the Prepayment Assumption to be used
for the purpose of determining the amount and rate of accrual of OID. No
representation is made that the REMIC Regular Certificates will prepay at the
Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of
its "stated redemption price at maturity" over its "issue price." The issue
price of a REMIC Regular Certificate is the first price at which a
substantial amount of REMIC Regular Certificates of that class are first sold
to the public (excluding bond houses, brokers, underwriters or wholesalers).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be treated
as the fair market value of such class on the Closing Date. The issue price
of a REMIC Regular Certificate also includes the amount paid by an initial
Certificateholder for accrued interest that relates to a period prior to the
issue date of the REMIC Regular Certificate. The stated redemption price at
maturity of a REMIC Regular Certificate includes the original principal
amount of the REMIC Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Qualified stated interest generally means interest payable at a
single fixed rate or qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately
takes into account the length of the interval between payments.
Distributions of interest on REMIC Regular Certificates with respect to which
Deferred Interest will accrue will not constitute qualified stated interest
payments, and the stated redemption price at maturity of such REMIC Regular
Certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during
the first period is treated as the amount by which the stated redemption
price at maturity of the Certificate exceeds its issue price for purposes of
the de minimis rule described below. The OID Regulations suggest that all
interest on a long first period REMIC Regular Certificate that is issued with
non-de minimis OID, as determined under the foregoing rule, will be treated
as OID. Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to
the Certificates stated redemption price at maturity. REMIC Regular
Certificateholders should consult their own tax advisors to determine the
issue price and stated redemption price at maturity of a REMIC Regular
Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the REMIC Regular Certificate
and the denominator of which is the stated redemption price at maturity of
the REMIC Regular Certificate. Although currently unclear, it appears that
the schedule of such distributions should be determined in accordance with
the Prepayment Assumption. The Prepayment Assumption with respect to a
Series of REMIC Regular Certificates will be set forth in the related
Prospectus Supplement. Holders generally must report de minimis OID pro rata
as principal payments are received, and such income will be capital gain if
the REMIC Regular Certificate is held as a capital asset. However, accrual
method holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances
(the "Super-Premium Certificates"). The income tax treatment of such REMIC
Regular Certificates is not entirely certain. For information reporting
purposes, the Trust Fund intends to take the position that the stated
redemption price at maturity of such REMIC Regular Certificates is the sum of
all payments to be made on such REMIC Regular Certificates determined under
the Prepayment Assumption, with the result that such REMIC Regular
Certificates would be issued with OID. The calculation of income in this
manner could result in negative original issue discount (which delays future
accruals of OID rather than being immediately deductible) when prepayments on
the Mortgage Assets exceed those estimated under the Prepayment Assumption.
The IRS might contend, however, that certain proposed contingent payment
rules contained in regulations issued on December 15, 1994, with respect to
original issue discount, should apply to such Certificates. Although such
rules are not applicable to instruments governed by Code Section 1272(a)(6),
they represent the only guidance regarding the current views of the IRS with
respect to contingent payment instruments. In the alternative, the IRS could
assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to
be issued at a premium. If such a position were to prevail, the rules
described below under "--Taxation of Owners of REMIC Regular Certificates--
Premium" would apply. It is unclear when a loss may be claimed for any
unrecovered basis for a Super-Premium Certificate. It is possible that a
holder of a Super-Premium Certificate may only claim a loss when its
remaining basis exceeds the maximum amount of future payments, assuming no
further prepayments or when the final payment is received with respect to
such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular
Certificate generally should not be treated as a Super-Premium Certificate
and the rules described below under "--REMIC Regular Certificates--Premium"
should apply. However, it is possible that holders of REMIC Regular
Certificates issued at a premium, even if the premium is less than 25% of
such Certificate's actual principal balance, will be required to amortize the
premium under an original issue discount method or contingent interest method
even though no election under Code Section 171 is made to amortize such
premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on
a REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a REMIC Regular
Certificate, a calculation will be made of the portion of the OID that
accrues during each successive period ("an accrual period") that ends on the
day in the calendar year corresponding to a Distribution Date (or if
Distribution Dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last
day of the immediately preceding month) and begins on the day after the end
of the immediately preceding accrual period (or on the issue date in the case
of the first accrual period). This will be done, in the case of each full
accrual period, by (i) adding (a) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to
maturity of the REMIC Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and (b) any payments included in
the stated redemption price at maturity received during such accrual period,
and (ii) subtracting from that total the adjusted issue price of the REMIC
Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first
accrual period is its issue price; the adjusted issue price of a REMIC
Regular Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest
made at the end of or during that accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease (but never below zero) in a given accrual
period to reflect the fact that prepayments are occurring faster or slower
than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable
method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular
Certificate. In computing the daily portions of OID for such a purchaser (as
well as an initial purchaser that purchases at a price higher than the
adjusted issue price but less than the stated redemption price at maturity),
however, the daily portion is reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by
which the price paid by such holder for that REMIC Regular Certificate
exceeds the following amount: (a) the sum of the issue price plus the
aggregate amount of OID that would have been includible in the gross income
of an original REMIC Regular Certificateholder (who purchased the REMIC
Regular Certificate at its issue price), less (b) any prior payments included
in the stated redemption price at maturity, and the denominator of which is
the sum of the daily portions for that REMIC Regular Certificate for all days
beginning on the date after the purchase date and ending on the maturity date
computed under the Prepayment Assumption. A holder who pays an acquisition
premium instead may elect to accrue OID by treating the purchase as a
purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a
variable rate will constitute qualified stated interest and not contingent
interest if, generally, (i) such interest is unconditionally payable at least
annually, (ii) the issue price of the debt instrument does not exceed the
total noncontingent principal payments and (iii) interest is based on a
"qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates," one "qualified inverse
floating rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers interest
payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under "--
Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on
a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest. In such case, the
weighted average rate used to compute the initial pass-through rate on the
REMIC Regular Certificates will be deemed to be the index in effect through
the life of the REMIC Regular Certificates. It is possible, however, that
the IRS may treat some or all of the interest on REMIC Regular Certificates
with a weighted average rate as taxable under the rules relating to
obligations providing for contingent payments. Such treatment may effect the
timing of income accruals on such REMIC Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such Certificateholder acquires during the year
of the election or thereafter. Similarly, a Certificateholder that makes
this election for a Certificate that is acquired at a premium will be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns
or acquires. See "-- REMIC Regular Certificates--Premium" herein. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Certificate is irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal
amount or, in the case of a REMIC Regular Certificate with OID, the adjusted
issue price (determined for this purpose as if the purchaser had purchased
such REMIC Regular Certificate from an original holder) over (ii) the price
for such REMIC Regular Certificate paid by the purchaser. A
Certificateholder that purchases a REMIC Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
amounts included in such certificate's stated redemption price at maturity.
In particular, under Section 1276 of the Code such a holder generally will be
required to allocate each such distribution first to accrued market discount
not previously included in income, and to recognize ordinary income to that
extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the
first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular
Certificate is less than 0.25% of such REMIC Regular Certificate's stated
redemption price at maturity multiplied by such REMIC Regular Certificate's
weighted average maturity remaining after the date of purchase. If market
discount on a REMIC Regular Certificate is considered to be zero under this
rule, the actual amount of market discount must be allocated to the remaining
principal payments on the REMIC Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment
is made. Treasury regulations implementing the market discount rules have
not yet been issued; therefore, investors should consult their own tax
advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis
of a constant interest method rate or according to one of the following
methods. For REMIC Regular Certificates issued with OID, the amount of
market discount that accrues during a period is equal to the product of (i)
the total remaining market discount and (ii) a fraction, the numerator of
which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the period. For REMIC Regular
Certificates issued without OID, the amount of market discount that accrues
during a period is equal to the product of (a) the total remaining market
discount and (b) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning of the
period. For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the REMIC Regular Certificates)
that provide for payments that may be accelerated by reason of prepayments of
other obligations securing such instruments, the same Prepayment Assumption
applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Certificate purchased with market discount. For these
purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during
such taxable year and is, in general, allowed as a deduction not later than
the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will
be considered to have purchased the REMIC Regular Certificate at a premium
and may elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that
such Certificateholder acquires during the year of the election or
thereafter. It is not clear whether the Prepayment Assumption would be taken
into account in determining the life of the REMIC Regular Certificate for
this purpose. However, the Legislative History states that the same rules
that apply to accrual of market discount (which rules require use of a
Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have OID)
will also apply in amortizing bond premium under Code Section 171. The Code
provides that amortizable bond premium will be allocated among the interest
payments on such REMIC Regular Certificates and will be applied as an offset
against such interest payment. On June 27, 1996, the IRS published in the
Federal Register proposed regulations on the amortization of bond premium.
The foregoing discussion is based in part on such proposed regulations. The
proposed regulations generally would be effective for Certificates acquired
on or after the date 60 days after the date they are published as final
regulations in the Federal Register. Certificateholders should consult their
tax advisors regarding the possibility of making an election to amortize any
such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such
Certificates prior to the time distributions of cash with respect to such
Deferred Interest are made. It is unclear, under the OID Regulations,
whether any of the interest on such Certificates will constitute qualified
stated interest or whether all or a portion of the interest payable on such
Certificates must be included in the stated redemption price at maturity of
the Certificates and accounted for as OID (which could accelerate such
inclusion). Interest on REMIC Regular Certificates must in any event be
accounted for under an accrual method by the holders of such Certificates
and, therefore, applying the latter analysis may result only in a slight
difference in the timing of the inclusion in income of interest on such REMIC
Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates
may contain one or more classes of Subordinated Certificates, and in the
event there are defaults or delinquencies on the Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such
Certificates under an accrual method without giving effect to delays and
reductions in distributions on such Subordinated Certificates attributable to
defaults and delinquencies on the Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of
defaults and delinquencies on the Assets. Timing and characterization of
such losses is discussed in "--REMIC Regular Certificates--Treatment of
Realized Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange,
redemption, or retirement and the seller's adjusted basis in the REMIC
Regular Certificate. Such adjusted basis generally will equal the cost of
the REMIC Regular Certificate to the seller, increased by any OID and market
discount included in the seller's gross income with respect to the REMIC
Regular Certificate, and reduced (but not below zero) by payments included in
the stated redemption price at maturity previously received by the seller and
by any amortized premium. Similarly, a holder who receives a payment that is
part of the stated redemption price at maturity of a REMIC Regular
Certificate will recognize gain equal to the excess, if any, of the amount of
the payment over the holder's adjusted basis in the REMIC Regular
Certificate. A REMIC Regular Certificateholder who receives a final payment
that is less than the holder's adjusted basis in the REMIC Regular
Certificate will generally recognize a loss. Except as provided in the
following paragraph and as provided under "--Market Discount" above, any such
gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income to
the extent that such gain does not exceed the excess, if any, of (i) the
amount that would have been includible in such holder's income with respect
to the REMIC Regular Certificate had income accrued thereon at a rate equal
to 110% of the AFR as defined in Code Section 1274(d) determined as of the
date of purchase of such REMIC Regular Certificate, over (ii) the amount
actually includible in such holder's income.
The Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
REMIC Regular Certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method
would require information relating to the holder's purchase price which the
REMIC may not have, it appears that the information reports will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of
interest based on a period that corresponds to the interval between
Distribution Dates but that ends prior to each such Distribution Date. The
period between the Closing Date for Payment Lag Certificates and their first
Distribution Date may or may not exceed such interval. Purchasers of Payment
Lag Certificates for which the period between the Closing Date and the first
Distribution Date does not exceed such interval could pay upon purchase of
the REMIC Regular Certificates accrued interest in excess of the accrued
interest that would be paid if the interest paid on the Distribution Date
were interest accrued from Distribution Date to Distribution Date. If a
portion of the initial purchase price of a REMIC Regular Certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest") and the REMIC Regular Certificate provides for a payment
of stated interest on the first payment date (and the first payment date is
within one year of the issue date) that equals or exceeds the amount of the
pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of pre-
issuance accrued interest, rather than as an amount payable on the REMIC
Regular Certificate. However, it is unclear under this method how the OID
Regulations treat interest on Payment Lag Certificates. Therefore, in the
case of a Payment Lag Certificate, the Trust Fund intends to include accrued
interest in the issue price and report interest payments made on the first
Distribution Date as interest to the extent such payments represent interest
for the number of days that the Certificateholder has held such Payment Lag
Certificate during the first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a
portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to those REMIC Regular
Certificateholders that are "pass-through interest holders."
Certificateholders that are pass-through interest holders should consult
their own tax advisors about the impact of these rules on an investment in
the REMIC Regular Certificates. See "Pass-Through of Non-Interest Expenses
of the REMIC" under "Taxation of Owners of REMIC Residual Certificates"
below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during
the taxable year on account of any such Certificates becoming wholly or
partially worthless, and that, in general, holders of Certificates that are
not corporations should be allowed to deduct as a short-term capital loss any
loss sustained during the taxable year on account of any such Certificates
becoming wholly worthless. Although the matter is not entirely clear, non-
corporate holders of Certificates may be allowed a bad debt deduction at such
time that the principal balance of any such Certificate is reduced to reflect
realized losses resulting from any liquidated Assets. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all Assets
remaining in the related Trust Fund have been liquidated or the Certificates
of the related Series have been otherwise retired. Potential investors and
holders of the Certificates are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
with respect to such Certificates, including any loss resulting from the
failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult
their tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person and is not engaged
in a trade or business within the United States will not be subject to
federal withholding tax if (i) such REMIC Regular Certificateholder does not
actually or constructively own 10 percent or more of the combined voting
power of all classes of equity in the Issuer; (ii) such REMIC Regular
Certificateholder is not a controlled foreign corporation (within the meaning
of Code Section 957) related to the Issuer; and (iii) such REMIC Regular
Certificateholder complies with certain identification requirements
(including delivery of a statement, signed by the REMIC Regular
Certificateholder under penalties of perjury, certifying that such REMIC
Regular Certificateholder is a foreign person and providing the name and
address of such REMIC Regular Certificateholder). If a REMIC Regular
Certificateholder is not exempt from withholding, distributions of interest
to such holder, including distributions in respect of accrued OID, may be
subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate
of a non-resident alien individual and will not be subject to United States
estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates,
and holders of REMIC Residual Certificates (the "REMIC Residual
Certificateholder") and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates without consulting their
tax advisors as to the possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at
any time during such year, such information as may be deemed necessary or
desirable to assist REMIC Regular Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
REMIC Regular Certificates on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that
such person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be
required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except
with respect to income from prohibited transactions and certain other
transactions. See "--Prohibited Transactions and Other Taxes" below.
Instead, each original holder of a REMIC Residual Certificate will report on
its federal income tax return, as ordinary income, its share of the taxable
income of the REMIC for each day during the taxable year on which such holder
owns any REMIC Residual Certificates. The taxable income of the REMIC for
each day will be determined by allocating the taxable income of the REMIC for
each calendar quarter ratably to each day in the quarter. Such a holder's
share of the taxable income of the REMIC for each day will be based on the
portion of the outstanding REMIC Residual Certificates that such holder owns
on that day. The taxable income of the REMIC will be determined under an
accrual method and will be taxable to the holders of REMIC Residual
Certificates without regard to the timing or amounts of cash distributions by
the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to the
limitations on the deductibility of "passive losses." As residual interests,
the REMIC Residual Certificates will be subject to tax rules, described
below, that differ from those that would apply if the REMIC Residual
Certificates were treated for federal income tax purposes as direct ownership
interests in the Certificates or as debt instruments issued by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such
a mismatching of income and cash distributions (that is, "phantom income").
This mismatching may be caused by the use of certain required tax accounting
methods by the REMIC, variations in the prepayment rate of the underlying
Mortgage Assets and certain other factors. Depending upon the structure of a
particular transaction, the aforementioned factors may significantly reduce
the after-tax yield of a REMIC Residual Certificate to a REMIC Residual
Certificateholder. Investors should consult their own tax advisors
concerning the federal income tax treatment of a REMIC Residual Certificate
and the impact of such tax treatment on the after-tax yield of a REMIC
Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would
equal the amounts that would have been reported for the same days by an
original REMIC Residual Certificateholder, as described above. The
Legislative History indicates that certain adjustments may be appropriate to
reduce (or increase) the income of a subsequent holder of a REMIC Residual
Certificate that purchased such REMIC Residual Certificate at a price greater
than (or less than) the adjusted basis such REMIC Residual Certificate would
have in the hands of an original REMIC Residual Certificateholder. See
"--Sale or Exchange of REMIC Residual Certificates" below. It is not clear,
however, whether such adjustments will in fact be permitted or required and,
if so, how they would be made. The REMIC Regulations do not provide for any
such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Assets and the REMIC's other assets and (ii) the deductions allowed to the
REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--Taxation of Owners of REMIC Regular Certificates--
Non-Interest Expenses of the REMIC," other expenses. REMIC taxable income is
generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible
as business bad debts, and (iii) the limitation on the deductibility of
interest and expenses related to tax-exempt income will apply. The REMIC's
gross income includes interest, original issue discount income, and market
discount income, if any, on the Contracts, reduced by amortization of any
premium on the Contracts, plus income on reinvestment of cash flows and
reserve assets, plus any cancellation of indebtedness income upon allocation
of realized losses to the REMIC Regular Certificates. Note that the timing
of cancellation of indebtedness income recognized by REMIC Residual
Certificateholders resulting from defaults and delinquencies on Assets may
differ from the time of the actual loss on the Asset. The REMIC's deductions
include interest and original issue discount expense on the REMIC Regular
Certificates, servicing fees on the Contracts, other administrative expenses
of the REMIC and realized losses on the Contracts. The requirement that
REMIC Residual Certificateholders report their pro rata share of taxable
income or net loss of the REMIC will continue until there are no Certificates
of any class of the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue
prices of the REMIC Regular Certificates and the REMIC Residual Certificates
(or, if a class of Certificates is not sold initially, its fair market
value). Such aggregate basis will be allocated among the Assets and other
assets of the REMIC in proportion to their respective fair market value. An
Asset will be deemed to have been acquired with discount or premium to the
extent that the REMIC's basis therein is less than or greater than its
principal balance, respectively. Any such discount (whether market discount
or OID) will be includible in the income of the REMIC as it accrues, in
advance of receipt of the cash attributable to such income, under a method
similar to the method described above for accruing OID on the REMIC Regular
Certificates. The REMIC expects to elect under Code Section 171 to amortize
any premium on the Assets. Premium on any Asset to which such election
applies would be amortized under a constant yield method. It is not clear
whether the yield of an Asset would be calculated for this purpose based on
scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to the yield with respect to
any underlying loan originated on or before September 27, 1985. Instead,
premium with respect to such a loan would be allocated among the principal
payments thereon and would be deductible by the REMIC as those payments
become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with
respect to REMIC Regular Certificates except that the 0.25% per annum de
minimis rule and adjustments for subsequent holders described therein will
not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC Residual
Certificates will be added to the issue price of the REMIC Regular
Certificates in determining the REMIC's initial basis in its assets. See "--
Sale or Exchange of REMIC Residual Certificates" below. For a discussion of
possible adjustments to income of a subsequent holder of a REMIC Residual
Certificate to reflect any difference between the actual cost of such REMIC
Residual Certificate to such holder and the adjusted basis such REMIC
Residual Certificate would have in the hands of an original REMIC Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the REMIC
Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net
loss would be allocated among the REMIC Residual Certificateholders in the
same manner as the REMIC's taxable income. The net loss allocable to any
REMIC Residual Certificate will not be deductible by the holder to the extent
that such net loss exceeds such holder's adjusted basis in such REMIC
Residual Certificate. Any net loss that is not currently deductible by
reason of this limitation may only be used by such REMIC Residual
Certificateholder to offset its share of the REMIC's taxable income in future
periods (but not otherwise). The ability of REMIC Residual
Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS recently finalized regulations (the
"Mark-to-Market Regulations") which provide that a REMIC Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-
Market Regulations replaced the temporary regulations which allowed a
Residual Certificate to be marked to market provided that it was not a
"negative value" residual interest and did not have the same economic effect
as a "negative value" residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders
of the REMIC Residual Certificates. In the case of a single class REMIC,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In general terms, a single class REMIC is one
that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC
will be allocated to holders of the related REMIC Residual Certificates in
their entirety and not to holders of the related REMIC Regular Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest
in a REMIC Regular Certificate or a REMIC Residual Certificate directly or
through a pass-through interest holder that is required to pass miscellaneous
itemized deductions through to its owners or beneficiaries (e.g. a
partnership, an S corporation or a grantor trust), such expenses will be
deductible under Code Section 67 only to the extent that such expenses, plus
other "miscellaneous itemized deductions" of the individual, exceed 2% of
such individual's adjusted gross income. In addition, Code Section 68
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a certain amount (the
"Applicable Amount") will be reduced by the lesser of (i) 3% of the excess of
the individual's adjusted gross income over the Applicable Amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable
year. The amount of additional taxable income recognized by REMIC Residual
Certificateholders who are subject to the limitations of either Code Section
67 or Code Section 68 may be substantial. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder"
generally refers to individuals, entities taxed as individuals and certain
pass-through entities, but does not include real estate investment trusts.
REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any
calendar quarter will be subject to federal income tax in all events. Thus,
for example, an excess inclusion (i) may not, except as described below, be
offset by any unrelated losses, deductions or loss carryovers of a REMIC
Residual Certificateholder; (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the REMIC Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income (see "--Tax-Exempt
Investors" below); and (iii) is not eligible for any reduction in the rate of
withholding tax in the case of a REMIC Residual Certificateholder that is a
foreign investor. See "--Non-U.S. Persons" below. The exception for thrift
institutions is available only to the institution holding the REMIC Residual
Certificate and not to any affiliate of the institution, unless the affiliate
is a subsidiary all the stock of which, and substantially all the
indebtedness of which, is held by the institution, and which is organized and
operated exclusively in connection with the organization and operation of one
or more REMICs.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar
quarter is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
all days during the calendar quarter on which the REMIC Residual
Certificateholder holds such REMIC Residual Certificate. For this purpose,
the daily accruals with respect to a REMIC Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of
the REMIC Residual Certificate at the beginning of the calendar quarter and
120 percent of the "Federal long-term rate" in effect at the time the REMIC
Residual Certificate is issued. For this purpose, the "adjusted issue price"
of a REMIC Residual Certificate at the beginning of any calendar quarter
equals the issue price of the REMIC Residual Certificate, increased by the
amount of daily accruals for all prior quarters, and decreased (but not below
zero) by the aggregate amount of payments made on the REMIC Residual
Certificate before the beginning of such quarter. The "federal long-term
rate" is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section
857(b)(2), excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder. Regulated investment companies, common trust
funds and certain cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, the amount of any alternative minimum tax net operating
loss deductions must be computed without regard to any excess inclusions.
Third, a residual holder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. The effect of this last
statutory amendment is to prevent the use of nonrefundable tax credits to
reduce a taxpayer's income tax below its tentative minimum tax computed only
on excess inclusions. These rules are effective for tax years beginning
after December 31, 1986, unless a residual holder elects to have such rules
apply only to tax years beginning after August 20, 1996.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual
Certificateholder's adjusted basis in such REMIC Residual Certificate. To
the extent a distribution exceeds such adjusted basis, it will be treated as
gain from the sale of the REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or
exchange and its adjusted basis in the REMIC Residual Certificate (except
that the recognition of loss may be limited under the "wash sale" rules
described below). A holder's adjusted basis in a REMIC Residual Certificate
generally equals the cost of such REMIC Residual Certificate to such REMIC
Residual Certificateholder, increased by the taxable income of the REMIC that
was included in the income of such REMIC Residual Certificateholder with
respect to such REMIC Residual Certificate, and decreased (but not below
zero) by the net losses that have been allowed as deductions to such REMIC
Residual Certificateholder with respect to such REMIC Residual Certificate
and by the distributions received thereon by such REMIC Residual
Certificateholder. In general, any such gain or loss will be capital gain or
loss provided the REMIC Residual Certificate is held as a capital asset.
However, REMIC Residual Certificates will be "evidences of indebtedness"
within the meaning of Code Section 582(c)(1), so that gain or loss recognized
from sale of a REMIC Residual Certificate by a bank or thrift institution to
which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool"
(as defined in Code Section 7701(i)) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Code Section 1091. In that event, any
loss realized by the REMIC Residual Certificateholder on the sale will not be
deductible, but, instead, will increase such REMIC Residual
Certificateholder's adjusted basis in the newly acquired asset.
C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of an Asset, the receipt of income from a source other
than an Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Assets for temporary investment pending distribution
on the Certificates. It is not anticipated that the Trust Fund for any
Series of Certificates will engage in any prohibited transactions in which it
would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day
on which such Trust Fund issues all of its interests could result in the
imposition of a tax on the Trust Fund equal to 100% of the value of the
contributed property (the "Contributions Tax"). No Trust Fund for any Series
of Certificates will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined
by reference to the rules applicable to real estate investment trusts. "Net
income from foreclosure property" generally means income from foreclosure
property other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax
that may be imposed on a REMIC relating to any Series of Certificates arises
out of or results from (i) a breach of the related Master Servicer's,
Trustee's or Asset Seller's obligations, as the case may be, under the
related Agreement for such Series, such tax will be borne by such Master
Servicer, Trustee or Asset Seller, as the case may be, out of its own funds
or (ii) the Asset Seller's obligation to repurchase a Contract, such tax will
be borne by the Asset Seller. In the event that such Master Servicer,
Trustee or Asset Seller, as the case may be, fails to pay or is not required
to pay any such tax as provided above, such tax will be payable out of the
Trust Fund for such Series and will result in a reduction in amounts
available to be distributed to the Certificateholders of such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC will not be subject to any Prohibited
Transaction Tax, provided that the REMIC credits or distributes in
liquidation all of the sale proceeds plus its cash (other than the amounts
retained to meet claims) to holders of Regular and REMIC Residual
Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis
in the REMIC Residual Certificate exceeds the amount of cash distributed to
such REMIC Residual Certificateholder in final liquidation of its interest,
then it would appear that the REMIC Residual Certificateholder would be
entitled to a loss equal to the amount of such excess. It is unclear whether
such a loss, if allowed, will be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will
be furnished quarterly to each REMIC Residual Certificateholder who held a
REMIC Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC level. The REMIC does
not intend to register as a tax shelter pursuant to Code Section 6111 because
it is not anticipated that the REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to
furnish the REMIC, in a manner to be provided in Treasury regulations, with
the name and address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other
entity that is subject to federal income taxation only on its "unrelated
business taxable income" within the meaning of Code Section 512 will be
subject to such tax on that portion of the distributions received on a REMIC
Residual Certificate that is considered an excess inclusion. See "--Taxation
of Owners of REMIC Residual Certificates--Excess Inclusions" above.
G. RESIDUAL CERTIFICATE PAYMENTS--NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Amounts distributed to holders
of REMIC Residual Certificates should qualify as "portfolio interest,"
subject to the conditions described in "--Taxation of Owners of REMIC Regular
Certificates" above, but only to the extent that the underlying mortgage
loans were originated after July 18, 1984. Furthermore, the rate of
withholding on any income on a REMIC Residual Certificate that is excess
inclusion income will not be subject to reduction under any applicable tax
treaties. See "--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or
otherwise distributed (or when the REMIC Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have OID. The Code, however, grants the Treasury Department
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance
of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of REMIC Residual Certificates
- --Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding will not apply. Instead, the amounts paid to
such non-U.S. Person will be subject to U.S. federal income taxation at
regular graduated rates. For special restrictions on the transfer of REMIC
Residual Certificates, see "--Tax-Related Restrictions on Transfers of REMIC
Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their
tax advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests
in such entity are not held by "disqualified organizations" (as defined
below). Further, a tax is imposed on the transfer of a residual interest in
a REMIC to a "disqualified organization." The amount of the tax equals the
product of (A) an amount (as determined under the REMIC Regulations) equal to
the present value of the total anticipated "excess inclusions" with respect
to such interest for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The tax is imposed on
the transferor unless the transfer is through an agent (including a broker or
other middleman) for a disqualified organization, in which event the tax is
imposed on the agent. The person otherwise liable for the tax shall be
relieved of liability for the tax if the transferee furnished to such person
an affidavit that the transferee is not a disqualified organization and, at
the time of the transfer, such person does not have actual knowledge that the
affidavit is false. A "disqualified organization" means (A) the United
States, any State, possession or political subdivision thereof, any foreign
government, any international organization or any agency or instrumentality
of any of the foregoing (provided that such term does not include an
instrumentality if all its activities are subject to tax and, except for
FHLMC, a majority of its board of directors is not selected by any such
governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of
(A) the amount of excess inclusions for the taxable year allocable to the
interest held by the disqualified organization and (B) the highest marginal
federal income tax rate applicable to corporations. The pass-through entity
otherwise liable for the tax, for any period during which the disqualified
organization is the record holder of an interest in such entity, will be
relieved of liability for the tax if such record holder furnishes to such
entity an affidavit that such record holder is not a disqualified
organization and, for such period, the pass-through entity does not have
actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means (i) a regulated investment company, real estate
investment trust or common trust fund, (ii) a partnership, trust or estate
and (iii) certain cooperatives. Except as may be provided in Treasury
regulations not yet issued, any person holding an interest in a pass-through
entity as a nominee for another will, with respect to such interest, be
treated as a pass-through entity. The tax on pass-through entities is
generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common
trust funds and publicly-traded partnerships the tax shall apply only to
taxable years of such entities beginning after December 31, 1988. Under
proposed legislation, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the
express written consent of the Master Servicer. The Master Servicer will
grant such consent to a proposed transfer only if it receives the following:
(i) an affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by
the proposed transferee to the effect that the proposed transferee agrees to
be bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic
REMIC Residual Certificate to a "U.S. Person," as defined above, unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A Noneconomic REMIC Residual Certificate is
any REMIC Residual Certificate (including a REMIC Residual Certificate with a
positive value at issuance) unless, at the time of transfer, taking into
account the Prepayment Assumption and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents, (i) the present value of the expected future distributions on the
REMIC Residual Certificate at least equals the product of the present value
of the anticipated excess inclusions and the highest corporate income tax
rate in effect for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC. A transferor is presumed not to
have such knowledge if (i) the transferor conducted a reasonable
investigation of the transferee and (ii) the transferee acknowledges to the
transferor that the residual interest may generate tax liabilities in excess
of the cash flow and the transferee represents that it intends to pay such
taxes associated with the residual interest as they become due. If a
transfer of a Noneconomic REMIC Residual Certificate is disregarded, the
transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion
of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule
appears to apply to a transferee who is not a U.S. Person unless such
transferee's income in respect of the REMIC Residual Certificate is
effectively connected with the conduct of a United Sates trade or business.
A REMIC Residual Certificate is deemed to have a tax avoidance potential
unless, at the time of transfer, the transferor reasonably expect that the
REMIC will distribute to the transferee amounts that will equal at least 30
percent of each excess inclusion, and that such amounts will be distributed
at or after the time the excess inclusion accrues and not later than the end
of the calendar year following the year of accrual. If the non-U.S. Person
transfers the REMIC Residual Certificate to a U.S. Person, the transfer will
be disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax
on accrued excess inclusions. The provisions in the REMIC Regulations
regarding transfers of REMIC Residual Certificates that have tax avoidance
potential to foreign persons are effective for all transfers after June 30,
1992. The Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with
a duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in
any purported transferee. Investors in REMIC Residual Certificates are
advised to consult their own tax advisors with respect to transfers of the
REMIC Residual Certificates and, in addition, pass-through entities are
advised to consult their own tax advisors with respect to any tax which may
be imposed on a pass-through entity.
TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not
be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will
be complied with, and on counsel's conclusions that (1) the Trust Fund will
not have certain characteristics necessary for a business trust to be
classified as an association taxable as a corporation and (2) the nature of
the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its
taxable income. The Trust Fund's taxable income would include all its
income, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments
on the Notes and distributions on the Certificates, and Certificateholders
could be liable for any such tax that is unpaid by the Trust Fund.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Special counsel to the Depositor will,
except as otherwise provided in the related Prospectus Supplement, advise the
Depositor that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, etc. The discussion below assumes that all payments on the Notes
are denominated in U.S. dollars. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 1/4% of their principal amount multiplied
by the number of full years included in their term), all within the meaning
of the OID regulations. If these conditions are not satisfied with respect
to any given series of Notes, additional tax considerations with respect to
such Notes will be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder
of a Note issued with a de minimis amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the Note. It
is believed that any prepayment premium paid as a result of a mandatory
redemption will be taxable as contingent interest when it becomes fixed and
unconditionally payable. A purchaser who buys a Note for more or less than
its principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except
for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income
tax and withholding tax, if the interest is not effectively connected with
the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust or the Depositor (including a holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Asset Seller is a "related person"
within the meaning of the Code and (ii) provides the Owner Trustee or other
person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note
is a foreign person and providing the foreign person's name and address. If
a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however,
the signed statement must be accompanied by a Form W-8 or substitute form
provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income
and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted
that one or more of the Notes did not represent debt for federal income tax
purposes, the Notes might be treated as equity interests in the Trust Fund.
If so treated, the Trust Fund would likely be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain tax-exempt
entities (including pension funds) would be "unrelated business taxable
income", income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual holders
might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state
income tax, franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the Trust
Fund, the partners of the partnership being the Certificateholders, and the
Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the
Trust Fund and the Master Servicer is not clear because there is no authority
on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Contracts (including appropriate adjustments for market discount, OID
and bond premium) and any gain upon collection or disposition of Contracts.
The Trust Fund's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Contracts.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such
month, including interest accruing at the Pass-Through Rate for such month
and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the
Contracts that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; (iii) prepayment premium payable
to the Certificateholders for such month; and (iv) any other amounts of
income payable to the Certificateholders for such month. Such allocation
will be reduced by any amortization by the Trust Fund of premium on Contracts
that corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Company. Based on the economic arrangement of the parties,
this approach for allocating Trust Fund income should be permissible under
applicable treasury regulations, although no assurance can be given that the
IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through
Rate plus the other items described above even though the Trust Fund might
not have sufficient cash to make current cash distributions of such amount.
Thus, cash basis holders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable
for taxes on Trust Fund income even if they have not received cash from the
Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to
them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual
in whole or in part and might result in such holder being taxed on an amount
of income that exceeds the amount of cash actually distributed to such holder
over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Contract, the
Trust Fund might be required to incur additional expense but it is believed
that there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Contracts may be greater or
less than the remaining principal balance of the Loans at the time of
purchase. If so, the Loan will have been acquired at a premium or discount,
as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan by Contract basis.)
If the Trust Fund acquires the Contracts at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Contracts or to offset any such
premium against interest income on the Contracts. As indicated above, a
portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged
within a 12-month period. Pursuant to final Treasury regulations issued May
8, 1997 under Section 708 of the Code, if such a termination occurs, the
Trust Fund (the "old partnership") would be deemed to contribute its assets
to a new partnership (the "new partnership") in exchange for interests in the
new partnership. Such interests would be deemed distributed to the Partners
of the old partnership in liquidation thereof, which would not constitute a
sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the holder's share of the Notes and other liabilities of the Trust Fund. A
holder acquiring Certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Contracts would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result, a
holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records,
as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-1 information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information return filed
by the Trust Fund or be subject to penalties unless the holder notifies the
IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of
the Exchange Act is not required to furnish any such information statement to
the Trust Fund. The information referred to above for any calendar year must
be furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
Fund with the information described above may be subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the
income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or business in
the United States for such purposes, the Trust Fund will withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust Fund to change
its withholding procedures. In determining a holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be
entitled to file with the IRS a claim for refund with respect to taxes
withheld by the Trust Fund taking the position that no taxes were due because
the Trust Fund was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Trust Fund. If
these interest payments are properly characterized as guaranteed payments,
then the interest will not be considered "portfolio interest." As a result,
Certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a foreign holder would only
be enticed to claim a refund for that portion of the taxes in excess of the
taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
TAX TREATMENT OF CERTIFICATES AS DEBT FOR TAX PURPOSES
A. CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
If the related Prospectus Supplement indicates that the Certificates
will be treated as indebtedness for federal income tax purposes, then based
on the application of existing law to the facts as set forth in the Trust
Agreement and other relevant documents and assuming compliance with the terms
of the Trust Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Depositor ("TAX
COUNSEL"), will deliver its opinion that the Certificates will be treated as
debt instruments for federal income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related
Trust Agreement their intent that, for applicable tax purposes, the
Certificates will be indebtedness secured by the related Assets. The
Depositor and the Certificateholders, by accepting the Certificates, and each
Certificate Owner by its acquisition of a beneficial interest in a
Certificate, have agreed to treat the Certificates as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Depositor may treat this transaction as a sale of an interest in the related
Assets for financial accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured
by property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several
factors to be take into account in determining whether the substance of a
transaction is a sale of property or a secured loan, the primary factor in
making this determination is whether the transferee has assumed the risk of
loss or other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Tax Counsel will analyze and rely on several
factors in reaching its opinion that the weight of the benefits and burdens
of ownership of the Contracts will be retained by the Depositor and not
transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions of the documents
either accords with the characterization of the Certificates as debt or
otherwise makes the rationale of those cases inapplicable to this situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been
issued with OID if the interest were not treated as "unconditionally payable"
under the OID Regulations. If such regulations were to apply, all of the
taxable income to be recognized with respect to the Certificates would be
includible in income of Certificate owners as OID, but would not be
includible again when the interest is actually received.
C. POSSIBLE CLASSIFICATION OF THE TRUST FUND AS A PARTNERSHIP OR
ASSOCIATION TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as
a corporation. The opinion of Tax Counsel is not binding on the courts or
the IRS. It is possible that the IRS could assert that, for purposes of the
Code, the transaction contemplated by this Prospectus Supplement with respect
to the Certificates constitutes a sale of the Contracts (or an interest
therein) to the Certificate Owners and that the proper classification of the
legal relationship between the Depositor and the Certificate Owners resulting
form this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be
treated as indebtedness in the hands of the Certificateholders for U.S.
federal income tax purposes and that the entity constituted by the Trust will
not be a publicly traded partnership treated as a corporation or an
association taxable as a corporation, the Depositor will not attempt to
comply with U.S. federal income tax reporting requirements applicable to
partnerships or corporations as such requirements would apply if the
Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified
as a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Contracts, which
would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be
treated as dividends for tax purposes to the extent of such corporation's
earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity
(or portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Any
entity (or portion of any entity) will be a taxable mortgage pool if (i)
substantially all of its assets consist of debt instruments, more than 50% of
which are real estate mortgages, (ii) the entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the
entity's debt obligations (or an underlying arrangement), payments on such
debt obligations bear a relationship to the debt instruments held by the
entity.
In the case of a Trust Fund containing Assets, assuming that all of the
provisions of the Trust Agreement, as in effect on the date of issuance, will
be complied with, Tax Counsel will deliver its opinion that the arrangement
created by the Agreement will not be a taxable mortgage pool under Section
7701(i) of the Code because only one class of indebtedness secured by the
Contracts will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Trust Agreement is a taxable mortgage
pool, such arrangement would be subject to U.S. federal corporate income tax
on its taxable income generated by ownership of the Contracts. Such a tax
might reduce amounts available for distributions to Certificate Owners. The
amount of such a tax would depend upon whether distributions to Certificate
Owners would be deductible as interest expense in computing the taxable
income of such an arrangement as a taxable mortgage pool.
E. FOREIGN INVESTORS
In general, subject to certain exception, interest (including OID) paid
on a Certificate to a nonresident alien individual, foreign corporation or
other non-United States person is not subject to U.S. federal income tax,.
provided that such interest is not effectively connected with a trade or
business of the recipient in the United sates and the Certificate Owner
provides the required foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch
profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each
foreign partner would be credited against such foreign partner's U.S. income
tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an
applicable tax treaty.
F. BACKUP WITHHOLDING
Certain Certificate owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the
Certificate Owners, upon issuance of the Certificates, fail to supply the
Trustee or the Certificate Owners' brokers with their respective taxpayer
identification numbers, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to
provide the Trustee of the Certificate Owners' brokers with certified
statements, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S.
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only "Certificateholder" of record
is Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax
and other information including the amount of interest paid on the
Certificates owned from Participants and Indirect Participants rather than
from the Trustee. (The Trustee, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and
certain other persons to complete their reports.) Each non-exempt
Certificate Owner will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct
federal taxpayer identification number and a statement that he or she is not
to subject to backup withholding. Should a non-exempt Certificate Owner fail
to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income
tax liability.
G. NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
FASIT PROVISIONS
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been
issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
Securityholders. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series. The Prospectus
Supplement for each Series of Securities will indicate whether one or more
FASIT elections will be made for that Series and which Securities of such
Series will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interest in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated company as
defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool)
must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments
issued by the holder of the FASIT's ownership interest or by any person
related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements.
All of the interests in a FASIT must belong to either of the following: (i)
one or more classes of regular interests or (ii) a single class of ownership
interest that is held by a fully taxable domestic corporation. In the case
of Series that include FASIT Ownership Securities, the ownership interest
will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5%, and (vi) if
it pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average rates).
See "Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of
REMIC Regular Certificates--Variable Rate REMIC Regular Certificates."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security
consists of a specified portion of the interest payments on permitted assets
and that portion does not vary over the life of the Security, the Security
also will qualify as a High-Yield Interest. A High-Yield Interest may be
held only by domestic corporations that are fully subject to corporate income
tax ("Eligible Corporations"), other FASITs and dealers in securities who
acquire such interests as inventory, rather than for investment. In
addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Federal Income Tax
Consequences--FASIT Securities--Tax Treatment of FASIT Regular Securities--
Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may
be lost for that year and thereafter. If FASIT status is lost, the treatment
of the former FASIT and the interests therein for federal income tax purposes
is uncertain. The former FASIT might be treated as a grantor trust, as a
separate association taxed as a corporation, or as a partnership. The FASIT
Regular Securities could be treated as debt instruments for federal income
tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for a
period of time in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of holders of
REMIC Regular Securities, holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or
accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Securityholder and a principal payment on such Security will be
treated as a return of capital to the extent that the Securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will
treat interest and principal payments on such Securities in the same manner
described for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates--
"Original Issuer Discount and Premium" and "--Market Discounts" above. High-
Yield Securities may be held only by fully taxable domestic corporations,
other FASITs, and certain securities dealers. Holders of High-Yield
Securities are subject to limitations on their ability to use current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption". In addition, if a FASIT Regular Security becomes
wholly or partially worthless as a result of Default and Delinquencies of the
underlying Assets, the holder of such Security should be allowed to deduct
the loss sustained (or alternatively be able to report a lesser amount of
income). See "Certain Federal Income Tax Consequences--REMIC Taxation of
Owners of REMIC Regular Certificates"--"Effects of Default and Delinquencies"
and "Treatment of Realized Losses."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular
Securities held by a Thrift Institution taxed as a "domestic building and
loan association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Securities would be so considered. See "Certain Federal
Income Tax Consequences--REMICS Securities--Status as Real Property Loans."
In addition, FASIT Regular Securities held by a financial institution to
which Section 585 of the Code applies will be treated as evidences of
indebtedness for purposes of Section 582(c)(1) of the Code. FASIT Securities
will not qualify as "Government Securities" for either REIT or RIC
qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield
Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities
backed by the FASIT Regular Security and that have the same features as High-
Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit
of a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security
must determine the amount of interest, original issue discount, market
discount and premium recognized with respect to the FASIT's assets and the
FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders
of FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
holders of High-Yield Interests. See "Federal Income Tax Securities--
Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition, the
seller of such Security acquires any other FASIT Ownership Security or, in
the case of a FASIT holding mortgage assets, any interest in a Taxable
Mortgage Pool that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT Ownership Security was required to be marked-to-
market under Code section 475 by such holder, then section 475 will continue
to apply to such securities, except that the amount realized under the mark-
to-market rules will be a greater of the securities' value under present law
or the securities' value after applying special valuation rules contained in
the FASIT provisions. Those special valuation rules generally require that
the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of
120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders
of REMIC Securities would be subject. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates--
Information Reporting and Backup Withholding." For purposes of reporting and
tax administration, holders of record of FASIT Securities generally will be
treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Offered Securities. State and local income
tax law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences
of an investment in the Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election
has been made under Section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the
Securities without regard to the ERISA considerations described below,
subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Section 401(a) of the
Code and exempt from taxation under Section 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions involving a Plan and its assets
unless a statutory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA) on parties
in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining
what constitutes the assets of a Plan. This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity investment" will be deemed for purposes of ERISA to be assets of the
Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Contracts and any other assets
held by the Trust Fund. In such an event, the Asset Seller, the Master
Servicer, the Trustee, any insurer of the Assets and other persons, in
providing services with respect to the assets of the Trust Fund, may be
parties in interest, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of Section
406 of ERISA (and of Section 4975 of the Code), with respect to transactions
involving such assets unless such transactions are subject to a statutory or
administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity
participation in the entity will be significant if immediately after any
acquisition of any equity interest in the entity, "benefit plan investors" in
the aggregate, own at least 25% of the value of any class of equity interest.
-------
"Benefit plan investors" are defined as Plans as well as employee benefit
plans not subject to ERISA (e.g., governmental plans). The 25% limitation
must be met with respect to each class of certificates, regardless of the
portion of total equity value represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided
ownership interest in property and a beneficial ownership interest in a trust
are deemed to be "equity interest" under the final regulation. If Notes of a
particular Series were deemed to be indebtedness under applicable local law
without any substantial equity features, an investing Plan's assets would
include such Notes, but not, by reason of such purchase, the underlying
assets of the Trust Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the "Exemption") which exempts from the application
of the prohibited transaction rules transactions relating to: (1) the
acquisition, sale and holding by Plans of certain certificates representing
an undivided interest in certain asset-backed pass-through trusts, with
respect to which Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of
its affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of
such asset-backed pass-through trusts, provided that the general conditions
and certain other conditions set forth in the Exemption are satisfied. With
respect to a series of Notes, the related Prospectus Supplement will discuss
whether the Exemption may be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates
or a transaction in connection with the servicing, operation and management
of the Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Inc., Fitch Investors
Service, Inc., Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group.
(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Assets, any borrower
whose obligations under one or more Assets constitute more than 5% of
the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (the "Restricted Group");
(5) The sum of all payments made to and retained by the Underwriter
in connection with the distribution of the Certificates represents not
more than reasonable compensation for underwriting such Certificates;
the sum of all payments made to and retained by the Asset Seller
pursuant to the sale of the Assets to the Trust Fund represents not more
than the fair market value of such Assets; the sum of all payments made
to and retained by the Master Servicer represent not more than
reasonable compensation for the Master Servicer's services under the
Agreement and reimbursement of the Master Servicer's reasonable expenses
in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of
the Exemption and (b) that the specific and general conditions set forth in
the Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of
ERISA and the Code to such investment. Among other things, before purchasing
any Securities, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to
the availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
Purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust & Savings Bank (decided December 13,
1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to make purchases of the
Securities. In particular, such an insurance company should consider the
exemptive relief granted by Labor for transactions involving insurance
company general accounts in Prohibited Transactions Exemption 95-60, 60 Fed.
Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance
in one of the four highest rating categories by at least one Rating Agency.
The related Prospectus Supplement will specify which classes of the
Securities, if any, will constitute "mortgage related securities" ("SMMEA
Securities") for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). SMMEA Securities will constitute legal investments for
persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance
companies, as well as trustees and state government employee retirement
systems) created pursuant to or existing under the laws of the United States
or of any state (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North
Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia enacted
legislation before the October 4, 1991 cutoff established by SMMEA for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in mortgage related securities, in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Investors affected by such legislation will be
authorized to invest in SMMEA Certificates only to the extent provided in
such legislation. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe. In this
connection, federal credit unions should review the National Credit Union
Administration ("NCUA") Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities, and
the NCUA's regulation "Investment and Deposit Activities" (12 C.F.R. Part
703), which sets forth certain restrictions on investment by federal credit
unions in mortgage related securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be
subject to restrictions on investment in certain classes of Offered
Securities. Any financial institution which is subject to the jurisdiction
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation ("FDIC"), the
Office of Thrift Supervision ("OTS"), the NCUA or other federal or state
agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing any Offered Security. The
Federal Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement") setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC, the OTS and the NCUA (with certain modifications),
with respect to the depository institutions that they regulate. The Policy
Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a
standard fixed rate thirty-year mortgage security. According to the Policy
Statement, prior to purchase, a depository institution will be required to
determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce
the institution's overall interest rate risk. Reliance on analysis and
documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There
can be no assurance that any classes of Offered Securities will not be
treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for
the investment by savings institutions in certain "high-risk" mortgage
derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According
to the bulletin, such "high-risk" mortgage derivative securities include
securities having certain specified characteristics, which may include
certain classes of Securities. In accordance with Section 402 of the
Financial Institutions Reform, Recovery and Enhancement Act of 1989, the
foregoing bulletin will remain in effect unless and until modified,
terminated, set aside or superseded by the FDIC. Similar policy statements
have been issued by regulators having jurisdiction over the types of
depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth
model investment guidelines for the insurance industry. Institutions subject
to insurance regulatory authorities may be subject to restrictions on
investment similar to those set forth in the Model Law and other
restrictions.
If specified in the related Prospectus Supplement, other classes of
Offered Securities offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization
of this Offered Security under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase such
Offered Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or
financial institution regulatory purposes, or as to the ability of particular
investors to purchase any Offered Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Securities) may
adversely affect the liquidity of the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or
to purchase Offered Securities representing more than a specified percentage
of the investor's assets. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Offered Securities of any class constitute legal investments or are subject
to investment, capital or other restrictions, and, if applicable, whether
SMMEA has been overridden in any jurisdiction relevant to such investor.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may
be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. If so specified in the related Prospectus Supplement, the Offered
Securities will be distributed in a firm commitment underwriting, subject to
the terms and conditions of the underwriting agreement, by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") acting as underwriter
with other underwriters, if any, named therein. Merrill Lynch is an affiliate
of the Depositor. In such event, the Prospectus Supplement may also specify
that the underwriters will not be obligated to pay for any Offered Securities
agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of Offered
Certificates, underwriters may receive compensation from the Depositor or
from purchasers of Offered Securities in the form of discounts, concessions
or commissions. The Prospectus Supplement will describe any such compensation
paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with
respect to Offered Securities that it has previously purchased or agreed to
purchase. If Merrill Lynch or such persons act as agents in the sale of
Offered Securities, they will receive a selling commission with respect to
such Offered Securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance or notional amount of such
Offered Securities as of the Cut-off Date. The exact percentage for each
series of Securities will be disclosed in the related Prospectus Supplement.
To the extent that Merrill Lynch or such persons elect to purchase Offered
Securities as principal, they may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Offered
Securities of such series.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may
be required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor or
Asset Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by
such investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the Depositor
or the Underwriter will promptly deliver, or cause to be delivered, without
charge, a paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including
certain federal income tax consequences, will be passed upon for the
Depositor by Brown & Wood LLP, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of
the guarantor, if any. Ratings on asset backed securities do not represent
any assessment of the likelihood of principal prepayments by borrowers or of
the degree by which such prepayments might differ from those originally
anticipated. As a result, securityholders might suffer a lower than
anticipated yield, and, in addition, holders of stripped interest
certificates in extreme cases might fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
1986 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64, 69
ABS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ABS Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ABS Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ABS Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Accrual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
Accrued Security Interest . . . . . . . . . . . . . . . . . . . . . . . . 26
adjusted issue price . . . . . . . . . . . . . . . . . . . . . . . . 65, 79
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
an accrual period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Applicable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
ARM Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Asset Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6, 17
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . . 25
benefit plan investors . . . . . . . . . . . . . . . . . . . . . . . . . 96
Book-Entry Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 25
capital asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 74
Cash Flow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 20
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 31
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
clearing agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Collection Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Contract Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
Contract Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 18
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 14, 17
Contributions Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Covered Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 49
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Credit Support . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 7, 20
Crime Control Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
daily accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Deferred Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Definitive Securities . . . . . . . . . . . . . . . . . . . . . . . . 25, 31
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 17
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
disqualified organization . . . . . . . . . . . . . . . . . . . . . . . . 82
disqualified organizations . . . . . . . . . . . . . . . . . . . . . . . 82
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 31
Due Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
equity of redemption . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 96
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
excess inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
excess servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 99
Federal long-term rate . . . . . . . . . . . . . . . . . . . . . . . . . 79
foreign person . . . . . . . . . . . . . . . . . . . . . . . . . . . 83, 85
Government Securities . . . . . . . . . . . . . . . . . . . . . 1, 7, 17, 68
Grantor Trust Certificates . . . . . . . . . . . . . . . . . . . . . . . 11
Holder-in-Due-Course . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 32
Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Indirect Participants . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
L/C Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Land-and-Home Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 53
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Manufactured Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
manufactured housing contracts . . . . . . . . . . . . . . . . . . . . . 14
Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . . . . . 78
Master REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Merrill Lynch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Model Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
mortgagor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
NCUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Nonrecoverable Advance . . . . . . . . . . . . . . . . . . . . . . . . . 28
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Offered Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 61
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
pass-through entity . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
pass-through interest holder . . . . . . . . . . . . . . . . . . . . . . 78
pass-through interest holders . . . . . . . . . . . . . . . . . . . . . . 75
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 26
passive losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Payment Lag Certificates . . . . . . . . . . . . . . . . . . . . . . . . 74
Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 35
phantom income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . 32
portfolio income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
portfolio interest . . . . . . . . . . . . . . . . . . . . . . . 81, 85, 89
Pre-Funded Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 19
pre-issuance accrued interest . . . . . . . . . . . . . . . . . . . . . . 75
prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Prohibited Transactions Tax . . . . . . . . . . . . . . . . . . . . . . . 80
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
qualified mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
qualified stated interest . . . . . . . . . . . . . . . . . . . . . . . . 69
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Real estate assets . . . . . . . . . . . . . . . . . . . . . . . 61, 64, 68
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Related Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
REMIC Regular Certificateholders . . . . . . . . . . . . . . . . . . . . 69
REMIC Regular Certificates . . . . . . . . . . . . . . . . . . . . . 11, 68
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
REMIC Residual Certificateholder . . . . . . . . . . . . . . . . . . . . 76
REMIC Residual Certificates . . . . . . . . . . . . . . . . . . . . . 11, 68
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Retained Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
RICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Security Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 27
Security Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Securityholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 17
Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Servicing Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Short-Term Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
single family residences . . . . . . . . . . . . . . . . . . . . . . . . 68
single-class REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 98
SMMEA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
SPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Stripped ARM Obligations . . . . . . . . . . . . . . . . . . . . . . . . 66
Stripped Bond Certificates . . . . . . . . . . . . . . . . . . . . . . . 63
stripped bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 63
Stripped Coupon Certificates . . . . . . . . . . . . . . . . . . . . . . 63
stripped coupons . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 63
Stripped Interest Certificates . . . . . . . . . . . . . . . . . . . . . . 9
Stripped Interest Securities . . . . . . . . . . . . . . . . . . . . . . 24
Stripped Principal Securities . . . . . . . . . . . . . . . . . . . . . 9, 24
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Sub-Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 39
Subordinate Securities . . . . . . . . . . . . . . . . . . . . . . . . 9, 24
Subsequent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 19
Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Super-Premium Certificates . . . . . . . . . . . . . . . . . . . . . . . 70
tax avoidance potential . . . . . . . . . . . . . . . . . . . . . . . . . 83
Tax Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
taxable mortgage pool . . . . . . . . . . . . . . . . . . . . . . . . 80, 91
thrift institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
U.S. Person, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 51
Underlying ABS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Underlying Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 18
United States Department of Labor . . . . . . . . . . . . . . . . . . . . 96
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Warranting Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus supplement and the prospectus to which it
relates 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.
(foreign)
PROSPECTUS
- ----------
SUBJECT TO COMPLETION, DATED December 11, 1997
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
Merrill Lynch Mortgage Investors, Inc.
Depositor
_________
The Asset Backed Certificates (the "Certificates") and Asset Backed
Notes (the "Notes" and, together with the Certificates, the "Securities")
offered hereby and by Supplements to this Prospectus (the "Offered
Securities") will be offered from time to time in one or more series. Each
series of Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (with respect to any series, the "Trust
Fund") consisting of one or more segregated pools of various types of single
family mortgage loans (or certain balances thereof) for which the related
mortgaged properties are located in non-U.S. jurisdictions (collectively, the
"Mortgage Loans"), mortgage participations or co-ownership arrangements in
Mortgage Loans ("Mortgage Participations"), mortgage pass-through
certificates or mortgage-backed securities evidencing interests in Mortgage
Loans or secured thereby (the "MBS") or certain direct obligations of the
United States, agencies thereof or agencies created thereby (the "Government
Securities") (with respect to any series, collectively, "Assets"). The
Mortgage Loans, Mortgage Participations, mortgage co-ownership arrangements
and MBS are collectively referred to herein as the "Mortgage Assets." If a
series of Securities includes Notes, such Notes will be issued and secured
pursuant to an indenture and will represent indebtedness of the Trust Fund.
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any
combination thereof (with respect to any series, collectively, "Credit
Support"), and currency or interest rate exchange agreements and other
financial assets or derivative instruments, or any combination thereof (with
respect to any series, collectively, "Cash Flow Agreements"). See
"Description of the Trust Funds," "Description of the Securities" and
"Description of Credit Support."
Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be
entitled to interest distributions, with disproportionately low, nominal or
no principal distributions; (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events, such as
the retirement of one or more other classes of Securities of such series;
(vi) provide for distributions of principal as described in the related
Prospectus Supplement; and/or (vii) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available
funds, in each case as described in the related Prospectus Supplement. Any
such classes may include classes of Offered Securities. See "Description of
the Securities."
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Securities of any series will be made only from the assets of the related
Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, any Master Servicer, any Sub-Servicer or any of their
respective affiliates, except to the limited extent described herein and in
the related Prospectus Supplement. Neither the Securities nor any assets in
the related Trust Fund will be guaranteed or insured by any governmental
agency or instrumentality or by any other person, unless otherwise provided
in the related Prospectus Supplement. The assets in each Trust Fund will be
held in trust for the benefit of the holders of the related series of
Certificates pursuant to a Pooling and Servicing Agreement or a Trust
Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the
timing of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement.
Prospective investors should review the information appearing under the
caption "Risk Factors" herein and such information as may be set forth under
the caption "Risk Factors" in the related Prospectus Supplement before
purchasing any Offered Security.
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" for federal income tax
purposes. See also "Material Federal Income Tax Consequences" herein.
________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
________
Prior to issuance there will have been no market for the Securities of
any series and there can be no assurance that a secondary market for any
Offered Securities will develop or that, if it does develop, it will
continue. This Prospectus may not be used to consummate sales of the Offered
Securities of any series unless accompanied by the Prospectus Supplement for
such series.
Offers of the Offered Securities may be made through one or more
different methods, including offerings through underwriters, as more fully
described under "Plan of Distribution" herein and in the related Prospectus
Supplement.
________
Merrill Lynch & Co.
The date of this Prospectus is ______, 199_.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Securities of each series will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities, the payment provisions with respect to
each such class and the Pass-Through Rate or interest rate or method of
determining the Pass-Through Rate or interest rate with respect to each such
class; (ii) the aggregate principal amount and distribution dates relating to
such series and, if applicable, the initial and final scheduled distribution
dates for each class; (iii) information as to the assets comprising the Trust
Fund, including the general characteristics of the assets included therein,
including the Assets and any Credit Support and Cash Flow Agreements (with
respect to the Securities of any series, the "Trust Assets"); (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) additional information with respect to the method of
distribution of such Certificates; (vi) whether one or more REMIC elections
will be made and designation of the regular interests and residual interests;
(vii) the aggregate original percentage ownership interest in the Trust Fund
to be evidenced by each class of Securities; (viii) information as to any
Master Servicer, any Sub-Servicer and the Trustee, as applicable;
(ix) information as to the nature and extent of subordination with respect to
any class of Securities that is subordinate in right of payment to any other
class; and (x) whether such Securities will be initially issued in definitive
or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Offered Securities. This Prospectus and the Prospectus
Supplement relating to each series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement
pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the
exhibits thereto. Such Registration Statement and exhibits can be inspected
and copied at prescribed rates at the public reference facilities maintained
by the Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048. The Commission maintains
a Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the
Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Offered Securities or an offer of the Offered Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus and any Prospectus Supplement hereto at any time
does not imply that information herein is correct as of any time subsequent
to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Securities, pursuant to the applicable Agreement. Such reports may be
available to holders of interests in the Securities (the "Securityholders")
upon request to their respective DTC participants. See "Description of the
Securities--Reports to Securityholders" and "Description of the Agreements--
Evidence as to Compliance." The Depositor will file or cause to be filed with
the Commission such periodic reports with respect to each Trust Fund as are
required under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the rules and regulations of the Commission thereunder, as interpreted
by the staff of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to
the termination of an offering of Offered Securities evidencing interests
therein. Upon request, the Depositor will provide or cause to be provided
without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Offered Securities, a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of
such classes of such Offered Securities, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed in writing to
Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial
Center - North Tower, 10th Floor, New York, New York 10281-1310, Attention:
Secretary, or by telephone at (212) 449-0357. The Depositor has determined
that its financial statements are not material to the offering of any Offered
Securities.
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 3
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . 4
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . 6
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DESCRIPTION OF THE TRUST FUNDS . . . . . . . . . . . . . . . . . . . . . 18
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
YIELD CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 23
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
DESCRIPTION OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . 28
DESCRIPTION OF THE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . 35
DESCRIPTION OF CREDIT SUPPORT . . . . . . . . . . . . . . . . . . . . . . 53
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS . . . . . . . . . . . . . . . . . 56
MATERIAL FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . 56
STATE TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 93
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 93
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 95
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 96
RATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
INDEX OF PRINCIPAL DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 98
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing
elsewhere in this Prospectus and by reference to the information with respect
to each series of Securities contained in the Prospectus Supplement to be
prepared and delivered in connection with the offering of such series. An
Index of Principal Definitions is included at the end of this Prospectus.
Title of Securitie Asset-Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with
theCertificates,the "Securities"),issuablein series.
Issuer With respect to each series, the trust fund (the
"Trust Fund") formed to issue the Securities of that
series.
Depositor Merrill Lynch Mortgage Investors, Inc. (the
"Depositor"), a wholly owned subsidiary of Merrill
Lynch Mortgage Capital, Inc., which is a wholly-
owned indirect subsidiary of Merrill Lynch & Co.,
Inc. The Depositor is an affiliate of Merrill
Lynch, Pierce, Fenner & Smith Incorporated. Neither
Merrill Lynch & Co., Inc. nor any of its affiliates,
including the Depositor and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, will insure or
guarantee the Securities or the Mortgage Loans or be
otherwise obligated in respect thereof.
Master Servicer The master servicer or master servicers (each, a
"Master Servicer"), if any, or a servicer for
substantially all the Mortgage Loans for each series
of Securities, which servicer or master servicer(s)
may be affiliates of the Depositor, will be named in
the related Prospectus Supplement. See "Description
of the Agreements--General" and "--Collection and
Other Servicing Procedures."
Trustee The trustee (the "Trustee") for each series of
Certificates will be named in the related Prospectus
Supplement. See "Description of the Agreements--The
Trustee."
The Trust Assets Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest
in a Trust Fund. If a series of Securities includes
Notes, such Notes will represent indebtedness of the
Trust Fund and will be secured by a security
interest in the Assets of the Trust Fund. A Trust
Fund will consist primarily of any of the following
assets (the Mortgage Assets and Government
Securities may be referred to collectively or
individually as "Assets"):
(a) Mortgage Assets The Mortgage Assets with respect to a series of
Certificates will consist of a pool of single family
loans (or certain balances thereof) for which the
related mortgaged properties are located in non-U.S.
jurisdictions (collectively, the "Mortgage Loans"),
mortgage participations or co-ownership arrangements
in Mortgage Loans ("Mortgage Participations") or
mortgage pass-through certificates or other
mortgage-backed securities evidencing interests in
or secured by Mortgage Loans (collectively, the
"MBS") or a combination of Mortgage Loans, Mortgage
Participations and/or MBS. The Mortgage Loans will
not be guaranteed or insured by the Depositor or any
of its affiliates or, unless otherwise provided in
the Prospectus Supplement, by any governmental
agency or instrumentality or other person. The
Mortgage Loans will be secured by first and/or
junior liens on one- to four-family residential
properties or security interests in shares issued by
cooperative housing corporations ("Single Family
Properties"), including mixed residential and
commercial structures. The Mortgage Loans may
include closed-end and/or revolving home equity
loans or certain balances thereof ("Home Equity
Loans"). Unless otherwise provided in the related
Prospectus Supplement, all Mortgage Loans will have
original terms to maturity of not more than 40
years. All Mortgage Loans will have been originated
by persons other than the Depositor, and all
Mortgage Assets will have been purchased, either
directly or indirectly, by the Depositor on or
before the date of initial issuance of the related
series of Certificates. The related Prospectus
Supplement will indicate if any such persons are
affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of
interest thereon at an interest rate (a "Mortgage
Rate") that is fixed over its term or that adjusts
from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate, from time to time at
the mortgagor's election, in each case as described
in the related Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage Loans in a Trust Fund
may be based on one or more indices. Each Mortgage
Loan may provide for scheduled payments to maturity,
payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to
reflect the occurrence of certain events, and may
provide for negative amortization or accelerated
amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan
may be fully amortizing or require a balloon payment
due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each
Mortgage Loan may contain prohibitions on prepayment
or require payment of a premium or a yield
maintenance penalty in connection with a prepayment,
in each case as described in the related Prospectus
Supplement. The Mortgage Loans may provide for
payments of principal, interest or both, on due
dates that occur monthly, quarterly, semi-annually
or at such other interval as is specified in the
related Prospectus Supplement. See "Description of
the Trust Funds--Assets."
(b) Government
Securities If so provided in the related Prospectus
Supplement, the Trust Fund may include, in
addition to Mortgage Assets, certain direct
obligations of the United States, agencies
thereof or agencies created thereby which
provide for payment of interest and/or
principal (collectively, "Government Securities").
(c) Collection
Accounts Each Trust Fund will include one or more
accounts established and maintained on behalf
of the Securityholders into which the person or
persons designated in the related Prospectus
Supplement will, to the extent described herein
and in such Prospectus Supplement, deposit all
payments and collections received or advanced
with respect to the Assets and other assets in
the Trust Fund. Such an account may be
maintained as an interest bearing or a non-
interest bearing account, and funds held
therein may be held as cash or invested in
certain short-term, investment grade obligations, in
each case as described in the related Prospectus
Supplement. See "Description of the Agreements--
Collection Account and Related Accounts."
(d) Credit Support If so provided in the related Prospectus Supplement,
partial or full protection against certain defaults
and losses on the Assets in the related Trust Fund
may be provided to one or more classes of Securities
of the related series in the form of subordination
of one or more other classes of Securities of such
series, which other classes may include one or more
classes of Offered Securities, or by one or more
other types of credit support, such as a letter of
credit, insurance policy, guarantee, reserve fund or
another type of credit support, or a combination
thereof (any such coverage with respect to the
Securities of any series, "Credit Support"). The
amount and types of coverage, the identification of
the entity providing the coverage (if applicable)
and related information with respect to each type of
Credit Support, if any, will be described in the
Prospectus Supplement for a series of Securities.
The Prospectus Supplement for any series of
Securities evidencing an interest in a Trust Fund
that includes MBS will describe any similar forms of
credit support that are provided by or with respect
to, or are included as part of the trust fund
evidenced by or providing security for, such MBS.
See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
(e) 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, other swaps and derivative
instruments or other financial assets. The
principal terms of any such agreement (any such
agreement, a "Cash Flow Agreement"), including,
without limitation, provisions relating to the
timing, manner and amount of payments
thereunder and provisions relating to the
termination thereof, will be described in the
Prospectus Supplement for the related series.
In addition, the related Prospectus Supplement
will provide certain information with respect
to the obligor under any such Cash Flow
Agreement. The Prospectus Supplement for any
series of Securities evidencing an interest in
a Trust Fund that includes MBS will describe
any cash flow agreements that are included as
part of the trust fund evidenced by or
providing security for such MBS. See
"Description of the Trust Funds-Cash Flow
Agreements."
(f) Pre-Funding
Account To the extent provided in a Prospectus
Supplement, the Depositor will be obligated
(subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for
the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain
conditions described in the applicable Agreement),
additional Assets (the "Subsequent Assets") from
time to time (as frequently as daily) within the
number of months specified in the Prospectus
Supplement after the issuance of such series of
Securities having an aggregate principal balance
approximately equal to the amount on deposit in the
Pre-Funding Account (the "Pre-Funded Amount") for
such series on date of such issuance.
Description of
Securities Each series of Certificates will evidence an
interest in the related Trust Fund and will be
issued pursuant to a pooling and servicing agreement
or a trust agreement. Pooling and servicing
agreements and trust agreements are referred to
herein as the "Agreements." If a series of
Securities includes Notes, such Notes will
represent indebtedness of the related Trust Fund and
will be secured by a security interest in the Assets
of the Trust Fund (or a specified group thereof)
pursuant to an indenture.
Each series of Securities will include one or more
classes. Each class of Securities (other than
certain Stripped Interest Securities, as defined
below) will have a stated principal amount (a
"Security Balance") and except for certain Stripped
Principal Securities, as defined below, will accrue
interest thereon based on a fixed, variable or
adjustable interest rate (in the case of
Certificates, a "Pass-Through Rate"). The related
Prospectus Supplement will specify the Security
Balance, if any, and the Pass-Through Rate or
interest rate for each class of Securities or, in
the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining
the Pass-Through Rate or interest rate.
Distributions on
Securities Each series of Securities will consist of one or
more classes of Securities that may (i) provide for
the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior
(collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or
more other classes of Securities in respect of
certain distributions on the Securities; (iii) be
entitled to principal distributions, with
disproportionately low, nominal or no interest
distributions (collectively, "Stripped Principal
Securities"); (iv) be entitled to interest
distributions, with disproportionately low, nominal
or no principal distributions (collectively,
"Stripped Interest Securities"); (v) provide for
distributions of accrued interest thereon commencing
only following the occurrence of certain events,
such as the retirement of one or more other
classes of Securities of such series (collectively,
"Accrual Securities"); (vi) provide for
distributions of principal as described in the
related Prospectus Supplement; and/or (vii) provide
for distributions based on a combination of two or
more components thereof with one or more of the
characteristics described in this paragraph,
including a Stripped Principal Security component
and a Stripped Interest Security component, to the
extent of available funds, in each case as
described in the related Prospectus Supplement. If
so specified in the related Prospectus
Supplement, distributions on one or more classes of
a series of Securities may be limited to
collections from a designated portion of the
Mortgage Loans in the related Mortgage Pool (each
such portion of Mortgage Loans, a "Mortgage Loan
Group"). See "Description of the Securities--
General." Any such classes may include classes of
Offered Securities. With respect to Securities with
two or more components, references herein to
Security Balance, notional amount and Pass-Through
Rate or interest rate refer to the principal balance,
if any, notional amount, if any, and the Pass-
Through Rate or interest rate, if any, for any such
component.
The Securities will not be guaranteed or insured by
the Depositor or any of its affiliates, by any
governmental agency or instrumentality or by any
other person, unless otherwise provided in the
related Prospectus Supplement. See "Risk Factors--
Limited Assets" and "Description of the Securities."
(a) Interest Interest on each class of Offered Securities (other
than Stripped Principal Securities and certain
classes of Stripped Interest Securities) of each
series will accrue at the applicable Pass-Through
Rate or interest rate on the outstanding Security
Balance thereof and will be distributed to
Securityholders as provided in the related
Prospectus Supplement. The specified date on which
distributions are to be made is a "Distribution
Date." Distributions with respect to interest on
Stripped Interest Securities may be made on each
Distribution Date on the basis of a notional amount
as described in the related Prospectus Supplement.
Distributions of interest with respect to one or
more classes of Securities may be reduced to the
extent of certain delinquencies, losses, prepayment
interest shortfalls, and other contingencies
described herein and in the related Prospectus
Supplement. See "Risk Factors--Average Life of
Securities; Prepayments; Yields," "Yield
Considerations" and "Description of the Securities--
Distributions of Interest on the Securities."
(b) Principal The Securities of each series initially will have an
aggregate Security Balance no greater than the
outstanding principal balance of the Assets as of,
unless the related Prospectus Supplement provides
otherwise, the close of business on the first day of
the month of formation of the related Trust Fund
(the "Cut-off Date"), after application of scheduled
payments due on or before such date, whether or not
received. The Security Balance of a Security
outstanding from time to time represents the maximum
amount that the holder thereof is then entitled to
receive in respect of principal from future cash
flow on the assets in the related Trust Fund. Unless
otherwise provided in the related Prospectus
Supplement, distributions of principal will be made
on each Distribution Date to the class or classes of
Securities entitled thereto until the Security
Balances of such Securities have been reduced to
zero. Unless otherwise specified in the related
Prospectus Supplement, distributions of principal of
any class of Securities will be made on a pro rata
basis among all of the Securities of such class or
by random selection, as described in the related
Prospectus Supplement or otherwise established by
the related Trustee. Stripped Interest Securities
with no Security Balance will not receive
distributions in respect of principal. See
"Description of the Securities--Distributions of
Principal of the Securities."
Risk Factors There are risks to be considered in investing in the
Securities. See "Risk Factors" herein and, if
applicable, in the related Prospectus Supplement.
Advances Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated as
part of its servicing responsibilities to make
certain advances that in its good faith judgment it
deems recoverable with respect to delinquent
scheduled payments on the Whole Loans in such Trust
Fund. Neither the Depositor nor any of its
affiliates will have any responsibility to make such
advances. Advances made by a Master Servicer are
reimbursable generally from subsequent recoveries in
respect of such Whole Loans and otherwise to the
extent described herein and in the related
Prospectus Supplement. If and to the extent provided
in the Prospectus Supplement for any series, the
Master Servicer will be entitled to receive interest
on its outstanding advances, payable from amounts in
the related Trust Fund. The Prospectus Supplement
for any series of Securities evidencing an interest
in a Trust Fund that includes MBS will describe any
corresponding advancing obligation of any person in
connection with such MBS. See "Description of the
Securities--Advances in Respect of Delinquencies."
Termination If so specified in the related Prospectus
Supplement, a series of Securities be subject to
optional early termination through the repurchase of
the Assets in the related Trust Fund by the party
specified therein, under the circumstances and in
the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of
the Security Balance of a specified class or classes
of Securities to a specified percentage or amount or
on and after a date specified in such Prospectus
Supplement, the party specified therein will solicit
bids for the purchase of all of the Assets of the
Trust Fund, or of a sufficient portion of such
Assets to retire such class or classes, or purchase
such Assets at a price set forth in the related
Prospectus Supplement. In addition, if so provided
in the related Prospectus Supplement, certain
classes of Securities may be purchased subject to
similar conditions. See "Description of the
Securities--Termination."
Registration of
Securities If so provided in the related Prospectus
Supplement, one or more classes of the Offered
Securities will initially be represented by one or
more certificates or notes, as applicable,
registered in the name of Cede & Co., as the
nominee of DTC. No person acquiring an interest in
Offered Securities so registered will be entitled to
receive a definitive certificate or note, as
applicable, representing such person's interest
except in the event that definitive certificates or
notes, as applicable, are issued under the limited
circumstances described herein. See "Risk Factors--
Book-Entry Registration" and "Description of the
Securities--Book-Entry Registration and Definitive
Securities."
Tax Status of the
Certificates The Certificates of each series will constitute, as
specified in the related Prospectus Supplement,
either (i) "regular interests" ("REMIC Regular
Certificates") and "residual interests" ("REMIC
Residual Certificates") in a Trust Fund treated as a
real estate mortgage investment conduit ("REMIC")
under Sections 860A through 860G of the Internal
Revenue Code of 1986, as amended (the "Code"),
(ii) interests ("Grantor Trust Certificates") in a
Trust Fund treated as a grantor trust under
applicable provisions of the Code, (iii) an interest
in a Trust Fund treated as a partnership for
purposes of federal and state income tax or (iv)
indebtedness of the Trust Fund for federal income
tax purposes.
(a) REMIC REMIC Regular Certificates generally will be treated
as debt obligations of the applicable REMIC for
federal income tax purposes. Certain REMIC Regular
Certificates may be issued with original issue
discount for federal income tax purposes. See
"Material Federal Income Tax Consequences" herein
and in the related Prospectus Supplement.
(b) Grantor Trust If the related Prospectus Supplement specifies that
the related Trust Fund will be a grantor trust, the
Trust Fund will be classified as a grantor trust and
not as an association taxable as a corporation for
federal income tax purposes, and therefore holders
of Certificates will be treated as the owners of
undivided pro rata interests in the Assets held by
the Trust Fund.
(c) Partnership If so specified in a Prospectus Supplement, the
related Trust Fund will be treated as a partnership
for purposes of federal and state income tax, and
each Certificateholder, by the acceptance of a
Certificate of such Trust Fund, will agree to treat
the Trust Fund as a partnership in which such
Certificateholder is a partner for federal income
and state tax purposes. Alternative
characterizations of such Trust Fund and such
Certificates are possible, but would not result in
materially adverse tax consequences to
Certificateholders.
(d) Indebtedness If so specified in the related Prospectus
Supplement, the Certificates of a series will be
treated as indebtedness for federal income tax
purposes and the Certificateholder, in accepting the
Certificate, will agree to treat such Certificate as
indebtedness.
Investors are advised to consult their tax advisors
and to review "Material Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
Tax Status of Notes Unless otherwise specified in the related Prospectus
Supplement, Notes of a series will be treated as
indebtedness for federal and state income tax
purposes and the Noteholder, in accepting the Note,
will agree to treat such Note as indebtedness. See
"Material Federal Income Tax Consequences" herein
and in such Prospectus Supplement.
Investors are advised to consult their tax advisors
and to review "Material Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
ERISA Considerations A fiduciary of an employee benefit plan and certain
other retirement plans and arrangements, including
individual retirement accounts, annuities, Keogh
plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or
arrangements are invested, that is subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code
should carefully review with its legal advisors
whether the purchase or holding of Offered
Securities could give rise to a transaction that is
prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. See "ERISA
Considerations" herein and in the related Prospectus
Supplement. Certain classes of Securities may not
be transferred unless the Trustee and the Depositor
are furnished with a letter of representations or an
opinion of counsel to the effect that such transfer
will not result in a violation of the prohibited
transaction provisions of ERISA and the Code and
will not subject the Trustee, the Depositor or the
Master Servicer to additional obligations. See
"Description of the Securities--General" and "ERISA
Considerations".
Legal Investment While each Prospectus Supplement will specify which
class or classes of Offered Securities, if any, will
constitute "mortgage-related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") it is not expected
that any Securities will be "mortgage-related
securities" for purposes of SMMEA. Institutions
whose investment activities are subject to legal
investment laws and regulations or review by certain
regulatory authorities may be subject to
restrictions on investment in certain classes of the
Offered Securities. See "Legal Investment" herein
and in the related Prospectus Supplement.
Rating At the date of issuance, as to each series, each
class of Offered Securities will be rated not lower
than investment grade by one or more nationally
recognized statistical rating agencies (each, a
"Rating Agency"). See "Rating" herein and in the
related Prospectus Supplement.
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and additional risk
factors, if any, listed under "Risk Factors" in the related Prospectus
Supplement.
Limited Liquidity
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the
Offered Securities, but has no obligation to do so. There can be no
assurance that a secondary market for the Securities of any series will
develop or, if it does develop, that it will provide holders with liquidity
of investment or will continue while Securities of such series remain
outstanding.
Risks Related to Non-U.S. Mortgage Loans
Difficulty in Enforcing Liabilities Against Non-U.S. Persons
It is expected that the Asset Seller and the Master Servicer will be
non-U.S. persons that may or may not have any substantial amount of assets
in the United States. In such cases, it may be difficult, or it may not be
possible, for the Trustee to effect service of process on such persons to
enforce their duties, if any, under the applicable Agreements. Moreover, in
certain foreign jurisdictions, a judgment obtained in a court in the United
States may not be enforceable as such in that foreign jurisdiction and it may
be necessary to bring a new action in a court in that foreign jurisdiction.
Currency Exchange Controls - Risk That Payments on the Mortgage Loans
May Not Be Permitted to Leave the Foreign Jurisdiction
The Master Servicer will collect payments on the Mortgage Loans in a
foreign currency in the related foreign jurisdiction. It is possible that in
the future the government of that foreign jurisdiction may impose exchange
controls that affect the availability of such foreign currency outside of
that foreign jurisdiction. Each Trust Fund will bear the risk of the
imposition of foreign exchange controls that adversely impact the ability of
that Trust Fund to exchange collections on its Mortgage Loans in a foreign
currency for U.S. dollars and distribute U.S. dollars to its Securityholders.
A Trust fund will have no control over such risk, which will generally be
affected by economic and political events in the foreign jurisdiction. If
the Trust Fund has entered into a swap agreement to exchange its foreign
currency collections for U.S. dollars, any failure by the Trust Fund to
deliver such foreign currency to the swap counterparty would be an event of
default by the Trust Fund under the swap agreement that would discharge the
swap counterparty from its obligations under the swap agreement and may
result in substantial termination payments payable by the Trust Fund. In
such event, it is unlikely that the Trust Fund will have sufficient U.S.
dollars to make the payments due on its Securities, and its Securityholders
would incur losses on their investment.
Risk of Default by Swap Counterparty Under a Currency Exchange Swap
Agreement
If the swap counterparty fails to perform under a currency exchange swap
agreement with a Trust Fund or were to be discharged from such performance
because of a default thereunder by the Trust Fund, the Trust Fund may have to
exchange its foreign currency collections on its Mortgage Loans for U.S.
dollars at an exchange rate that is less favorable (i.e., results in fewer
----
fewer U.S. dollars) than the exchange rate under such terminated swap
agreement. In such a case, the Trust Fund would not have sufficient U.S.
dollars to make the payments due on its Securities, even though the loss and
delinquency experience on the Mortgage Loans is acceptable, and the
Securityholders would incur a loss on their investments. If a Trust Fund's
original currency exchange swap agreement is terminated for any reason, there
is no assurance that a Trust Fund would be able to enter into a new currency
exchange swap agreement with terms similar to those of its original currency
exchange swap agreement.
Certain Legal Aspects of the Mortgage Loans - Possible Limitations on
Lenders' Ability to Collect
The Prospectus Supplement for a series will discuss the material aspects
of the laws in the related foreign jurisdiction that affect the ability of a
lender in that jurisdiction to collect on a mortgage loan secured by
mortgaged property located in that jurisdiction. It is possible that the
laws of that jurisdiction may restrict the ability of a lender to collect
from a borrower or to realize on the borrower's mortgaged property.
Any such restrictions may cause delays in the realization process that
result in the lender realizing less proceeds than it otherwise would realize.
Any such restrictions could cause the related Trust Fund to incur a loss in
respect of a defaulted Mortgage Loan, which loss could cause the related
Securityholders to incur a loss on their investment.
Limited Assets and Risk That Such Assets Will Not Be Sufficient To Pay
Securities in Full
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only
obligations with respect to the Securities or the Assets will be the
obligations (if any) of the Warranting Party (as defined herein) pursuant to
certain limited representations and warranties made with respect to the
Mortgage Loans, the Master Servicer's and any Sub-Servicer's servicing
obligations under the related Agreement (including the limited obligation to
make certain advances in the event of delinquencies on the Mortgage Loans,
but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Master Servicer in connection with an agreement to
purchase or act as remarketing agent with respect to a convertible ARM Loan
(as defined herein) upon conversion to a fixed rate or a different index.
Since certain representations and warranties with respect to the Mortgage
Assets may have been made and/or assigned in connection with transfers of
such Mortgage Assets prior to the Closing Date, the rights of the Trustee and
the Securityholders with respect to such representations or warranties will
be limited to their rights as an assignee thereof. Unless otherwise specified
in the related Prospectus Supplement, none of the Depositor, the Master
Servicer or any affiliate thereof will have any obligation with respect to
representations or warranties made by any other entity. Unless otherwise
specified in the related Prospectus Supplement, neither the Securities nor
the underlying Assets will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, any Sub-
Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Fund for each series of Securities (including the Assets and
any form of credit enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Depositor or any other
entity in the event that such proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a
series of Securities will not have any claim against or security interest in
the Trust Funds for any other series. If the related Trust Fund is
insufficient to make payments on such Securities, no other assets will be
available for payment of the deficiency. Additionally, certain amounts
remaining in certain funds or accounts, including the Collection Account and
any accounts maintained as Credit Support, may be withdrawn under certain
conditions, as described in the related Prospectus Supplement. In the event
of such withdrawal, such amounts will not be available for future payment of
principal of or interest on the Securities. If so provided in the Prospectus
Supplement for a series of Securities consisting of one or more classes of
Subordinate Securities, on any Distribution Date in respect of which losses
or shortfalls in collections on the Assets have been incurred, the amount of
such losses or shortfalls will be borne first by one or more classes of the
Subordinate Securities, and, thereafter, by the remaining classes of
Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
See "Description of the Trust Funds".
Risk That Prepayments Will Adversely Affect Average Life and Yields of
Securities
Prepayments (including those caused by defaults) on the Assets in any
Trust Fund generally will result in a faster rate of principal payments on
one or more classes of the related Securities than if payments on such Assets
were made as scheduled. Thus, the prepayment experience on the Assets may
affect the average life of each class of related Securities. The rate of
principal payments on pools of mortgage loans or manufactured housing
contracts varies between pools and from time to time is influenced by a
variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Assets
in any Trust Fund or that the rate of payments will conform to any model
described herein or in any Prospectus Supplement. If prevailing interest
rates fall significantly below the applicable mortgage interest rates,
principal prepayments are likely to be higher than if prevailing rates remain
at or above the rates borne by the Mortgage Loans underlying or comprising
the Mortgage Assets in any Trust Fund. As a result, the actual maturity of
any class of Securities evidencing an interest in a Trust Fund containing
Mortgage Assets could occur significantly earlier than expected.
A series of Securities may include one or more classes of Securities
with priorities of payment and, as a result, yields on other classes of
Securities, including classes of Offered Securities, of such series may be
more sensitive to prepayments on Assets. A series of Securities may include
one or more classes offered at a significant premium or discount. Yields on
such classes of Securities will be sensitive, and in some cases extremely
sensitive, to prepayments on Mortgage Assets and, where the amount of
interest payable with respect to a class is disproportionately high, as
compared to the amount of principal, as with certain classes of Stripped
Interest Securities, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A series of Securities may include one or
more classes of Securities, including classes of Offered Securities, that
provide for distribution of principal thereof from amounts attributable to
interest accrued but not currently distributable on one or more classes of
Accrual Securities and, as a result, yields on such Securities will be
sensitive to (a) the provisions of such Accrual Securities relating to the
timing of distributions of interest thereon and (b) if such Accrual
Securities accrue interest at a variable or adjustable Pass-Through Rate or
interest rate, changes in such rate.
See "Yield Considerations" herein and, if applicable, in the related
Prospectus Supplement.
Mortgage Loans and Mortgaged Properties In General -- Risk That Defaults by
Obligors or Declines in the Values of Mortgaged Properties Will Result in
Losses to Investors
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things,
a decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of
the related Mortgage Loans. If the relevant residential real estate market
should experience an overall decline in property values such that the
outstanding balances of the related Mortgage Loans, and any secondary
financing on the Mortgaged Properties, become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry in that market. In addition, in the case of
Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of deferred interest, the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by the
applicable Credit Support, if any, holders of Securities of the series
evidencing interests in the related Mortgage Loans will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal
and unpaid interest on the defaulted Mortgage Loans. Certain of the types of
Mortgage Loans may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans
provide for escalating or variable payments by the mortgagor under the
Mortgage Loan, as to which the mortgagor is generally qualified on the basis
of the initial payment amount. In some instances the Mortgagor's income may
not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase. In
addition to the foregoing, certain geographic regions of a country from time
to time will experience weaker regional economic conditions and housing
markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. The
Mortgage Loans underlying certain series of Securities may be concentrated in
these regions, and such concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without such concentration. Furthermore, the rate of default on Mortgage
Loans that are refinance or limited documentation mortgage loans, and on
Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Additionally, a decline in the value of the
Mortgaged Properties will increase the risk of loss particularly with respect
to any related junior Mortgage Loans. See "--Junior Mortgage Loans."
Junior Mortgage Loans -- Risk That There Will Be Reduced or No Proceeds
Available to Holders of Junior Lien Mortgage Loans
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior
lien"), may not be included in the Mortgage Pool. The primary risk to
holders of Mortgage Loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related senior lien to satisfy fully both the senior lien and the Mortgage
Loan. In the event that a holder of the senior lien forecloses on a
Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any
other sums due and owing to the holder of the senior lien. The claims of the
holder of the senior lien will be satisfied in full out of proceeds of the
liquidation of the Mortgage Loan, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of
the Mortgage Loan. If the Master Servicer were to foreclose on any Mortgage
Loan, it would do so subject to any related senior lien. In order for the
debt related to the Mortgage Loan to be paid in full at such sale, a bidder
at the foreclosure sale of such Mortgage Loan would have to bid an amount
sufficient to pay off all sums due under the Mortgage Loan and the senior
lien or purchase the Mortgaged Property subject to the senior lien. In the
event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate,
the Trust Fund, as the holder of the junior lien, and, accordingly, holders
of the Certificates, would bear the risk of delay in distributions while a
deficiency judgment against the borrower was being obtained and the risk of
loss if the deficiency judgment were not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions. In addition, a
junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the senior mortgage. See "Certain Legal
Aspects of the Mortgage Loans - Junior Mortgages".
Credit Support Limitations -- Risk That Credit Support Will Not Cover All
Losses
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of
credit support, or combinations thereof. Use of Credit Support will be
subject to the conditions and limitations described herein and in the related
Prospectus Supplement. Moreover, such Credit Support may not cover all
potential losses or risks; for example, Credit Support may or may not cover
fraud or negligence by a mortgage loan or contract originator or other
parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce
the risk to holders of Senior Securities of delinquent distributions or
ultimate losses, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Securities of a series are made in a specified order of
priority, any limits with respect to the aggregate amount of claims under any
related Credit Support may be exhausted before the principal of the lower
priority classes of Securities of such series has been repaid. As a result,
the impact of significant losses and shortfalls on the Assets may fall
primarily upon those classes of Securities having a lower priority of
payment. Moreover, if a form of Credit Support covers more than one series of
Securities (each, a "Covered Trust"), holders of Securities evidencing an
interest in a Covered Trust will be subject to the risk that such Credit
Support will be exhausted by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Securities, including the subordination of one or more
classes of Securities, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Securities based on
an assumed level of defaults, delinquencies, other losses or other factors.
There can, however, be no assurance that the loss experience on the related
Assets will not exceed such assumed levels.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer will generally be permitted to reduce, terminate or substitute all
or a portion of the credit enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Securities by any
applicable Rating Agency may be lowered following the initial issuance
thereof as a result of the downgrading of the obligations of any applicable
Credit Support provider, or as a result of losses on the related Assets
substantially in excess of the levels contemplated by such Rating Agency at
the time of its initial rating analysis. None of the Depositor, the Master
Servicer or any of their affiliates will have any obligation to replace or
supplement any Credit Support or to take any other action to maintain any
rating of any series of Securities.
See "--Limited Nature of Ratings," "Description of the Securities" and
"Description of Credit Support."
Subordination of the Subordinate Securities; Effect of Losses on the
Subordinate Securities
The rights of Subordinate Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Master Servicer (to the extent that the
Master Servicer is paid its servicing fee, including any unpaid servicing
fees with respect to one or more prior Due Periods, and is reimbursed for
certain unreimbursed advances and unreimbursed liquidation expenses) and the
Senior Securityholders to the extent described in the related Prospectus
Supplement. As a result of the foregoing, investors must be prepared to bear
the risk that they may be subject to delays in payment and may not recover
their initial investments in the Subordinate Securities. See "Description of
the Securities--General" and "--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to
the loss experience of the Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate
and amount of such losses assumed by an investor, the yields to maturity on
the Subordinate Securities may be lower than anticipated.
Balloon Payments -- Risk That Obligor Will Not Be Able to Make Balloon
Payment
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage Loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or
to timely sell the related Mortgaged Property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale
or refinancing, the mortgagor's equity in the related Mortgaged Property, the
financial condition of the mortgagor, the value of the Mortgaged Property,
tax laws, prevailing general economic conditions and the availability of
credit for single family or multifamily real properties generally.
Certain Federal Tax Considerations Regarding REMIC Residual Certificates
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of
the taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a
taxable year in excess of the cash received during such period. Individual
holders of REMIC Residual Certificates may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. In addition, REMIC
Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the
taxable income arising in a given year on a REMIC Residual Certificate will
not be equal to the taxable income associated with investment in a corporate
bond or stripped instrument having similar cash flow characteristics and
pre-tax yield. Therefore, the after-tax yield on the REMIC Residual
Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics. Additionally,
prospective purchasers of a REMIC Residual Certificate should be aware that
recently issued temporary regulations provide restrictions on the ability to
mark-to-market certain "negative value" REMIC residual interests. See
"Material Federal Income Tax Consequences-REMICs."
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Securities of such class will receive payments to which such
Securityholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Mortgage Assets will be
made, the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
series of Securities. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an
investor purchasing a Security at a significant premium might fail to recoup
its initial investment under certain prepayment scenarios. Each Prospectus
Supplement will identify any payment to which holders of Offered Securities
of the related series are entitled that is not covered by the applicable
rating. See "Rating".
Book-Entry Registration
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be
registered in the names of the Securityholders or their nominees. Because of
this, unless and until Definitive Securities are issued, Securityholders will
not be recognized by the Trustee as "Securityholders" (as that term is to be
used in the related Agreement). Hence, until such time, Securityholders will
be able to exercise the rights of Securityholders only indirectly through DTC
and its participating organizations. See "Description of the Securities--
Book-Entry Registration and Definitive Securities.
DESCRIPTION OF THE TRUST FUNDS
Assets
The primary assets of each Trust Fund (the "Assets") will include
(i) single family and/or mortgage loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), including without limitation, Home
Equity Loans, (ii) mortgage participations and co-ownership arrangements
("Mortgage Participations"), (iii) pass-through certificates or other
mortgage-backed securities evidencing interests in or secured by one or more
Mortgage Loans or other similar participations, certificates or securities
("MBS") or (iv) direct obligations of the United States, agencies thereof or
agencies created thereby which are (a) interest-bearing securities, (b) non-
interest-bearing securities, (c) originally interest-bearing securities from
which coupons representing the right to payment of interest have been
removed, or (d) interest-bearing securities from which the right to payment
of principal has been removed (the "Government Securities"). As used herein,
"Mortgage Loans" refers to both whole Mortgage Loans (or certain balances
thereof) and Mortgage Loans underlying Mortgage Participations or MBS.
Mortgage Loans that secure, or interests in which are evidenced by, MBS are
herein sometimes referred to as "Underlying Mortgage Loans." Mortgage Loans
(or certain balances thereof) that are not Underlying Mortgage Loans are
sometimes referred to as "Whole Loans." Any pass-through certificates or
other asset-backed certificates in which an MBS evidences an interest or
which secure an MBS are sometimes referred to herein also as MBS or as
"Underlying MBS." Mortgage Loans, Mortgage Participations and MBS are
sometimes referred to herein as "Mortgage Assets." The Mortgage Assets will
not be guaranteed or insured by Merrill Lynch Mortgage Investors, Inc. (the
"Depositor") or any of its affiliates or, unless otherwise provided in the
Prospectus Supplement, by any governmental agency or instrumentality or by
any other person. Each Asset will be selected by the Depositor for inclusion
in a Trust Fund from among those purchased, either directly or indirectly,
from a prior holder thereof (an "Asset Seller"), which may be an affiliate of
the Depositor and, with respect to Assets, which prior holder may or may not
be the originator of such Mortgage Loan or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of
any other trust fund established by the Depositor. If specified in the
related Prospectus Supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets.
Mortgage Loans
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property
consisting of a one- to four-family residential property located in a non-
U.S. jurisdiction (a "Single Family Property" and the related Mortgage Loan a
"Single Family Mortgage Loan") or (ii) a security interests in shares issued
by private cooperative housing corporations ("Cooperatives"). If so
specified in the related Prospectus Supplement, a Mortgaged Property may
include some commercial use. Mortgaged Properties will be located in one or
more foreign jurisdictions specified in the related Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the Mortgage
Loans will be secured by first and/or junior mortgages or deeds of trust or
other similar security instruments creating a first or junior lien on
Mortgaged Property. The Mortgaged Properties may include apartments owned by
Cooperatives and leasehold interests or other use arrangements in properties,
the title to which is held by third party lessors. Unless otherwise specified
in the Prospectus Supplement, the term of any such leasehold or use
arrangement shall exceed the term of the related mortgage note by at least
five years. Each Mortgage Loan will have been originated by a person (the
"Originator") other than the Depositor. The related Prospectus Supplement
will indicate if any Originator is an affiliate of the Depositor. The
Mortgage Loans will be evidenced by promissory notes (the "Mortgage Notes")
secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance
of the Mortgage Loan to the Value of the related Mortgaged Property. The
"Value" of a Mortgaged Property, other than with respect to Refinance Loans,
is generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales
price for such property. "Refinance Loans" are loans made to refinance
existing loans. Unless otherwise set forth in the related Prospectus
Supplement, the Value of the Mortgaged Property securing a Refinance Loan is
the appraised value thereof determined in an appraisal obtained at the time
of origination of the Refinance Loan. The Value of a Mortgaged Property as of
the date of initial issuance of the related series of Certificates may be
less than the value at origination and will fluctuate from time to time based
upon changes in economic conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the type of property securing the
Mortgage Loans, (iii) the weighted average (by principal balance) of the
original and remaining terms to maturity of the Mortgage Loans, (iv) the
earliest and latest origination date and maturity date of the Mortgage Loans,
(v) the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans, (vi) the Mortgage Rates or range of Mortgage Rates and the weighted
average Mortgage Rate borne by the Mortgage Loans, (vii) the foreign country
in which most of the Mortgaged Properties are located, (viii) information
with respect to the prepayment provisions, if any, of the Mortgage Loans,
(ix) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index, the frequency of the adjustment dates, the range of
margins added to the index, and the maximum Mortgage Rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Loan, (x) information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other amortization
provisions and (xi) the currency in which payments on the Mortgage Loans are
due. If specific information respecting the Mortgage Loans is not known to
the Depositor at the time Securities are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement, and specific information will be set forth in a report which will
be available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K
with the Commission within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"), which may be secured by Mortgages that are
junior to other liens on the related Mortgaged Property.
If specified in the related Prospectus Supplement, new draws by
borrowers under the revolving Home Equity Loans will, during a specified
period of time, automatically become part of the Trust Fund for a series. As
a result, the aggregate balance of the revolving Home Equity Loans will
fluctuate from day to day as new draws by borrowers are added to the Trust
Fund and principal payments are applied to such balances and such amounts
will usually differ each day, as more specifically described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
principal collections received on the closed-end Home Equity Loans may be
applied to purchase additional closed-end Home Equity Loans which will become
part of the Trust Fund for a series.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will (i) have original terms to maturity of not more than
40 years and (ii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such other
interval as is specified in the related Prospectus Supplement. Each Mortgage
Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term
or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate or a different adjustable Mortgage Rate,
or from a fixed to an adjustable Mortgage Rate, from time to time pursuant to
an election or as otherwise specified on the related Mortgage Note, in each
case as described in the related Prospectus Supplement. Each Mortgage Loan
may provide for scheduled payments to maturity or payments that adjust from
time to time to accommodate changes in the Mortgage Rate or to reflect the
occurrence of certain events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due
on its stated maturity date, in each case as described in the related
Prospectus Supplement.
Mortgage Participations
Mortgage Participations will evidence an undivided participation
interest or co-ownership arrangement in Underlying Mortgage Loans. To the
extent available to the Depositor, the related Prospectus Supplement will
contain information in respect of the Underlying Mortgage Loans substantially
similar to the information described above in respect of Mortgage Loans.
Such Prospectus Supplement will also specify the amount of the participation
interest and describe the servicing provisions of the participation and
servicing agreements.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a trust agreement, an indenture or similar agreement (an "MBS
Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS Servicer")
of the underlying Mortgage Loans (or Underlying MBS) will have entered into
the MBS Agreement with a trustee or a custodian under the MBS Agreement (the
"MBS Trustee"), if any, or with the original purchaser of the interest in the
underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made
on MBS on the dates specified in the related Prospectus Supplement. The MBS
may be issued in one or more classes with characteristics similar to the
classes of Securities described in this Prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms
of credit support similar to that described for the Securities under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Underlying Mortgage Loans or
Underlying MBS evidenced by or securing such MBS and other factors and
generally will have been established for the MBS on the basis of requirements
of either any Rating Agency that may have assigned a rating to the MBS or the
initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing
interests in Mortgage Assets that include MBS will specify, to the extent
available to the Depositor, (i) the aggregate approximate initial and
outstanding principal amount or notional amount, as applicable, and type of
the MBS to be included in the Trust Fund, (ii) the original and remaining
term to stated maturity of the MBS, if applicable, (iii) whether such MBS is
entitled only to interest payments, only to principal payments or to both,
(iv) the pass-through or bond rate of the MBS or formula for determining such
rates, if any, (v) the applicable payment provisions for the MBS, including,
but not limited to, any priorities, payment schedules and subordination
features, (vi) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related Underlying Mortgage Loans, the Underlying
MBS or directly to such MBS, (viii) the terms on which the related Underlying
Mortgage Loans or Underlying MBS for such MBS or the MBS may, or are required
to, be purchased prior to their maturity, (ix) the terms on which Mortgage
Loans or Underlying MBS may be substituted for those originally underlying
the MBS, (x) the servicing fees payable under the MBS Agreement, (xi) the
type of information in respect of the Underlying Mortgage Loans described
under "--Mortgage Loans--Mortgage Loan Information in Prospectus Supplements"
above, and the type of information in respect of the Underlying MBS described
in this paragraph, (xii) the characteristics of any cash flow agreements that
are included as part of the trust fund evidenced or secured by the MBS and
(xiii) whether the MBS is in certificated form or held through a depository
such as The Depository Trust Company or the Participants Trust Company.
Each MBS will be either (i) an exempted security, (ii) a security that
has been previously registered under the Securities Act or (iii) a security
that is eligible for sale under Rule 144(k) under the Securities Act. In the
case of clauses (ii) and (iii), such security will be acquired in a secondary
market transaction not from the issuer thereofor an affiliate of such issuer.
MBS may include MBS issued, guaranteed or otherwise supported by
corporations located outside the United States or agencies or
instrumentalities of governments other than the United States. In such
cases, the Prospectus Supplement will include disclosure regarding any such
corporations, agencies or instrumentalities and the program under which such
MBS was issued.
Government Securities
The Prospectus Supplement for a series of Securities evidencing
interests in Assets of a Trust Fund that include Government Securities will
specify, to the extent available, (i) the aggregate approximate initial and
outstanding principal amounts or notional amounts, as applicable, and types
of the Government Securities to be included in the Trust Fund, (ii) the
original and remaining terms to stated maturity of the Government Securities,
(iii) whether such Government Securities are entitled only to interest
payments, only to principal payments or to both, (iv) the interest rates of
the Government Securities or the formula to determine such rates, if any, (v)
the applicable payment provisions for the Government Securities and (vi) to
what extent, if any, the obligation evidenced thereby is backed by the full
faith and credit of the United States.
Pre-Funding Account
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of Securities
will be obligated to purchase (subject to the satisfaction of certain
conditions described in the applicable Agreement), additional Assets (the
"Subsequent Assets") from time to time (as frequently as daily) within the
number of months specified in the related Prospectus Supplement after the
issuance of such series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
"Pre-Funded Amount") for such series on date of such issuance.
Accounts
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreement--Collection Account and Related Accounts."
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the
related series in the form of subordination of one or more other classes of
Securities in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee, reserve fund or
another type of credit support, or a combination thereof (any such coverage
with respect to the Securities of any series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "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, other swaps and derivative
instruments or other financial assets. The principal terms of any such
agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be
described in the Prospectus Supplement for the related series. In addition,
the related Prospectus Supplement will provide certain information with
respect to the obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing
and amount of offerings of Securities will depend on a number of factors,
including the volume of Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the
weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors."
Pass-Through Rate and Interest Rate
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be
based upon the interest rates borne by the Assets in the related Trust Fund.
The Prospectus Supplement with respect to any series of Securities will
specify the Pass-Through Rate or interest rate for each class of such
Securities or, in the case of a variable or adjustable Pass-Through Rate or
interest rate, the method of determining the Pass-Through Rate or interest
rate; the effect, if any, of the prepayment of any Asset on the Pass-Through
Rate or interest rate of one or more classes of Securities; and whether the
distributions of interest on the Securities of any class will be dependent,
in whole or in part, on the performance of any obligor under a Cash Flow
Agreement.
If so specified in the related Prospectus Supplement, the effective
yield to maturity to each holder of Securities entitled to payments of
interest will be below that otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price of such Security because, while
interest may accrue on each Asset during a certain period, the distribution
of such interest will be made on a day which may be several days, weeks or
months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution
Date. As indicated above under "--Pass-Through Rate and Interest Rate," if
the Interest Accrual Period ends on a date other than the day before a
Distribution Date for the related series, the yield realized by the holders
of such Securities may be lower than the yield that would result if the
Interest Accrual Period ended on such day before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans resulting from both voluntary prepayments by the borrowers and
involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans will be affected by a variety of factors, including,
without limitation, the terms of the Mortgage Loans, the level of prevailing
interest rates, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors. In general, however,
if prevailing interest rates fall significantly below the Mortgage Rates on
the Mortgage Loans comprising or underlying the Assets in a particular Trust
Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by
such Mortgage Loans. In this regard, it should be noted that certain Assets
may consist of Mortgage Loans with different Mortgage Rates and the stated
pass-through or pay-through interest rate of certain MBS may be a number of
percentage points higher or lower than certain of the Underlying Mortgage
Loans. The rate of principal payments on some or all of the classes of
Securities of a series will correspond to the rate of principal payments on
the Assets in the related Trust Fund and is likely to be affected by the
existence of periods during which a prepayment is not permitted (a "Lock-out
Period") and prepayment premium provisions of the Mortgage Loans underlying
or comprising such Assets, and by the extent to which the servicer of any
such Mortgage Loan is able to enforce such provisions. Mortgage Loans with a
Lock-out Period or a prepayment premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal
prepayments than otherwise identical Mortgage Loans without such provisions,
with shorter Lock-out Periods or with lower prepayment premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal
amounts of manufactured housing contracts are generally shorter and smaller
than the terms and principal amounts of mortgage loans secured by site-built
homes, changes in interest rates have a correspondingly smaller effect on the
amount of the monthly payments on manufactured housing contracts than on the
amount of the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and certain of the other factors mentioned above may play
a larger role in the prepayment behavior of manufactured housing contracts
than they do in the prepayment behavior of loans secured by mortgages on
site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Security offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. In either
case, if so provided in the Prospectus Supplement for a series of Securities,
the effect on yield on one or more classes of the Securities of such series
of prepayments of the Assets in the related Trust Fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to such classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan, the obligor is charged interest
on the principal amount of the Mortgage Loan so prepaid for the number of
days in the month actually elapsed up to the date of the prepayment. Unless
otherwise specified in the related Prospectus Supplement, the effect of
prepayments in full will be to reduce the amount of interest paid in the
following month to holders of Securities entitled to payments of interest
because interest on the principal amount of any Mortgage Loan so prepaid will
be paid only to the date of prepayment rather than for a full month. Unless
otherwise specified in the related Prospectus Supplement, a partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related Mortgage Loan as of the Due Date in the month in which
such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by
the investor during a given period may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are
made from any Credit Support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund will generally accelerate
the rate at which principal is paid on some or all of the classes of the
Securities of the related series.
If so provided in the Prospectus Supplement for a series of Securities,
one or more classes of Securities may have a final scheduled Distribution
Date, which is the date on or prior to which the Security Balance thereof is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Securities of a series will be influenced by the rate at which
principal on the Mortgage Loans comprising or underlying the Assets is paid
to such class, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Mortgage Loans comprising or underlying the
Assets in a Trust Fund. If any Mortgage Loans comprising or underlying the
Assets in a particular Trust Fund have actual terms to maturity less than
those assumed in calculating final scheduled Distribution Dates for the
classes of Securities of the related series, one or more classes of such
Securities may be fully paid prior to their respective final scheduled
Distribution Dates, even in the absence of prepayments. Accordingly, the
prepayment experience of the Assets will, to some extent, be a function of
the mix of Mortgage Rates and maturities of the Mortgage Loans comprising or
underlying such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans.
A prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per
annum of the then outstanding principal balance of such loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Beginning in the thirtieth month and in
each month thereafter during the life of the loans, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the Mortgage Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Securities of such series and the percentage of
the initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such
Prospectus Supplement, including assumptions that prepayments on the Mortgage
Loans comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR, SPA or such other standard
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Securities to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual
weighted average life of the Securities. It is unlikely that prepayment of
any Mortgage Loans comprising or underlying the Assets for any series will
conform to any particular level of CPR, SPA or any other rate specified in
the related Prospectus Supplement.
Other Factors Affecting Weighted Average Life
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon
its ability either to refinance the loan or to sell the related Mortgaged
Property, there is a risk that a number of Mortgage Loans having balloon
payments may default at maturity. In the case of defaults, recovery of
proceeds may be delayed by, among other things, bankruptcy of the mortgagor
or adverse conditions in the market where the property is located. In order
to minimize losses on defaulted Mortgage Loans, the servicer may, to the
extent and under the circumstances set forth in the related Prospectus
Supplement, be permitted to modify Mortgage Loans that are in default or as
to which a payment default is imminent. Any defaulted balloon payment or
modification that extends the maturity of a Mortgage Loan will tend to extend
the weighted average life of the Securities, thereby lengthening the period
of time elapsed from the date of issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the mortgagor under each Mortgage Loan
generally will be qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor or obligor to make larger level monthly payments
following the adjustment of the Mortgage Rate. In addition, certain Mortgage
Loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the mortgagor during the early
years of the Mortgage Loan will be less than the scheduled monthly payments
thereon (the "Buydown Period"). The periodic increase in the amount paid by
the mortgagor of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition
of any such deferred interest to the principal balance of any related class
or classes of Securities will lengthen the weighted average life thereof and
may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased. In addition, with respect to certain
ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly
payment on such a Mortgage Loan would exceed the amount of scheduled
principal and accrued interest on the principal balance thereof, and since
such excess will be applied to reduce the principal balance of the related
class or classes of Securities, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof, depending
upon the price at which such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on
the Securities. In general, defaults on mortgage loans or contracts are
expected to occur with greater frequency in their early years. The rate of
default on Mortgage Loans which are refinance or limited documentation
mortgage loans, and on Mortgage Loans with high Loan-to-Value Ratios, may be
higher than for other types of Mortgage Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will
be affected by the general economic condition of the region of the country in
which the related Mortgage Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak
or deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of Mortgage Loans
that are repaid in accordance with their terms will affect the weighted
average life of the Mortgage Loans comprising or underlying the Assets and
that of the related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the
same property. In the event of such a refinancing, the new loan would not be
included in the related Trust Fund and, therefore, such refinancing would
have the same effect as a prepayment in full of the related Mortgage Loan. A
Sub-Servicer or the Master Servicer may, from time to time, implement
programs designed to encourage refinancing. Such programs may include,
without limitation, modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. In addition, Sub-
Servicers may encourage the refinancing of Mortgage Loans, including
defaulted Mortgage Loans, that would permit creditworthy borrowers to assume
the outstanding indebtedness of such Mortgage Loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant Prospectus Supplement. A number of the Mortgage Loans comprising or
underlying the Assets may include "due-on-sale" clauses that allow the holder
of the Mortgage Loans to demand payment in full of the remaining principal
balance of the Mortgage Loans upon sale, transfer or conveyance of the
related Mortgaged Property. With respect to any Whole Loans, unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of
the conveyance or proposed conveyance of the underlying Mortgaged Property
and it is entitled to do so under applicable law; provided, however, that the
Master Servicer will not take any action in relation to the enforcement of
any due-on-sale provision which would adversely affect or jeopardize coverage
under any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Due-on-Sale
Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310.
Its telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it
expected in the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the
related Trust Fund and will be issued and secured pursuant to an indenture
(an "Indenture"). Each series of Securities will consist of one or more
classes of Securities that may (i) provide for the accrual of interest
thereon based on fixed, variable or adjustable rates; (ii) be senior
(collectively, "Senior Securities") or subordinate (collectively,
"Subordinate Securities") to one or more other classes of Securities in
respect of certain distributions on the Securities; (iii) be entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions (collectively, "Stripped Principal Securities"); (iv) be
entitled to interest distributions, with disproportionately low, nominal or
no principal distributions (collectively, "Stripped Interest Securities");
(v) provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of one or
more other classes of Securities of such series (collectively, "Accrual
Securities"); (vi) provide for payments of principal as described in the
related Prospectus Supplement, from all or only a portion of the Assets in
such Trust Fund, to the extent of available funds, in each case as described
in the related Prospectus Supplement; and/or (vii) provide for distributions
based on a combination of two or more components thereof with one or more of
the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If
so specified in the related Prospectus Supplement, a Trust Fund may include
(i) additional Mortgage Loans (or certain balances thereof) that will be
transferred to the Trust from time to time and/or (ii) in the case of
revolving Home Equity loans or certain balances thereof, any additional
balances advanced to the borrowers under the revolving Home Equity loans
during certain periods. If so specified in the related Prospectus Supplement,
distributions on one or more classes of a series of Securities may be limited
to collections from a designated portion of the Whole Loans in the related
Mortgage Pool (each such portion of Whole Loans, a "Mortgage Loan Group").
Any such classes may include classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in
the related Prospectus Supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge.
One or more classes of Securities of a series may be issued in definitive
form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus Supplement. See "Risk
Factors--Book-Entry Registration" and "Description of the Securities--
Book-Entry Registration and Definitive Securities." Definitive Securities
will be exchangeable for other Securities of the same class and series of a
like aggregate Security Balance, notional amount or percentage interest but
of different authorized denominations. See "Risk Factors--Limited Liquidity"
and "--Limited Assets."
Distributions
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made to the persons in whose names the Securities are registered at the
close of business on the last business day of the month preceding the month
in which the Distribution Date occurs (the "Record Date"), and the amount of
each distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date").
All distributions with respect to each class of Securities on each
Distribution Date will be allocated pro rata among the outstanding Securities
in such class or by random selection, as described in the related Prospectus
Supplement or otherwise established by the related Trustee. Payments will be
made either by wire transfer in immediately available funds to the account of
a Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or other person
required to make such payments no later than the date specified in the
related Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or
by check mailed to the address of the person entitled thereto as it appears
on the Security Register; provided, however, that the final distribution in
retirement of the Securities (whether Definitive Securities or Book-Entry
Securities) will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
Available Distribution Amount
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement.
Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period"
with respect to any Distribution Date will commence on the second
day of the month in which the immediately preceding Distribution
Date occurs, or the day after the Cut-off Date in the case of the
first Due Period, and will end on the first day of the month of the
related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise, all
prepayments, together with related payments of the interest thereon
and related prepayment premiums, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received subsequent to the
related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified
in the related Prospectus Supplement or that are payable in respect
of certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment
Period; and
(v) unless the related Prospectus Supplement provides otherwise, to the
extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or
in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not
offered hereby) on each Distribution Date, and accordingly will be released
from the Trust Fund and will not be available for any future distributions.
Currency Exchange Swap
The Prospectus Supplement will specify whether the Trust Fund will
acquire a currency exchange swap pursuant to which the Trust Fund will pay
its collections in the related foreign currency on its Mortgage Loans to the
swap counterparty in exchange for U.S. dollars at the exchange rate specified
in the swap. Unless otherwise specified in the Prospectus Supplement, the
rights of the swap counterparty to receive the payments due to it will be
senior to the rights of any Securityholder to receive a distribution. See
"Risk Factors-Risks Related to Non-U.S. Mortgage Loans - Risk of Default by
Swap Counterparty Under a Currency Exchange Swap Agreement".
Distributions of Interest on the Securities
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a
different Pass-Through Rate or interest rate, which will be a fixed, variable
or adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable
Pass-Through Rate or interest rate, the method for determining the
Pass-Through Rate or interest rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Securities will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will
be made on each Distribution Date (other than any class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances,
specified in the related Prospectus Supplement, and any class of Stripped
Principal Securities that are not entitled to any distributions of interest)
based on the Accrued Security Interest for such class and such Distribution
Date, subject to the sufficiency of the portion of the Available Distribution
Amount allocable to such class on such Distribution Date. Prior to the time
interest is distributable on any class of Accrual Securities, the amount of
Accrued Security Interest otherwise distributable on such class will be added
to the Security Balance thereof on each Distribution Date. With respect to
each class of Securities and each Distribution Date (other than certain
classes of Stripped Interest Securities), "Accrued Security Interest" will be
equal to interest accrued for a specified period on the outstanding Security
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. Unless
otherwise provided in the Prospectus Supplement, Accrued Security Interest on
Stripped Interest Securities will be equal to interest accrued for a
specified period on the outstanding notional amount thereof immediately prior
to each Distribution Date, at the applicable Pass-Through Rate or interest
rate, reduced as described below. The method of determining the notional
amount for any class of Stripped Interest Securities will be described in the
related Prospectus Supplement. Reference to notional amount is solely for
convenience in certain calculations and does not represent the right to
receive any distributions of principal. Unless otherwise provided in the
related Prospectus Supplement, the Accrued Security Interest on a series of
Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on
the Mortgage Loans comprising or underlying the Assets in the Trust Fund for
such series. The particular manner in which such shortfalls are to be
allocated among some or all of the classes of Securities of that series will
be specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Loans comprising or underlying the Assets in the
related Trust Fund. Unless otherwise provided in the related Prospectus
Supplement, any reduction in the amount of Accrued Security Interest
otherwise distributable on a class of Securities by reason of the allocation
to such class of a portion of any deferred interest on the Mortgage Loans
comprising or underlying the Assets in the related Trust Fund will result in
a corresponding increase in the Security Balance of such class. See "Risk
Factors--Average Life of Securities; Prepayments; Yields" and "Yield
Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other
assets included in the related Trust Fund. The outstanding Security Balance
of a Security will be reduced to the extent of distributions of principal
thereon from time to time and, if and to the extent so provided in the
related Prospectus Supplement, by the amount of losses incurred in respect of
the related Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Securities prior to the Distribution
Date on which distributions of interest are required to commence, will be
increased by any related Accrued Security Interest. Unless otherwise provided
in the related Prospectus Supplement, the initial aggregate Security Balance
of all classes of Securities of a series will not be greater than the
outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a series
and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Distribution Date to the
class or classes of Securities entitled thereto in accordance with the
provisions described in such Prospectus Supplement until the Security Balance
of such class has been reduced to zero. Stripped Interest Securities with no
Security Balance are not entitled to any distributions of principal.
Components
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such
extent, the descriptions set forth under "--Distributions of Interests on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference
in such sections to Security Balance and Pass-Through Rate or interest rate
refer to the principal balance, if any, of any such component and the Pass-
Through Rate or interest rate, if any, on any such component, respectively.
Allocation of Losses and Shortfalls
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will
be borne first by a class of Subordinate Securities in the priority and
manner and subject to the limitations specified in such Prospectus
Supplement. See "Description of Credit Support" for a description of the
types of protection that may be included in a Trust Fund against losses and
shortfalls on Assets comprising such Trust Fund.
Advances in Respect of Delinquencies
With respect to any series of Securities evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer or another entity described therein will be required as
part of its servicing responsibilities to advance on or before each
Distribution Date its own funds or funds held in the Collection Account that
are not included in the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of payments of principal (other
than any balloon payments) and interest (net of related servicing fees and
Retained Interest) that were due on the Whole Loans in such Trust Fund during
the related Due Period and were delinquent on the related Determination Date,
subject to the Master Servicer's (or another entity's) good faith
determination that such advances will be reimbursable from Related Proceeds
(as defined below). In the case of a series of Securities that includes one
or more classes of Subordinate Securities and if so provided in the related
Prospectus Supplement, the Master Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary
to make the required distributions on one or more classes of Senior
Securities and/or may be subject to the Master Servicer's (or another
entity's) good faith determination that such advances will be reimbursable
not only from Related Proceeds but also from collections on other Assets
otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the
Master Servicer's (or another entity's) funds will be reimbursable only out
of related recoveries on the Mortgage Loans (including amounts received under
any form of Credit Support) respecting which such advances were made (as to
any Mortgage Loan, "Related Proceeds") and, if so provided in the Prospectus
Supplement, out of any amounts otherwise distributable on one or more classes
of Subordinate Securities of such series; provided, however, that any such
advance will be reimbursable from any amounts in the Collection Account prior
to any distributions being made on the Securities to the extent that the
Master Servicer (or such other entity) shall determine in good faith that
such advance (a "Nonrecoverable Advance") is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets
otherwise distributable on such Subordinate Securities. If advances have been
made by the Master Servicer from excess funds in the Collection Account, the
Master Servicer is required to replace such funds in the Collection Account
on any future Distribution Date to the extent that funds in the Collection
Account on such Distribution Date are less than payments required to be made
to Securityholders on such date. If so specified in the related Prospectus
Supplement, the obligations of the Master Servicer (or another entity) to
make advances may be secured by a cash advance reserve fund, a surety bond, a
letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer (or another entity) will be entitled to receive interest
at the rate specified therein on its outstanding advances and will be
entitled to pay itself such interest periodically from general collections on
the Assets prior to any payment to Securityholders or as otherwise provided
in the related Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
Reports to Securityholders
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement,
will forward or cause to be forwarded to each such holder, to the Depositor
and to such other parties as may be specified in the related Agreement, a
statement setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to prepayment
premiums;
(iv) the amount of related servicing compensation received by a
Master Servicer (and, if payable directly out of the related Trust Fund, by
any Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are delinquent
and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related Due
Period, (a) the portion of such liquidation proceeds payable or reimbursable
to the Master Servicer (or any other entity) in respect of such Mortgage Loan
and (b) the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
loan number of the related Mortgage Loan and (b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
book value, (b) the principal balance of the related Mortgage Loan
immediately following such Distribution Date (calculated as if such Mortgage
Loan were still outstanding taking into account certain limited modifications
to the terms thereof specified in the Agreement), (c) the aggregate amount of
unreimbursed servicing expenses and unreimbursed advances in respect thereof
and (d) if applicable, the aggregate amount of interest accrued and payable
on related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related
Due Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan and (c) the amount of any loss
to Securityholders in respect of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been added
to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the
close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding Distribution
Date, as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xii), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Securities. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any MBS. The Prospectus Supplement for each
series of Offered Securities will describe any additional information to be
included in reports to the holders of such Securities.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the extent that substantially comparable information shall
be provided by the Master Servicer or the Trustee pursuant to any
requirements of the Code as are from time to time in force. See "Description
of the Securities--Registration and Definitive Securities."
Termination
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Whole Loan subject thereto and
(ii) the purchase of all of the assets of the Trust Fund by the party
entitled to effect such termination, under the circumstances and in the
manner set forth in the related Prospectus Supplement. In no event, however,
will the trust created by the Agreement continue beyond the date specified in
the related Prospectus Supplement. Written notice of termination of the
Agreement will be given to each Securityholder, and the final distribution
will be made only upon presentation and surrender of the Securities at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by the party specified
therein, under the circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the reduction of the
Security Balance of a specified class or classes of Securities by a specified
percentage or amount, the party specified therein will solicit bids for the
purchase of all assets of the Trust Fund, or of a sufficient portion of such
assets to retire such class or classes or purchase such class or classes at a
price set forth in the related Prospectus Supplement, in each case, under the
circumstances and in the manner set forth therein.
Book-Entry Registration and Definitive Securities
If so provided in the related Prospectus Supplement, one or more classes
of the Offered Securities of any series will be issued as Book-Entry
Securities, and each such class will be represented by one or more single
Securities registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also
is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive
all distributions on the Book-Entry Securities through DTC and its
Participants. Under a book-entry format, Security Owners will receive
payments after the related Distribution Date because, while payments are
required to be forwarded to Cede & Co., as nominee for DTC ("Cede"), on each
such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus
Supplement, the only "Securityholder" (as such term is used in the Agreement)
will be Cede, as nominee of DTC, and the Security Owners will not be
recognized by the Trustee as Securityholders under the Agreement. Security
Owners will be permitted to exercise the rights of Securityholders under the
related Agreement, Trust Agreement or Indenture, as applicable, only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry
Securities and is required to receive and transmit distributions of principal
of and interest on the Book-Entry Securities. Participants and Indirect
Participants with which Security Owners have accounts with respect to the
Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Security
Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in the Book-Entry Securities, may be limited due
to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Securityholder under an Agreement only at the direction of one
or more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Unless otherwise specified in the related Prospectus Supplement,
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees
("Definitive Securities"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or
able to properly discharge its responsibilities as depository with respect to
the Securities and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Securities, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Security Owners identified
in such instructions the Definitive Securities to which they are entitled,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax
purposes will be issued, and the related Trust Fund will be created, pursuant
to a pooling and servicing agreement (a "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer and the Trustee. The Assets of such
Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with the terms of the Pooling and Servicing Agreement. In the
context of the conveyance and servicing of the related Assets, the Pooling
and Servicing Agreement may be referred to herein as the "Agreement".
Notwithstanding the foregoing, if the Assets of the Trust Fund for such a
series consists only of Government Securities or MBS, such Assets will be
conveyed to the Trust Fund and administered pursuant to a trust agreement
between the Depositor and the Trustee (a "Trust Agreement"), which may also
be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and Notes.
Certificates that are partnership interests for tax purposes will be issued,
and the related Trust Fund will be created, pursuant to a Trust Agreement
between the Depositor and the Trustee. The Assets of the related Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a "Servicing Agreement") between the Depositor,
the Servicer and the Trustee. In the context of the conveyance and servicing
of the related Assets, a Servicing may be referred to herein as the
"Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist
only of MBS or Government Securities, such Assets will be conveyed to the
Trust Fund and administered in accordance with the terms of the Trust
Agreement, which in such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series
of Securities will be named in the related Prospectus Supplement. In any
series of Securities for which there are multiple Master Servicers, there may
also be multiple Mortgage Loan Groups, each corresponding to a particular
Master Servicer; and, if the related Prospectus Supplement so specifies, the
servicing obligations of each such Master Servicer will be limited to the
Whole Loans in such corresponding Mortgage Loan Group. In lieu of appointing
a Master Servicer, a servicer may be appointed pursuant to the Agreement for
any Trust Fund. Such servicer will service all or a significant number of
Whole Loans directly without a Sub-Servicer. Unless otherwise specified in
the related Prospectus Supplement, the obligations of any such servicer shall
be commensurate with those of the Master Servicer described herein.
References in this Prospectus to Master Servicer and its rights and
obligations, unless otherwise specified in the related Prospectus Supplement,
shall be deemed to also be references to any servicer servicing Whole Loans
directly. A manager or administrator may be appointed pursuant to the Trust
Agreement for any Trust Fund to administer such Trust Fund. The provisions of
each Agreement will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. Forms of a
Pooling and Servicing Agreement, a Sale and Servicing Agreement and a Trust
Agreement have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
The following summaries describe certain provisions that may appear in
each Agreement. The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that
materially differs from the description thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Security" refers to all of the Securities of that series, whether or
not offered hereby and by the related Prospectus Supplement, unless the
context otherwise requires. The Depositor will provide a copy of the
Agreement (without exhibits) relating to any series of Securities without
charge upon written request of a holder of a Security of such series
addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest
to be received on or with respect to such Assets after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date and other
than any Retained Interest. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Depositor in exchange for the
Assets and the other assets comprising the Trust Fund for such series. Each
Asset will be identified in a schedule appearing as an exhibit to the related
Agreement. Unless otherwise provided in the related Prospectus Supplement,
such schedule will include detailed information (i) in respect of each Whole
Loan included in the related Trust Fund, including without limitation, the
address of the related Mortgaged Property and type of such property, the
Mortgage Rate and, if applicable, the applicable index, margin, adjustment
date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment,
if any, the Value and Loan-to-Value Ratio as of the date indicated and
payment and prepayment provisions, if applicable; and (ii) in respect of each
MBS included in the related Trust Fund, including without limitation, the MBS
Issuer, MBS Servicer and MBS Trustee, the pass-through or bond rate or
formula for determining such rate, the issue date and original and remaining
term to maturity, if applicable, the original and outstanding principal
amount and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which unless otherwise specified in the related
Prospectus Supplement will include the original Mortgage Note endorsed,
without recourse, in blank or to the order of the Trustee, the original
Mortgage (or a certified copy thereof) with evidence of recording indicated
thereon and an assignment of the Mortgage to the Trustee in recordable form.
Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans where
the original Mortgage Note is not delivered to the Trustee if the Depositor
delivers to the Trustee or the custodian a copy or a duplicate original of
the Mortgage Note, together with an affidavit certifying that the original
thereof has been lost or destroyed. With respect to such Mortgage Loans, the
Trustee (or its nominee) may not be able to enforce the Mortgage Note against
the related borrower. Unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if
the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original Mortgage Note. Unless otherwise
provided in the related Prospectus Supplement, the related Agreement will
require the Depositor or another party specified therein to promptly cause
each such assignment of Mortgage to be recorded in the appropriate public
office for real property records, except in the State of California or in
other states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interest in the related
Whole Loan against the claim of any subsequent transferee or any successor to
or creditor of the Depositor, the Master Servicer, the relevant Asset Seller
or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or
a custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify
the Master Servicer and the Depositor, and the Master Servicer shall
immediately notify the relevant Asset Seller. If the Asset Seller cannot cure
the omission or defect within a specified number of days after receipt of
such notice, then unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be obligated, within a specified number of
days of receipt of such notice, to repurchase the related Whole Loan from the
Trustee at the Purchase Price or substitute for such Mortgage Loan. There can
be no assurance that an Asset Seller will fulfill this repurchase or
substitution obligation, and neither the Master Servicer nor the Depositor
will be obligated to repurchase or substitute for such Mortgage Loan if the
Asset Seller defaults on its obligation. Unless otherwise specified in the
related Prospectus Supplement, this repurchase or substitution obligation
constitutes the sole remedy available to the Certificateholders or the
Trustee for omission of, or a material defect in, a constituent document. To
the extent specified in the related Prospectus Supplement, in lieu of curing
any omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller may agree to cover any losses suffered by the Trust
Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified
in the related Prospectus Supplement, the documents with respect to Home
Equity Loans will not be delivered to the Trustee (or a custodian), but will
be retained by the Master Servicer, which may also be the Asset Seller. In
addition, assignments of the related Mortgages to the Trustee will not be
recorded, unless otherwise provided in the related Prospectus Supplement.
With respect to each Government Security or MBS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of
the Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name
of the Trustee for the benefit of the Securityholders. Unless otherwise
provided in the related Prospectus Supplement, the related Agreement will
require that either the Depositor or the Trustee promptly cause any MBS and
Government Securities in certificated form not registered in the name of the
Trustee to be re-registered, with the applicable persons, in the name of the
Trustee.
Representations and Warranties; Repurchases
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain
representations and warranties, as of a specified date (the person making
such representations and warranties, the "Warranting Party") covering, by way
of example, the following types of matters: (i) the accuracy of the
information set forth for such Whole Loan on the schedule of Assets appearing
as an exhibit to the related Agreement; (ii) the existence of title insurance
insuring the lien priority of the Whole Loan; (iii) the authority of the
Warranting Party to sell the Whole Loan; (iv) the payment status of the Whole
Loan; (v) the existence of customary provisions in the related Mortgage Note
and Mortgage to permit realization against the Mortgaged Property of the
benefit of the security of the Mortgage; and (vi) the existence of hazard and
extended perils insurance coverage on the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement,
in the event of a breach of any such representation or warranty, the
Warranting Party will be obligated to reimburse the Trust Fund for losses
caused by any such breach or either cure such breach or repurchase or replace
the affected Whole Loan as described below. Since the representations and
warranties may not address events that may occur following the date as of
which they were made, the Warranting Party will have a reimbursement, cure,
repurchase or substitution obligation in connection with a breach of such a
representation and warranty only if the relevant event that causes such
breach occurs prior to such date. Such party would have no such obligations
if the relevant event that causes such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Warranting Party of any breach of
any representation or warranty made by it in respect of a Whole Loan that
materially and adversely affects the value of such Whole Loan or the
interests therein of the Securityholders. If such Warranting Party cannot
cure such breach within a specified period following the date on which such
party was notified of such breach, then such Warranting Party will be
obligated to repurchase such Whole Loan from the Trustee within a specified
period from the date on which the Warranting Party was notified of such
breach, at the Purchase Price therefor. As to any Whole Loan, unless
otherwise specified in the related Prospectus Supplement, the "Purchase
Price" is equal to the sum of the unpaid principal balance thereof, plus
unpaid accrued interest thereon at the Mortgage Rate from the date as to
which interest was last paid to the due date in the Due Period in which the
relevant purchase is to occur, plus certain servicing expenses that are
reimbursable to the Master Servicer. If so provided in the Prospectus
Supplement for a series, a Warranting Party, rather than repurchase a Whole
Loan as to which a breach has occurred, will have the option, within a
specified period after initial issuance of such series of Certificates, to
cause the removal of such Whole Loan from the Trust Fund and substitute in
its place one or more other Whole Loans in accordance with the standards
described in the related Prospectus Supplement. If so provided in the
Prospectus Supplement for a series, a Warranting Party, rather than
repurchase or substitute a Whole Loan as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. Unless otherwise specified in the related
Prospectus Supplement, this reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to holders of Securities
or the Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute
for a Whole Loan if a Warranting Party defaults on its obligation to do so,
and no assurance can be given that Warranting Parties will carry out such
obligations with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as
of a specified date, with respect to such Government Securities or MBS,
covering (i) the accuracy of the information set forth therefor on the
schedule of Assets appearing as an exhibit to the related Agreement and (ii)
the authority of the Warranting Party to sell such Assets. The related
Prospectus Supplement will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Certificateholders and which continues unremedied for the number of
days specified in the Agreement after the giving of written notice of such
breach to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights (unless otherwise specified
in the related Prospectus Supplement), will constitute an Event of Default
under such Pooling and Servicing Agreement. See "Events of Default" and
"Rights Upon Event of Default."
Collection Account and Related Accounts
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and the
uninsured deposits in which are otherwise secured such that the Trustee have
a claim with respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing such funds
that is superior to the claims of any other depositors or general creditors
of the institution with which the Collection Account is maintained or
(ii) otherwise maintained with a bank or trust company, and in a manner,
satisfactory to the Rating Agency or Agencies rating any class of Securities
of such series. The collateral eligible to secure amounts in the Collection
Account is limited to United States government securities and other
investment grade obligations specified in the Agreement ("Permitted
Investments"). The Collection Account may be maintained in a non-U.S.
jurisdiction. A Collection Account may be maintained as an interest bearing
or a non-interest bearing account and the funds held therein may be invested
pending each succeeding Distribution Date in certain short-term Permitted
Investments. Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in the Collection Account will
be paid to a Master Servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution
that is an affiliate of the Master Servicer, if applicable, provided that
such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in
the related Prospectus Supplement, a Collection Account may contain funds
relating to more than one series of mortgage pass-through certificates and
may contain other funds respecting payments on mortgage loans belonging to
the Master Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis,
unless otherwise provided in the related Agreement, the following payments
and collections received, or advances made, by the Master Servicer or the
Trustee or on its behalf subsequent to the Cut-off Date (other than payments
due on or before the Cut-off Date, and exclusive of any amounts representing
a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof retained
by a Master Servicer or a Sub-Servicer as its servicing compensation and net
of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in the Trust Fund
(to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the normal servicing
procedures of a Master Servicer or the related Sub-Servicer, subject to the
terms and conditions of the related Mortgage and Mortgage Note)
(collectively, "Insurance Proceeds") and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans in
the Trust Fund, by foreclosure or otherwise ("Liquidation Proceeds"),
together with the net proceeds on a monthly basis with respect to any
Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of Securities as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the Securities-
- -Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under "Assignment of
Assets; Repurchases" and "Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described under
"Realization Upon Defaulted Whole Loans," and all proceeds of any Asset
purchased as described under "Description of the Securities--Termination"
(also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans in the Trust Fund as
described under "Description of the Agreements--Retained Interest; Servicing
Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or prepayment premiums
on the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy described
under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit of
the Master Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise specified in the related Prospectus Supplement or the related
Agreement, make withdrawals from the Collection Account for each Trust Fund
for any of the following purposes:
(i) to makedistributions to the Securityholderson each Distribution Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Whole Loans with respect to which the advances
were made or out of amounts drawn under any form of Credit Support with
respect to such Whole Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans and properties acquired in respect thereof, such reimbursement to be
made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Whole Loans and properties, and net
income collected on the particular properties, with respect to which such
fees were earned or such expenses were incurred or out of amounts drawn under
any form of Credit Support with respect to such Whole Loans and properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause (iii) above
which, in the Master Servicer's good faith judgment, will not be recoverable
from the amounts described in clauses (ii) and (iii), respectively, such
reimbursement to be made from amounts collected on other Assets or, if and to
the extent so provided by the related Agreement and described in the related
Prospectus Supplement, just from that portion of amounts collected on other
Assets that is otherwise distributable on one or more classes of Subordinate
Securities, if any, remain outstanding, and otherwise any outstanding class
of Securities, of the related series;
(v) if and to the extent described in the related Prospectus Supplement,
to pay a Master Servicer interest accrued on the advances described in clause
(ii) above and the servicing expenses described in clause (iii) above while
such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "Certain Matters Regarding a Master Servicer and the
Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of foreclosure
or otherwise, such payments to be made out of income received on such
property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Material Federal Income Tax Consequences--REMICS--
Prohibited Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in connection
with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or substitution
as contemplated by "Assignment of Assets; Repurchase" and "Representations
and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement;
(xviii) to make payments required under any Cash Flow Agreement; and
(xix) to clear and terminate the Collection Account at the termination
of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more series of
Securities. Any such collection account may be located in a non-U.S.
jurisdiction. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by
a time specified in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, any amounts which could be
withdrawn from the Collection Account as described under "--Withdrawals"
above, may also be withdrawn from any such collection account. The
Prospectus Supplement will set forth any restrictions with respect to any
such collection account, including investment restrictions and any
restrictions with respect to financial institutions with which any such
collection account may be maintained.
Collection and Other Servicing Procedures
The Master Servicer, directly or through Sub-Servicers, is required to
make reasonable efforts to collect all scheduled payments under the Whole
Loans and will follow or cause to be followed such collection procedures as
it would follow with respect to mortgage loans that are comparable to the
Whole Loans and held for its own account, provided such procedures are
consistent with (i) the terms of the related Agreement and any related hazard
insurance policy or instrument of Credit Support, if any, included in the
related Trust Fund described herein or under "Description of Credit Support,"
(ii) applicable law and (iii) the general servicing standard specified in the
related Prospectus Supplement or, if no such standard is so specified, its
normal servicing practices (in either case, the "Servicing Standard"). In
connection therewith, the Master Servicer will be permitted in its discretion
to waive any late payment charge or penalty interest in respect of a late
payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to a Whole Loan;
processing assumptions or substitutions in those cases where the Master
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures or repossessions;
inspecting and managing Mortgaged Properties under certain circumstances; and
maintaining accounting records relating to the Whole Loans. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Whole
Loans under any applicable instrument of Credit Support. See "Description of
Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Whole Loan or (ii) in
its judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless
otherwise provided in the related Prospectus Supplement, (i) in its judgment,
a material default on the Whole Loan has occurred or a payment default is
imminent and (ii) in its judgment, such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the Whole
Loan on a present value basis than would liquidation. The Master Servicer is
required to notify the Trustee in the event of any modification, waiver or
amendment of any Whole Loan.
Sub-Servicers
A Master Servicer may delegate its servicing obligations in respect of
the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for
the related series of Securities is no longer acting in such capacity, the
Trustee or any successor Master Servicer may assume the Master Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub- Servicer may be entitled to a Retained Interest in certain Whole Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest; Servicing
Compensation and Payment of Expenses."
Realization Upon Defaulted Whole Loans
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Whole Loan which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if
cure is likely, inspect the 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 such
corrective action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes
of Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified
number of scheduled payments thereunder are delinquent. Any such right
granted to the holder of an Offered Security will be described in the related
Prospectus Supplement. The related Prospectus Supplement will also describe
any such right granted to any person if the predetermined purchase price is
less than the Purchase Price described under "Representations and Warranties;
Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan described in the
preceding paragraph and not otherwise purchased by any person having a right
of first refusal with respect thereto, if and when the Master Servicer
determines, consistent with the Servicing Standard, that such a sale would
produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related
Agreement will provide that any such offering be made in a commercially
reasonable manner for a specified period and that the Master Servicer accept
the highest cash bid received from any person (including itself, an affiliate
of the Master Servicer or any Securityholder) that constitutes a fair price
for such defaulted Whole Loan. In the absence of any bid determined in
accordance with the related Agreement to be fair, the Master Servicer shall
proceed with respect to such defaulted Mortgage Loan as described below. Any
bid in an amount at least equal to the Purchase Price described under
"Representations and Warranties; Repurchases" will in all cases be deemed
fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to
a Mortgaged Property securing a Whole Loan by operation of law or otherwise,
if such action is consistent with the Servicing Standard and a default on
such Whole Loan has occurred or, in the Master Servicer's judgment, is
imminent.
Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund,
will be required to sell the Mortgaged Property within three years of
acquisition, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
Trust Fund subsequent to three 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 Security is
outstanding. Subject to the foregoing, the Master Servicer will be required
to (i) solicit bids for any Mortgaged Property so acquired in such a manner
as will be reasonably likely to realize a fair price for such property and
(ii) accept the first (and, if multiple bids are contemporaneously received,
the highest) cash bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan. If the proceeds of any liquidation of the property securing the
defaulted Whole Loan are less than the outstanding principal balance of the
defaulted Whole Loan plus interest accrued thereon at the Mortgage Rate, as
applicable, plus the aggregate amount of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Whole Loan, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Whole Loan, unreimbursed servicing expenses
incurred with respect to the Whole Loan and any unreimbursed advances of
delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to Securityholders on liquidation of the Whole 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.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself,
the Trustee and the Securityholders, will present claims to the obligor under
each instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from
the Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description
of Credit Support."
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such
coverage will be in general in an amount equal to the lesser of the principal
balance owing on such Whole Loan and the amount necessary to fully compensate
for any damage or loss to the improvements on the Mortgaged Property on a
replacement cost basis, but in either case not less than the amount necessary
to avoid the application of any co-insurance clause contained in the hazard
insurance policy. The ability of the Master Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under
any other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected
by the Master Servicer under any such policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the mortgagor in accordance with the Master Servicer's normal servicing
procedures, subject to the terms and conditions of the related Mortgage and
Mortgage Note) will be deposited in the Collection Account. The Agreement
will provide that the Master Servicer may satisfy its obligation to cause
each mortgagor to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Whole Loans. If such blanket policy contains a deductible clause, the Master
Servicer will be required to deposit in the Collection Account all sums that
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike
and civil commotion, subject to the conditions and exclusions specified in
each policy. Although the policies relating to the Whole Loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin, domestic animals and
certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified
percentage, such clause generally provides that the insurer's liability in
the event of partial loss does not exceed the lesser of (i) the replacement
cost of the improvements less physical depreciation and (ii) such proportion
of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan to maintain all
such other insurance coverage with respect to the related Mortgaged Property
as is consistent with the terms of the related Mortgage and the Servicing
Standard, which insurance may typically include flood insurance (if the
related Mortgaged Property was located at the time of origination in a
federally designated flood area).
Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan
where the terms of the Mortgage Loan so permit; provided, however, that the
addition of such cost will not be taken into account for purposes of
calculating the distribution to be made to Certificateholders. Such costs may
be recovered by the Master Servicer or Sub-Servicer, as the case may be, from
the Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on
behalf of the Trustee and Certificateholders, is obligated to present or
cause to be presented claims under any blanket insurance policy insuring
against hazard losses on Mortgaged Properties securing the Whole Loans.
However, the ability of the Master Servicer to present or cause to be
presented such claims is dependent upon the extent to which information in
this regard is furnished to the Master Servicer by mortgagors.
Fidelity Bonds and Errors and Omissions Insurance
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees
and agents of the Master Servicer. The related Agreement will allow the
Master Servicer to self-insure against loss occasioned by the errors and
omissions of the officers, employees and agents of the Master Servicer so
long as certain criteria set forth in the Agreement are met.
Due-on-Sale Provisions
The Whole Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Whole Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will generally enforce any due-on-sale clause to the extent
it has knowledge of the conveyance or proposed conveyance of the underlying
Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize coverage under any applicable insurance
policy. Unless otherwise specified in the related Prospectus Supplement, any
fee collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation.
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion
of the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust
Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Securities will come from the periodic payment to it
of a portion of the interest payment on each Asset. Since any Retained
Interest and a Master Servicer's primary compensation are percentages of the
principal balance of each Asset, such amounts will decrease in accordance
with the amortization of the Assets. The Prospectus Supplement with respect
to a series of Securities evidencing interests in a Trust Fund that includes
Whole Loans may provide that, as additional compensation, the Master Servicer
or the Sub-Servicers may retain all or a portion of assumption fees,
modification fees, late payment charges or prepayment premiums collected from
mortgagors and any interest or other income which may be earned on funds held
in the Collection Account or any account established by a Sub-Servicer
pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets,
including, without limitation, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in
connection with distributions and reports to Securityholders, and payment of
any other expenses described in the related Prospectus Supplement. Certain
other expenses, including certain expenses relating to defaults and
liquidations on the Whole Loans and, to the extent so provided in the related
Prospectus Supplement, interest thereon at the rate specified therein may be
borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Whole
Loans in the related Trust Fund during such period prior to their respective
due dates therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Whole Loans will provide
that on or before a specified date in each year, beginning with the first
such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with the audit or attestation program used by the
Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other
(including the related Agreement) was conducted in compliance with the terms
of such agreements or such program except for any significant exceptions or
errors in records that, in the opinion of the firm, such other program
requires it to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of mortgage loans by Sub-Servicers,
upon comparable statements for examinations conducted substantially in
compliance with the audit or attestion program used by such Sub-Servicer
(rendered within one year of such statement) of firms of independent public
accountants with respect to the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding
calendar year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus
Supplement.
Certain Matters Regarding a Master Servicer and the Depositor
The Master Servicer, if any, or a servicer for substantially all the
Whole Loans under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may
be an affiliate of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. Reference
herein to the Master Servicer shall be deemed to be to the servicer of
substantially all of the Whole Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Master Servicer so causing such
a conflict being of a type and nature carried on by the Master Servicer at
the date of the Agreement. No such resignation will become effective until
the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the
Depositor nor any director, officer, employee, or agent of a Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Security holders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be
protected against any breach of a representation, warranty or covenant made
in such Agreement, or against any liability specifically imposed thereby, or
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations
or duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Unless otherwise specified in the related Prospectus
Supplement, each Agreement will further provide that any Master Servicer, the
Depositor and any director, officer, employee or agent of a Master Servicer
or the Depositor will be entitled to indemnification by the related Trust
Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
Securities; provided, however, that such indemnification will not extend to
any loss, liability or expense (i) specifically imposed by such Agreement or
otherwise incidental to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of an
enforcement action in respect of any specific Whole Loan or Whole Loans
(except as any such loss, liability or expense shall be otherwise
reimbursable pursuant to such Agreement); (ii) incurred in connection with
any breach of a representation, warranty or covenant made in such Agreement;
(iii) incurred by reason of misfeasance, bad faith or gross negligence in the
performance of obligations or duties thereunder, or by reason of reckless
disregard of such obligations or duties; (iv) incurred in connection with any
violation of any state or federal securities law; or (v) imposed by any
taxing authority if such loss, liability or expense is not specifically
reimbursable pursuant to the terms of the related Agreement. In addition,
each Agreement will provide that neither any Master Servicer nor the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any expense or
liability. Any such Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
the Master Servicer or the Depositor, as the case may be, will be entitled to
be reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged
or consolidated, or any person resulting from any merger or consolidation to
which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be
the successor of the Master Servicer or the Depositor, as the case may be,
under the related Agreement.
Events of Default under the Agreement
Unless otherwise provided in the related Prospectus Supplement, Events
of Default under the related Agreement will include (i) any failure by the
Master Servicer to distribute or cause to be distributed to Securityholders,
or to remit to the Trustee or Indenture Trustee, as applicable, for
distribution to Securityholders, any required payment that continues after a
grace period, if any; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any of its other covenants or obligations
under the Agreement which continues unremedied for thirty days after written
notice of such failure has been given to the Master Servicer by the Trustee
or the Depositor, or to the Master Servicer, the Depositor and the Trustee by
the holders of Securities evidencing not less than 25% of the Voting Rights;
(iii) any breach of a representation or warranty made by the Master Servicer
under the Agreement which materially and adversely affects the interests of
Securityholders and which continues unremedied for thirty days (or such
longer period specified in the related Prospectus Supplement) after written
notice of such breach has been given to the Master Servicer by the Trustee or
the Depositor, or to the Master Servicer, the Depositor and the Trustee by
the holders of Securities evidencing not less than 25% of the Voting Rights;
and (iv) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by or on
behalf of the Master Servicer indicating its insolvency or inability to pay
its obligations. Material variations to the foregoing Events of Default
(other than to shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Trustee shall, not later than the
later of 60 days after the occurrence of any event which constitutes or, with
notice or lapse of time or both, would constitute an Event of Default and
five days after certain officers of the Trustee become aware of the
occurrence of such an event, transmit by mail to the Depositor and all
Securityholders of the applicable series notice of such occurrence, unless
such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
Rights Upon Event of Default under the Agreement
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities evidencing not less than 51% (or such other percentage specified
in the related Prospectus Supplement) of the Voting Rights, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer
under the Agreement and in and to the Mortgage Loans (other than as a
Securityholder or as the owner of any Retained Interest), whereupon the
Trustee will succeed to all of the responsibilities, duties and liabilities
of the Master Servicer under the Agreement (except that if the Trustee is
prohibited by law from obligating itself to make advances regarding
delinquent Mortgage Loans, or if the related Prospectus Supplement so
specifies, then the Trustee will not be obligated to make such advances) and
will be entitled to similar compensation arrangements. Unless otherwise
specified in the related Prospectus Supplement, in the event that the Trustee
is unwilling or unable so to act, it may or, at the written request of the
holders of Securities entitled to at least 51% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights, it
shall appoint, or petition a court of competent jurisdiction for the
appointment of, a loan servicing institution acceptable to the Rating Agency
with a net worth at the time of such appointment of at least $15,000,000 (or
such other amount specified in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee
and any such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights
allocated to the respective classes of Securities affected by any Event of
Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default involving a failure to distribute a required payment
to Securityholders described in clause (i) under "Events of Default" may be
waived only by all of the Securityholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given
to the Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the
Trustee for sixty days (or such other number of days specified in the related
Prospectus Supplement) has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of
the trusts or powers vested in it by any Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the holders of Securities covered by such Agreement,
unless such Securityholders have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Securities covered by the Agreement, (i) to
cure any ambiguity or mistake, (ii) to correct, modify or supplement any
provision therein which may be inconsistent with any other provision therein
or with the related Prospectus Supplement, (iii) to make any other provisions
with respect to matters or questions arising under the Agreement which are
not materially inconsistent with the provisions thereof, or (iv) to comply
with any requirements imposed by the Code; provided that, in the case of
clause (iii), such amendment will not (as evidenced by an opinion of counsel
to such effect) adversely affect in any material respect the interests of any
holder of Securities covered by the Agreement. Unless otherwise specified in
the related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer, if any, and the Trustee, with the consent of
the holders of Securities affected thereby evidencing not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, for any purpose; provided, however, that unless otherwise
specified in the related Prospectus Supplement, no such amendment may
(i) reduce in any manner the amount of or delay the timing of, payments
received or advanced on Mortgage Loans which are required to be distributed
on any Security without the consent of the holder of such Security or
(ii) reduce the consent percentages described in this paragraph without the
consent of the holders of all Securities covered by such Agreement then
outstanding. However, with respect to any series of Securities as to which a
REMIC election is to be made, the Trustee will not consent to any amendment
of the Agreement unless it shall first have received an opinion of counsel to
the effect that such amendment will not 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 Securities are outstanding.
The Trustee
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have
a banking relationship with the Depositor and its affiliates and with any
Master Servicer and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of any Agreement or Trust Agreement, the Securities or any Asset
or related document and is not accountable for the use or application by or
on behalf of any Master Servicer of any funds paid to the Master Servicer or
its designee in respect of the Securities or the Assets, or deposited into or
withdrawn from the Collection Account or any other account by or on behalf of
the Master Servicer. If no Event of Default has occurred and is continuing,
the Trustee is required to perform only those duties specifically required
under the related Agreement or Trust Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement or Trust
Agreement, as applicable.
Certain Matters Regarding the Trustee
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the Trustee's (i) enforcing its
rights and remedies and protecting the interests, of the Securityholders
during the continuance of an Event of Default, (ii) defending or prosecuting
any legal action in respect of the related Agreement or series of Securities
(iii) being the mortgagee of record with respect to the Mortgage Loans in a
Trust Fund and the owner of record with respect to any Mortgaged Property
acquired in respect thereof for the benefit of Securityholders, or
(iv) acting or refraining from acting in good faith at the direction of the
holders of the related series of Securities entitled to not less than 25% (or
such other percentage as is specified in the related Agreement with respect
to any particular matter) of the Voting Rights for such series; provided,
however, that such indemnification will not extend to any loss, liability or
expense that constitutes a specific liability of the Trustee pursuant to the
related Agreement, or to any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence on the part of the Trustee in
the performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a
breach of any representation, warranty or covenant of the Trustee made
therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, or if
a change in the financial condition of the Trustee has adversely affected or
will adversely affect the rating on any class of the Securities, then the
Depositor may remove the Trustee and appoint a successor trustee acceptable
to the Master Servicer, if any. Holders of the Securities of any series
entitled to at least 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series may at any time
remove the Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
Certain Terms of the Indenture
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any
principal of or interest on any Note of such series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
series having been incorrect in a material respect as of the time made, and
such breach is not cured within sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or
the holders of a majority of the then aggregate outstanding amount of the
Notes of such series may declare the principal amount (or, if the Notes of
that series are Accrual Securities, such portion of the principal amount as
may be specified in the terms of that series, as provided in the related
Prospectus Supplement) of all the Notes of such series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of a majority in aggregate outstanding amount of
the Notes of such series.
If, following an Event of Default with respect to any series of Notes,
the Notes of such series have been declared to be due and payable, the
Indenture Trustee may, in its discretion, notwithstanding such acceleration,
elect to maintain possession of the collateral securing the Notes of such
series and to continue to apply distributions on such collateral as if there
had been no declaration of acceleration if such collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of such series as they would have become due if there had not been such
a declaration. In addition, the Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an Event of
Default, other than a default in the payment of any principal or interest on
any Note of such series for thirty (30) days or more, unless (a) the holders
of 100% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such series at the date of such sale or
(c) the Indenture Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of
662/3% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days
(or such other number of days specified in the related Prospectus Supplement)
or more in the payment of principal of or interest on the Notes of a series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for distribution to the Noteholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless
such holders offered to the Indenture Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities which might be
incurred by it in complying with such request or direction. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority of the then aggregate outstanding amount
of the Notes of such series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Notes of such series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such series
may, in certain cases, waive any default with respect thereto, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of such series
affected thereby.
Discharge of the Indenture. The Indenture will be discharged with
respect to a series of Notes (except with respect to certain continuing
rights specified in the Indenture) upon the delivery to the Indenture Trustee
for cancellation of all the Notes of such series or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for
the payment in full of all of the Notes of such series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such series, to replace stolen, lost or mutilated Notes of
such series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the
Notes of such series on the maturity date for such Notes and any installment
of interest on such Notes in accordance with the terms of the Indenture and
the Notes of such series. In the event of any such defeasance and discharge
of Notes of such series, holders of Notes of such series would be able to
look only to such money and/or direct obligations for payment of principal
and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each
series of Notes will be required to mail each year to all related Noteholders
a brief report relating to its eligibility and qualification to continue as
Indenture Trustee under the related Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by such Indenture
Trustee as such and any action taken by it that materially affects such Notes
and that has not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will
be specified in the related Prospectus Supplement. The Indenture Trustee for
any series may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee for such series. The Depositor may
also remove any such Indenture Trustee if such Indenture Trustee ceases to be
eligible to continue as such under the related Indenture or if such Indenture
Trustee becomes insolvent. In such circumstances the Depositor will be
obligated to appoint a successor trustee for the applicable series of Notes.
Any resignation or removal of the Indenture Trustee and appointment of a
successor trustee for any series of Notes does not become effective until
acceptance of the appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates or the
Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
General
For any series of Securities Credit Support may be provided with respect
to one or more classes thereof or the related Assets. Credit Support may be
in the form of the subordination of one or more classes of Securities,
letters of credit, insurance policies, guarantees, the establishment of one
or more reserve funds or another method of Credit Support described in the
related Prospectus Supplement, or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of Credit Support may
be structured so as to be drawn upon by more than one series to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Securities the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Security
Balance of the Securities and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Securityholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities (each, a "Covered Trust"), holders of Securities
evidencing interests in any of such Covered Trusts will be subject to the
risk that such Credit Support will be exhausted by the claims of other
Covered Trusts prior to such Covered Trust receiving any of its intended
share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of
coverage under such Credit Support, (b) any conditions to payment thereunder
not otherwise described herein, (c) the conditions (if any) under which the
amount of coverage under such Credit Support may be reduced and under which
such Credit Support may be terminated or replaced and (d) the material
provisions relating to such Credit Support. Additionally, the related
Prospectus Supplement will set forth certain information with respect to the
obligor under any instrument of Credit Support, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of
its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See "Risk Factors--Credit Support Limitations--Risk
That Credit Support Will Not Cover All Losses."
Subordinate Securities
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Securities to receive distributions of principal and
interest from the Collection Account on any Distribution Date will be
subordinated to such rights of the holders of Senior Securities. If so
provided in the related Prospectus Supplement, the subordination of a class
may apply only in the event of (or may be limited to) certain types of losses
or shortfalls. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a class or classes of Subordinate
Securities in a series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of subordination will
be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group
of Assets prior to distributions on Subordinate Securities evidencing
interests in a different group of Assets within the Trust Fund. The
Prospectus Supplement for a series that includes a cross-support provision
will describe the manner and conditions for applying such provisions.
Insurance or Guarantees with Respect to the Whole Loans
If so provided in the Prospectus Supplement for a series of Securities,
the Whole Loans in the related Trust Fund will be covered for various default
risks by insurance policies or guarantees.
Letter of Credit
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the
"L/C Bank"). Under a letter of credit, the L/C Bank will be obligated to
honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified
in the related Prospectus Supplement of the aggregate principal balance of
the Assets on the related Cut-off Date or of the initial aggregate Security
Balance of one or more classes of Securities. If so specified in the related
Prospectus Supplement, the letter of credit may permit draws in the event of
only certain types of losses and shortfalls. The amount available under the
letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Securities will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Securities of the related
series, timely distributions of interest and/or full distributions of
principal on the basis of a schedule of principal distributions set forth in
or determined in the manner specified in the related Prospectus Supplement.
Reserve Funds
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain
classes thereof will be covered by one or more reserve funds in which cash, a
letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Certificates. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide limited protection against only certain types of
losses and shortfalls. Following each Distribution Date amounts in a reserve
fund in excess of any amount required to be maintained therein may be
released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement and will not be available for
further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund
may be applied to make distributions to Securityholders and use of investment
earnings from the Reserve Fund, if any.
Credit Support with respect to MBS
If so provided in the Prospectus Supplement for a series of Securities,
the MBS in the related Trust Fund and/or the Mortgage Loans underlying such
MBS may be covered by one or more of the types of Credit Support described
herein. The related Prospectus Supplement will specify as to each such form
of Credit Support the information indicated above with respect thereto, to
the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The Prospectus Supplement with respect to a series will set forth a
discussion that contains summaries, which will be general in nature, of
certain foreign law legal aspects of loans secured by single-family
residential properties located in the related non-U.S. jurisdiction. Because
such legal aspects are governed primarily by the applicable laws of the non-
U.S. jurisdiction in which the related Mortgaged Property is located, the
summaries will not purport to be complete or to reflect the laws of any
particular political subdivisions within such non-U.S. jurisdiction, or to
encompass the laws of all political subdivisions in which the security for
the Mortgage Loans is situated. The summaries qualified in their entirety by
reference to the applicable non-U.S. laws governing the Mortgage Loans.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered
Certificates is based on the advice of Brown & Wood LLP, counsel to the
Depositor. This summary is based on laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations)
proposed, all of which are subject to change either prospectively or
retroactively. This summary does not address the federal income tax
consequences of an investment in Securities applicable to all categories of
investors, some of which (for example, banks and insurance companies) may be
subject to special rules. Prospective investors should consult their tax
advisors regarding the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of Securities.
The term "U.S. 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 (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations), or an estate whose income is subject to
U.S. federal income tax regardless of its source of income, or a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996 and treated as United States persons prior to
such date that elect to continue to be treated as United States persons shall
be considered U.S. persons as well.
General
The federal income tax consequences to Securityholders will vary
depending on whether an election is made to treat the Trust Fund relating to
a particular Series of Securities as a REMIC under the Code. The Prospectus
Supplement for each Series of Securities will specify whether a REMIC
election will be made.
Grantor Trust Funds
If the related Prospectus Supplement indicates that the Trust Fund will
be treated as a grantor trust, then Brown & Wood LLP will deliver its opinion
that the Trust Fund will not be classified as an association taxable as a
corporation and that each such Trust Fund will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
owners of Certificates will be treated for federal income tax purposes as
owners of a portion of the Trust Fund's assets as described below.
a. Single Class of Grantor Trust Certificates
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust
Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust Fund represented
by the Grantor Trust Certificates and will be considered the equitable owner
of a pro rata undivided interest in each of the Mortgage Assets in the Pool.
Any amounts received by a Grantor Trust Certificateholder in lieu of amounts
due with respect to any Mortgage Asset because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections
162 or 212 each Grantor Trust Certificateholder will be entitled to deduct
its pro rata share of servicing fees, prepayment fees, assumption fees, any
loss recognized upon an assumption and late payment charges retained by the
Master Servicer, provided that such amounts are reasonable compensation for
services rendered to the Trust Fund. Grantor Trust Certificateholders that
are individuals, estates or trusts will be entitled to deduct their share of
expenses as itemized deductions only to the extent such expenses plus all
other Code Section 212 expenses exceed two percent of its adjusted gross
income. In addition, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds
the applicable amount (which amount will be adjusted for inflation) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over
the applicable amount and (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year. A Grantor Trust Certificateholder
using the cash method of accounting must take into account its pro rata share
of income and deductions as and when collected by or paid to the Master
Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions
as they become due or are paid to the Master Servicer, whichever is earlier.
If the servicing fees paid to the Master Servicer are deemed to exceed
reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of
the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to
each Series of Certificates evidencing an interest in a Trust Fund comprised
of Mortgage Loans, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19)
representing principal and interest payments on Mortgage Assets will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of
Code Section 7701(a)(19)(C)(v), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type described in
such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent "real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest income on the Mortgage Assets will be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), to the extent
that the Mortgage Assets represented by that Grantor Trust Certificate
are of a type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation(s) ... which (are) principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons"
as those terms are defined in section 1286 of the Code, and, as a result,
such assets would be subject to the stripped bond provisions of the Code.
Under these rules, such Government Securities are treated as having original
issue discount based on the purchase price and the stated redemption price at
maturity of each Security. As such, Grantor Trust Certificateholders would
be required to include in income their pro rata share of the original issue
discount on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the
Grantor Trust Certificateholder in any taxable year may exceed amounts
actually received during such year.
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such
holder's undivided interest in each Mortgage Asset will have its own tax
basis. A Grantor Trust Certificateholder that acquires an interest in
Mortgage Assets at a premium may elect to amortize such premium under a
constant interest method, provided that the underlying mortgage loans with
respect to such Mortgage Assets were originated after September 27, 1985.
Premium allocable to mortgage loans originated on or before September 27,
1985 should be allocated among the principal payments on such mortgage loans
and allowed as an ordinary deduction as principal payments are made.
Amortizable bond premium will be treated as an offset to interest income on
such Grantor Trust Certificate. The basis for such Grantor Trust Certificate
will be reduced to the extent that amortizable premium is applied to offset
interest payments. It is not clear whether a reasonable prepayment
assumption should be used in computing amortization of premium allowable
under Code Section 171. A Certificateholder that makes this election for a
Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year
of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at
a premium should recognize a loss if a Mortgage Loan (or an underlying
mortgage loan with respect to a Mortgage Asset) prepays in full, equal to the
difference between the portion of the prepaid principal amount of such
Mortgage Loan (or underlying mortgage loan) that is allocable to the
Certificate and the portion of the adjusted basis of the Certificate that is
allocable to such Mortgage Loan (or underlying mortgage loan). If a
reasonable prepayment assumption is used to amortize such premium, it appears
that such a loss would be available, if at all, only if prepayments have
occurred at a rate faster than the reasonable assumed prepayment rate. It is
not clear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Securities. Absent further guidance
from the IRS, the Trustee intends to account for amortizable bond premium in
the manner described above. Prospective purchasers of the Securities should
consult their tax advisors regarding the possible application of the
Amortizable Bond Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to original issue discount ("OID") (currently Code Sections
1271 through 1273 and 1275) and Treasury regulations issued on January 27,
1994, as amended on June 11, 1996, under such Sections (the "OID
Regulations"), will be applicable to a Grantor Trust Certificateholder's
interest in those Mortgage Assets meeting the conditions necessary for these
sections to apply. Rules regarding periodic inclusion of OID income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Such OID could arise by the financing of points or other charges by
the originator of the mortgages in an amount greater than a statutory de
minimis exception to the extent that the points are not currently deductible
under applicable Code provisions or are not for services provided by the
lender. OID generally must be reported as ordinary gross income as it
accrues under a constant interest method. See "--Multiple Classes of Grantor
Trust Certificates--Accrual of Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest
in a Mortgage Asset is considered to have been purchased at a "market
discount." Generally, the amount of market discount is equal to the excess
of the portion of the principal amount of such Mortgage Asset allocable to
such holder's undivided interest over such holder's tax basis in such
interest. Market discount with respect to a Grantor Trust Certificate will
be considered to be zero if the amount allocable to the Grantor Trust
Certificate is less than 0.25% of the Grantor Trust Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and
the advisability of making any of the elections allowed under Code Sections
1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the
holder of a market discount bond may elect to accrue market discount either
on the basis of a constant interest rate or according to one of the following
methods. If a Grantor Trust Certificate is issued with OID, the amount of
market discount that accrues during any accrual period would be equal to the
product of (i) the total remaining market discount and (ii) a fraction, the
numerator of which is the OID accruing during the period and the denominator
of which is the total remaining OID at the beginning of the accrual period.
For Grantor Trust Certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of (i) the
total remaining market discount and (ii) a fraction, the numerator of which
is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period. For purposes of calculating
market discount under any of the above methods in the case of instruments
(such as the Grantor Trust Certificates) that provide for payments that may
be accelerated by reason of prepayments of other obligations securing such
instruments, the same prepayment assumption applicable to calculating the
accrual of OID will apply. Because the regulations described above have not
been issued, it is impossible to predict what effect those regulations might
have on the tax treatment of a Grantor Trust Certificate purchased at a
discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Grantor Trust Certificate purchased with market
discount. For these purposes, the de minimis rule referred above applies.
Any such deferred interest expense would not exceed the market discount that
accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includible in
income. If such holder elects to include market discount in income currently
as it accrues on all market discount instruments acquired by such holder in
that taxable year or thereafter, the interest deferral rule described above
will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April
4, 1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--Regular
Certificates--Premium" herein. The election to accrue interest, discount and
premium on a constant yield method with respect to a Certificate is
irrevocable.
b. Multiple Classes of Grantor Trust Certificates
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments
results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. For
purposes of Code Sections 1271 through 1288, Code Section 1286 treats a
stripped bond or a stripped coupon as an obligation issued on the date that
such stripped interest is created. If a Trust Fund is created with two
classes of Grantor Trust Certificates, one class of Grantor Trust
Certificates may represent the right to principal and interest, or principal
only, on all or a portion of the Mortgage Assets (the "Stripped Bond
Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the
Mortgage Asset principal balance) or the Certificates are initially sold with
a de minimis discount (assuming no prepayment assumption is required), any
non-de minimis discount arising from a subsequent transfer of the
Certificates should be treated as market discount. The IRS appears to
require that reasonable servicing fees be calculated on a Mortgage Asset by
Mortgage Asset basis, which could result in some Mortgage Assets being
treated as having more than 100 basis points of interest stripped off. See
"--Non-REMIC Certificates" and "Multiple Classes of Grantor Trust
Certificates--Stripped Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if
the discount on a Mortgage Asset is larger than a de minimis amount (as
calculated for purposes of the OID rules) a purchaser of such a Certificate
will be required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust Certificates-
- -Original Issue Discount" herein. However, a purchaser of a Stripped Bond
Certificate will be required to account for any discount on the Mortgage
Assets as market discount rather than OID if either (i) the amount of OID
with respect to the Mortgage Assets is treated as zero under the OID de
minimis rule when the Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing fees in excess of reasonable
servicing fees) is stripped off of the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first
timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that
OID computations be made for each payment from each Mortgage Asset. However,
based on the recent IRS guidance, it appears that all payments from a
Mortgage Asset underlying a Stripped Coupon Certificate should be treated as
a single installment obligation subject to the OID rules of the Code, in
which case, all payments from such Mortgage Asset would be included in the
Mortgage Asset's stated redemption price at maturity for purposes of
calculating income on such certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account
in computing yield with respect to such Grantor Trust Certificate, it appears
that no loss will be available as a result of any particular prepayment
unless prepayments occur at a rate faster than the assumed prepayment rate.
However, if such Certificate is treated as an interest in discrete Mortgage
Assets, or if no prepayment assumption is used, then when a Mortgage Asset is
prepaid, the holder of such Certificate should be able to recognize a loss
equal to the portion of the adjusted issue price of such Certificate that is
allocable to such Mortgage Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper
treatment of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type
that make up the Trust Fund. With respect to these Code sections, no
specific legal authority exists regarding whether the character of the
Grantor Trust Certificates, for federal income tax purposes, will be the same
as that of the underlying Mortgage Assets. While Code Section 1286 treats a
stripped obligation as a separate obligation for purposes of the Code
provisions addressing OID, it is not clear whether such characterization
would apply with regard to these other Code sections. Although the issue is
not free from doubt, based on policy considerations, each class of Grantor
Trust Certificates, unless otherwise specified in the related Prospectus
Supplement, should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A) and "loans . . . secured by, an
interest in real property which is . . . residential real property" within
the meaning of Code Section 7701(a)(19)(C)(v), and interest income
attributable to Grantor Trust Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Assets and interest on such Mortgage Assets qualify for
such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the
income therefrom. Grantor Trust Certificates will be "obligation(s) ...
which (are) principally secured, directly or indirectly, by an interest in
real property" within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in Loans Other
Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275
will be applicable to a Certificateholder's interest in those Mortgage Assets
as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount in income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Under the OID Regulations, such original issue discount could arise by
the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that
is currently deductible by the borrower under applicable Code provisions, or
under certain circumstances, by the presence of "teaser" rates on the
Mortgage Assets. OID on each Grantor Trust Certificate must be included in
the owner's ordinary income for federal income tax purposes as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of receipt of the cash attributable to
such income. The amount of OID required to be included in an owner's income
in any taxable year with respect to a Grantor Trust Certificate representing
an interest in Mortgage Assets other than Mortgage Assets with interest rates
that adjust periodically ("ARM Loans") likely will be computed as described
below under "--Accrual of Original Issue Discount." The following discussion
is based in part on the OID Regulations and in part on the provisions of the
Tax Reform Act of 1986 (the "1986 Act"). The OID Regulations generally are
effective for debt instruments issued on or after April 4, 1994, but may be
relied upon as authority with respect to debt instruments, such as the
Grantor Trust Certificates, issued after December 21, 1992. Alternatively,
proposed Treasury regulations issued December 21, 1992 may be treated as
authority for debt instruments issued after December 21, 1992 and prior to
April 4, 1994, and proposed Treasury regulations issued in 1986 and 1991 may
be treated as authority for instruments issued before December 21, 1992. In
applying these dates, the issued date of the Mortgage Assets should be used,
or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the proposed OID
Regulations nor the OID Regulations adequately address certain issues
relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of
a Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments
to be made on such Mortgage Asset other than payments that are treated as
qualified stated interest payments. The accrual of this OID, as described
below under "--Accrual of Original Issue Discount," will, unless otherwise
specified in the related Prospectus Supplement, utilize the original yield to
maturity of the Grantor Trust Certificate calculated based on a reasonable
assumed prepayment rate for the mortgage loans underlying the Grantor Trust
Certificates (the "Prepayment Assumption"), and will take into account events
that occur during the calculation period. The Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the 1986 Act (the "Legislative History")
provides, however, that the regulations will require that the Prepayment
Assumption be the prepayment assumption that is used in determining the
offering price of such Certificate. No representation is made that any
Certificate will prepay at the Prepayment Assumption or at any other rate.
The prepayment assumption contained in the Code literally only applies to
debt instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments,
such as the Certificates represent. However, no other legal authority
provides guidance with regard to the proper method for accruing OID on
obligations that are subject to prepayment, and, until further guidance is
issued, the Master Servicer intends to calculate and report OID under the
method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily
portions," as defined below, of the OID on such Grantor Trust Certificate for
each day on which it owns such Certificate, including the date of purchase
but excluding the date of disposition. In the case of an original owner, the
daily portions of OID with respect to each component generally will be
determined as set forth under the OID Regulations. A calculation will be
made by the Master Servicer or such other entity specified in the related
Prospectus Supplement of the portion of OID that accrues during each
successive monthly accrual period (or shorter period from the date of
original issue) that ends on the day in the calendar year corresponding to
each of the Distribution Dates on the Grantor Trust Certificates (or the day
prior to each such date). This will be done, in the case of each full month
accrual period, by (i) adding (a) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to
maturity of the respective component under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption on the
respective component and (b) any payments included in the state redemption
price at maturity received during such accrual period, and (ii) subtracting
from that total the "adjusted issue price" of the respective component at the
beginning of such accrual period. The adjusted issue price of a Grantor
Trust Certificate at the beginning of the first accrual period is its issue
price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under any reasonable
method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received.
However, the amount of original issue discount includible in the income of a
holder of an obligation is reduced when the obligation is acquired after its
initial issuance at a price greater than the sum of the original issue price
and the previously accrued original issue discount, less prior payments of
principal. Accordingly, if such Mortgage Assets acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Asset, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Asset (i.e. points) will be includible by such holder. Other
original issue discount on the Mortgage Assets (e.g., that arising from a
"teaser" rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon
stripping rules with respect to such instruments. In the absence of any
authority, the Master Servicer will report OID on Grantor Trust Certificates
attributable to ARM Loans ("Stripped ARM Obligations") to holders in a manner
it believes is consistent with the rules described above under the heading "-
- -Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans" and with the OID Regulations. In general, application of these rules
may require inclusion of income on a Stripped ARM Obligation in advance of
the receipt of cash attributable to such income. Further, the addition of
interest deferred by reason of negative amortization ("Deferred Interest") to
the principal balance of an ARM Loan may require the inclusion of such amount
in the income of the Grantor Trust Certificateholder when such amount
accrues. Furthermore, the addition of Deferred Interest to the Grantor Trust
Certificate's principal balance will result in additional income (including
possibly OID income) to the Grantor Trust Certificateholder over the
remaining life of such Grantor Trust Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will
be includible with respect to such Certificates.
c. Sale or Exchange of a Grantor Trust Certificate
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the
amount received and the owner's adjusted basis in the Grantor Trust
Certificate. Such adjusted basis generally will equal the seller's purchase
price for the Grantor Trust Certificate, increased by the OID included in the
seller's gross income with respect to the Grantor Trust Certificate, and
reduced by principal payments on the Grantor Trust Certificate previously
received by the seller. Such gain or loss will be capital gain or loss to an
owner for which a Grantor Trust Certificate is a "capital asset" within the
meaning of Code Section 1221, and will be long-term or short-term depending
on whether the Grantor Trust Certificate has been owned for the long-term
capital gain holding period (generally more than one year).
The Taxpayer Relief Act of 1997 (the "Act") reduces the maximum rates on
long-term capital gains recognized on capital assets held by individuals
taxpayers for more than eighteen months as of the date of disposition (and
would further reduce the maximum rates on such gains in the year 2001 and
thereafter for certain individual taxpayers who meet specified conditions).
The capital gains rate for capital assets held by individual taxpayers for
more than twelve months but less than eighteen months was not changed by the
Act ("mid-term rate"). The Act does not change the capital gain rates for
corporations. Prospective investors should consult their own tax advisors
concerning these tax law changes.
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from
the sale of a Grantor Trust Certificate by a bank or a thrift institution to
which such section applies will be treated as ordinary income or loss.
d. Non-U.S. Persons
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July
18, 1984, interest or OID paid by the person required to withhold tax under
Code Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as
defined below) or (ii) a Grantor Trust Certificateholder holding on behalf of
an owner that is not a U.S. Person will be subject to federal income tax,
collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued OID recognized by
the owner on the sale or exchange of such a Grantor Trust Certificate also
will be subject to federal income tax at the same rate. Generally, such
payments would not be subject to withholding to the extent that a Grantor
Trust Certificate evidences ownership in Mortgage Assets issued after July
18, 1984, by natural persons if such Grantor Trust Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the Grantor Trust Certificateholder under penalties of perjury,
certifying that such Grantor Trust Certificateholder is not a U.S. Person and
providing the name and address of such Grantor Trust Certificateholder).
Additional restrictions apply to Mortgage Assets of where the mortgagor is
not a natural person in order to qualify for the exemption from withholding.
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation or a partnership organized in or under the laws
of the United States or any political subdivision thereof, an estate, the
income of which from sources outside the United States is includible in gross
income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States, or a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States trustees have
authority to control all substantial decisions of the trust.
e. Information Reporting and Backup Withholding
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that
such person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be
required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
f. New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
REMICs
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance
with certain conditions. Although a REMIC is not generally subject to
federal income tax (see, however "--Taxation of Owners of REMIC Residual
Certificates" and "--Prohibited Transactions" below), if a Trust Fund with
respect to which a REMIC election is made fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, including the implementation of restrictions on the purchase and
transfer of the residual interests in a REMIC as described below under
"Taxation of Owners of REMIC Residual Certificates," the Code provides that a
Trust Fund will not be treated as a REMIC for such year and thereafter. In
that event, such entity may be taxable as a separate corporation, and the
related Certificates (the "REMIC Certificates") may not be accorded the
status or given the tax treatment described below. While the Code authorizes
the Treasury Department to issue regulations providing relief in the event of
an inadvertent termination of the status of a trust fund as a REMIC, no such
regulations have been issued. Any such relief, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion
of the REMIC's income for the period in which the requirements for such
status are not satisfied. With respect to each Trust Fund that elects REMIC
status, Brown & Wood LLP will deliver its opinion generally to the effect
that, under then existing law and assuming compliance with all provisions of
the related Pooling and Servicing Agreement, such Trust Fund will qualify as
a REMIC, and the related Certificates will be considered to be regular
interests ("REMIC Regular Certificates") or a sole class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related
Prospectus Supplement for each Series of Certificates will indicate whether
the Trust Fund will make a REMIC election and whether a class of Certificates
will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) such Certificates held by a thrift institution
taxed as a "domestic building and loan association" will constitute assets
described in Code Section 7701(a)(19)(C); (ii) such Certificates held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A); and (iii) interest on such Certificates
held by a real estate investment trust will be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B). Under Code Section 7701(a)(19)(C)(v), "loans secured
by an interest in real property" include loans secured by mobile homes not
used on a transient basis. The Treasury regulations under Code Section 856
state that the local law definitions are not controlling in determining the
meaning of the term "real property" for purposes of Section 856, and the IRS
has ruled that obligations secured by permanently installed mobile home units
qualify as "real estate assets" under this provision. If less than 95% of
the REMIC's assets are assets qualifying under any of the foregoing Code
sections, the Certificates will be qualifying assets only to the extent that
the REMIC's assets are qualifying assets. In addition, payments on Mortgage
Assets held pending distribution on the REMIC Certificates will be considered
to be real estate assets for purposes of Code Section 856(c). The Small
Business Job Protection Act of 1996, as part of the repeal of the bad debt
reserve method for thrift institutions, repealed the application of Code
Section 593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets may not be treated entirely as
assets described in the foregoing sections. See, in this regard, the
discussion of Buydown Loans contained in "--Non-REMIC Certificates--Single
Class of Grantor Trust Certificates" above. REMIC Certificates held by a
real estate investment trust will not constitute "Government Securities"
within the meaning of Code Section 856(c)(4)(A), and REMIC Certificates held
by a regulated investment company will not constitute "Government Securities"
within the meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held
b y certain financial institutions will constitute "evidences of
indebtedness" within the meaning of Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally
secured by an interest in real property and that is transferred to the REMIC
within a prescribed time period in exchange for regular or residual interests
in the REMIC.
Tiered REMIC Structures. For certain Series of Certificates, two
separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of any such
Series of Certificates, Brown & Wood LLP, counsel to the Depositor, will
deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Agreement, the Master REMIC as well as any
Subsidiary REMIC will each qualify as a REMIC, and the REMIC Certificates
issued by the Master REMIC and the Subsidiary REMIC, respectively, will be
considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
provisions.
Only REMIC Certificates, other than the residual interest in the
Subsidiary REMIC, issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code; (ii)
"loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code; and (iii) whether the income on such Certificates is interest
described in Section 856(c)(3)(B) of the Code.
a. Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC
or its assets. Moreover, holders of REMIC Regular Certificates that
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Original Issue Discount and Premium. The REMIC Regular Certificates may
be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular
Certificate and its "issue price." Holders of any class of Certificates
issued with OID will be required to include such OID in gross income for
federal income tax purposes as it accrues, in accordance with a constant
interest method based on the compounding of interest as it accrues rather
than in accordance with receipt of the interest payments. The following
discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). Holders of REMIC
Regular Certificates (the "REMIC Regular Certificateholders") should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the REMIC Regular
Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated
reinvestment rate, if any, relating to the REMIC Regular Certificates and
prescribe a method for adjusting the amount and rate of accrual of such
discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in
the manner prescribed by regulations, which regulations have not yet been
issued. The Legislative History provides, however, that Congress intended
the regulations to require that the Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such
REMIC Regular Certificates. The Prospectus Supplement for each Series of
REMIC Regular Certificates will specify the Prepayment Assumption to be used
for the purpose of determining the amount and rate of accrual of OID. No
representation is made that the REMIC Regular Certificates will prepay at the
Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of
its "stated redemption price at maturity" over its "issue price." The issue
price of a REMIC Regular Certificate is the first price at which a
substantial amount of REMIC Regular Certificates of that class are first sold
to the public (excluding bond houses, brokers, underwriters or wholesalers).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be treated
as the fair market value of such class on the Closing Date. The issue price
of a REMIC Regular Certificate also includes the amount paid by an initial
Certificateholder for accrued interest that relates to a period prior to the
issue date of the REMIC Regular Certificate. The stated redemption price at
maturity of a REMIC Regular Certificate includes the original principal
amount of the REMIC Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Qualified stated interest generally means interest payable at a
single fixed rate or qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately
takes into account the length of the interval between payments.
Distributions of interest on REMIC Regular Certificates with respect to which
Deferred Interest will accrue will not constitute qualified stated interest
payments, and the stated redemption price at maturity of such REMIC Regular
Certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during
the first period is treated as the amount by which the stated redemption
price at maturity of the Certificate exceeds its issue price for purposes of
the de minimis rule described below. The OID Regulations suggest that all
interest on a long first period REMIC Regular Certificate that is issued with
non-de minimis OID, as determined under the foregoing rule, will be treated
as OID. Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to
the Certificates stated redemption price at maturity. REMIC Regular
Certificateholders should consult their own tax advisors to determine the
issue price and stated redemption price at maturity of a REMIC Regular
Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the REMIC Regular Certificate
and the denominator of which is the stated redemption price at maturity of
the REMIC Regular Certificate. Although currently unclear, it appears that
the schedule of such distributions should be determined in accordance with
the Prepayment Assumption. The Prepayment Assumption with respect to a
Series of REMIC Regular Certificates will be set forth in the related
Prospectus Supplement. Holders generally must report de minimis OID pro rata
as principal payments are received, and such income will be capital gain if
the REMIC Regular Certificate is held as a capital asset. However, accrual
method holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances
(the "Super-Premium Certificates"). The income tax treatment of such REMIC
Regular Certificates is not entirely certain. For information reporting
purposes, the Trust Fund intends to take the position that the stated
redemption price at maturity of such REMIC Regular Certificates is the sum of
all payments to be made on such REMIC Regular Certificates determined under
the Prepayment Assumption, with the result that such REMIC Regular
Certificates would be issued with OID. The calculation of income in this
manner could result in negative original issue discount (which delays future
accruals of OID rather than being immediately deductible) when prepayments on
the Mortgage Assets exceed those estimated under the Prepayment Assumption.
The IRS might contend, however, that certain proposed contingent payment
rules contained in regulations issued on December 15, 1994, with respect to
original issue discount, should apply to such Certificates. Although such
rules are not applicable to instruments governed by Code Section 1272(a)(6),
they represent the only guidance regarding the current views of the IRS with
respect to contingent payment instruments. In the alternative, the IRS could
assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to
be issued at a premium. If such a position were to prevail, the rules
described below under "--Taxation of Owners of REMIC Regular Certificates--
Premium" would apply. It is unclear when a loss may be claimed for any
unrecovered basis for a Super-Premium Certificate. It is possible that a
holder of a Super-Premium Certificate may only claim a loss when its
remaining basis exceeds the maximum amount of future payments, assuming no
further prepayments or when the final payment is received with respect to
such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular
Certificate generally should not be treated as a Super-Premium Certificate
and the rules described below under "--REMIC Regular Certificates--Premium"
should apply. However, it is possible that holders of REMIC Regular
Certificates issued at a premium, even if the premium is less than 25% of
such Certificate's actual principal balance, will be required to amortize the
premium under an original issue discount method or contingent interest method
even though no election under Code Section 171 is made to amortize such
premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on
a REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a REMIC Regular
Certificate, a calculation will be made of the portion of the OID that
accrues during each successive period ("an accrual period") that ends on the
day in the calendar year corresponding to a Distribution Date (or if
Distribution Dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last
day of the immediately preceding month) and begins on the day after the end
of the immediately preceding accrual period (or on the issue date in the case
of the first accrual period). This will be done, in the case of each full
accrual period, by (i) adding (a) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to
maturity of the REMIC Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and (b) any payments included in
the stated redemption price at maturity received during such accrual period,
and (ii) subtracting from that total the adjusted issue price of the REMIC
Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first
accrual period is its issue price; the adjusted issue price of a REMIC
Regular Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest
made at the end of or during that accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease (but never below zero) in a given accrual
period to reflect the fact that prepayments are occurring faster or slower
than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable
method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular
Certificate. In computing the daily portions of OID for such a purchaser (as
well as an initial purchaser that purchases at a price higher than the
adjusted issue price but less than the stated redemption price at maturity),
however, the daily portion is reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by
which the price paid by such holder for that REMIC Regular Certificate
exceeds the following amount: (a) the sum of the issue price plus the
aggregate amount of OID that would have been includible in the gross income
of an original REMIC Regular Certificateholder (who purchased the REMIC
Regular Certificate at its issue price), less (b) any prior payments included
in the stated redemption price at maturity, and the denominator of which is
the sum of the daily portions for that REMIC Regular Certificate for all days
beginning on the date after the purchase date and ending on the maturity date
computed under the Prepayment Assumption. A holder who pays an acquisition
premium instead may elect to accrue OID by treating the purchase as a
purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a
variable rate will constitute qualified stated interest and not contingent
interest if, generally, (i) such interest is unconditionally payable at least
annually, (ii) the issue price of the debt instrument does not exceed the
total noncontingent principal payments and (iii) interest is based on a
"qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates," one "qualified inverse
floating rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers interest
payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under "--
Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on
a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest. In such case, the
weighted average rate used to compute the initial pass-through rate on the
REMIC Regular Certificates will be deemed to be the index in effect through
the life of the REMIC Regular Certificates. It is possible, however, that
the IRS may treat some or all of the interest on REMIC Regular Certificates
with a weighted average rate as taxable under the rules relating to
obligations providing for contingent payments. Such treatment may effect the
timing of income accruals on such REMIC Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such Certificateholder acquires during the year
of the election or thereafter. Similarly, a Certificateholder that makes
this election for a Certificate that is acquired at a premium will be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns
or acquires. See "-- REMIC Regular Certificates--Premium" herein. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Certificate is irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal
amount or, in the case of a REMIC Regular Certificate with OID, the adjusted
issue price (determined for this purpose as if the purchaser had purchased
such REMIC Regular Certificate from an original holder) over (ii) the price
for such REMIC Regular Certificate paid by the purchaser. A
Certificateholder that purchases a REMIC Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
amounts included in such certificate's stated redemption price at maturity.
In particular, under Section 1276 of the Code such a holder generally will be
required to allocate each such distribution first to accrued market discount
not previously included in income, and to recognize ordinary income to that
extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the
first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular
Certificate is less than 0.25% of such REMIC Regular Certificate's stated
redemption price at maturity multiplied by such REMIC Regular Certificate's
weighted average maturity remaining after the date of purchase. If market
discount on a REMIC Regular Certificate is considered to be zero under this
rule, the actual amount of market discount must be allocated to the remaining
principal payments on the REMIC Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment
is made. Treasury regulations implementing the market discount rules have
not yet been issued; therefore, investors should consult their own tax
advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis
of a constant interest method rate or according to one of the following
methods. For REMIC Regular Certificates issued with OID, the amount of
market discount that accrues during a period is equal to the product of (i)
the total remaining market discount and (ii) a fraction, the numerator of
which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the period. For REMIC Regular
Certificates issued without OID, the amount of market discount that accrues
during a period is equal to the product of (a) the total remaining market
discount and (b) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning of the
period. For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the REMIC Regular Certificates)
that provide for payments that may be accelerated by reason of prepayments of
other obligations securing such instruments, the same Prepayment Assumption
applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Certificate purchased with market discount. For these
purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during
such taxable year and is, in general, allowed as a deduction not later than
the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will
be considered to have purchased the REMIC Regular Certificate at a premium
and may elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that
such Certificateholder acquires during the year of the election or
thereafter. It is not clear whether the Prepayment Assumption would be taken
into account in determining the life of the REMIC Regular Certificate for
this purpose. However, the Legislative History states that the same rules
that apply to accrual of market discount (which rules require use of a
Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have OID)
will also apply in amortizing bond premium under Code Section 171. The Code
provides that amortizable bond premium will be allocated among the interest
payments on such REMIC Regular Certificates and will be applied as an offset
against such interest payment. On June 27, 1996, the IRS published in the
Federal Register proposed regulations on the amortization of bond premium.
The foregoing discussion is based in part on such proposed regulations. The
proposed regulations generally would be effective for Certificates acquired
on or after the date 60 days after the date they are published as final
regulations in the Federal Register. Certificateholders should consult their
tax advisors regarding the possibility of making an election to amortize any
such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such
Certificates prior to the time distributions of cash with respect to such
Deferred Interest are made. It is unclear, under the OID Regulations,
whether any of the interest on such Certificates will constitute qualified
stated interest or whether all or a portion of the interest payable on such
Certificates must be included in the stated redemption price at maturity of
the Certificates and accounted for as OID (which could accelerate such
inclusion). Interest on REMIC Regular Certificates must in any event be
accounted for under an accrual method by the holders of such Certificates
and, therefore, applying the latter analysis may result only in a slight
difference in the timing of the inclusion in income of interest on such REMIC
Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates
may contain one or more classes of Subordinated Certificates, and in the
event there are defaults or delinquencies on the Mortgage Assets, amounts
that would otherwise be distributed on the Subordinated Certificates may
instead be distributed on the Senior Certificates. Subordinated
Certificateholders nevertheless will be required to report income with
respect to such Certificates under an accrual method without giving effect to
delays and reductions in distributions on such Subordinated Certificates
attributable to defaults and delinquencies on the Mortgage Assets, except to
the extent that it can be established that such amounts are uncollectible.
As a result, the amount of income reported by a Subordinated
Certificateholder in any period could significantly exceed the amount of cash
distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to
the extent that the aggregate amount of distributions on the Subordinated
Certificate is reduced as a result of defaults and delinquencies on the
Mortgage Assets. Timing and characterization of such losses is discussed in
"--REMIC Regular Certificates--Treatment of Realized Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange,
redemption, or retirement and the seller's adjusted basis in the REMIC
Regular Certificate. Such adjusted basis generally will equal the cost of
the REMIC Regular Certificate to the seller, increased by any OID and market
discount included in the seller's gross income with respect to the REMIC
Regular Certificate, and reduced (but not below zero) by payments included in
the stated redemption price at maturity previously received by the seller and
by any amortized premium. Similarly, a holder who receives a payment that is
part of the stated redemption price at maturity of a REMIC Regular
Certificate will recognize gain equal to the excess, if any, of the amount of
the payment over the holder's adjusted basis in the REMIC Regular
Certificate. A REMIC Regular Certificateholder who receives a final payment
that is less than the holder's adjusted basis in the REMIC Regular
Certificate will generally recognize a loss. Except as provided in the
following paragraph and as provided under "--Market Discount" above, any such
gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income to
the extent that such gain does not exceed the excess, if any, of (i) the
amount that would have been includible in such holder's income with respect
to the REMIC Regular Certificate had income accrued thereon at a rate equal
to 110% of the AFR as defined in Code Section 1274(d) determined as of the
date of purchase of such REMIC Regular Certificate, over (ii) the amount
actually includible in such holder's income.
The Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
REMIC Regular Certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method
would require information relating to the holder's purchase price which the
REMIC may not have, it appears that the information reports will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of
interest based on a period that corresponds to the interval between
Distribution Dates but that ends prior to each such Distribution Date. The
period between the Closing Date for Payment Lag Certificates and their first
Distribution Date may or may not exceed such interval. Purchasers of Payment
Lag Certificates for which the period between the Closing Date and the first
Distribution Date does not exceed such interval could pay upon purchase of
the REMIC Regular Certificates accrued interest in excess of the accrued
interest that would be paid if the interest paid on the Distribution Date
were interest accrued from Distribution Date to Distribution Date. If a
portion of the initial purchase price of a REMIC Regular Certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest") and the REMIC Regular Certificate provides for a payment
of stated interest on the first payment date (and the first payment date is
within one year of the issue date) that equals or exceeds the amount of the
pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of pre-
issuance accrued interest, rather than as an amount payable on the REMIC
Regular Certificate. However, it is unclear under this method how the OID
Regulations treat interest on Payment Lag Certificates. Therefore, in the
case of a Payment Lag Certificate, the Trust Fund intends to include accrued
interest in the issue price and report interest payments made on the first
Distribution Date as interest to the extent such payments represent interest
for the number of days that the Certificateholder has held such Payment Lag
Certificate during the first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a
portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to those REMIC Regular
Certificateholders that are "pass-through interest holders."
Certificateholders that are pass-through interest holders should consult
their own tax advisors about the impact of these rules on an investment in
the REMIC Regular Certificates. See "Pass-Through of Non-Interest Expenses
of the REMIC" under "Taxation of Owners of REMIC Residual Certificates"
below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during
the taxable year on account of any such Certificates becoming wholly or
partially worthless, and that, in general, holders of Certificates that are
not corporations should be allowed to deduct as a short-term capital loss any
loss sustained during the taxable year on account of any such Certificates
becoming wholly worthless. Although the matter is not entirely clear, non-
corporate holders of Certificates may be allowed a bad debt deduction at such
time that the principal balance of any such Certificate is reduced to reflect
realized losses resulting from any liquidated Mortgage Assets. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect realized losses only after
all Mortgage Assets remaining in the related Trust Fund have been liquidated
or the Certificates of the related Series have been otherwise retired.
Potential investors and holders of the Certificates are urged to consult
their own tax advisors regarding the appropriate timing, amount and character
of any loss sustained with respect to such Certificates, including any loss
resulting from the failure to recover previously accrued interest or discount
income. Special loss rules are applicable to banks and thrift institutions,
including rules regarding reserves for bad debts. Such taxpayers are advised
to consult their tax advisors regarding the treatment of losses on
Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person and is not engaged
in a trade or business within the United States will not be subject to
federal withholding tax if (i) such REMIC Regular Certificateholder does not
actually or constructively own 10 percent or more of the combined voting
power of all classes of equity in the Issuer; (ii) such REMIC Regular
Certificateholder is not a controlled foreign corporation (within the meaning
of Code Section 957) related to the Issuer; and (iii) such REMIC Regular
Certificateholder complies with certain identification requirements
(including delivery of a statement, signed by the REMIC Regular
Certificateholder under penalties of perjury, certifying that such REMIC
Regular Certificateholder is a foreign person and providing the name and
address of such REMIC Regular Certificateholder). If a REMIC Regular
Certificateholder is not exempt from withholding, distributions of interest
to such holder, including distributions in respect of accrued OID, may be
subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate
of a non-resident alien individual and will not be subject to United States
estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates,
and holders of REMIC Residual Certificates (the "REMIC Residual
Certificateholder") and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates without consulting their
tax advisors as to the possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at
any time during such year, such information as may be deemed necessary or
desirable to assist REMIC Regular Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
REMIC Regular Certificates on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that
such person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be
required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged
to consult their own advisors regarding the New Regulations.
b. Taxation of Owners of REMIC Residual Certificates
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except
with respect to income from prohibited transactions and certain other
transactions. See "--Prohibited Transactions and Other Taxes" below.
Instead, each original holder of a REMIC Residual Certificate will report on
its federal income tax return, as ordinary income, its share of the taxable
income of the REMIC for each day during the taxable year on which such holder
owns any REMIC Residual Certificates. The taxable income of the REMIC for
each day will be determined by allocating the taxable income of the REMIC for
each calendar quarter ratably to each day in the quarter. Such a holder's
share of the taxable income of the REMIC for each day will be based on the
portion of the outstanding REMIC Residual Certificates that such holder owns
on that day. The taxable income of the REMIC will be determined under an
accrual method and will be taxable to the holders of REMIC Residual
Certificates without regard to the timing or amounts of cash distributions by
the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to the
limitations on the deductibility of "passive losses." As residual interests,
the REMIC Residual Certificates will be subject to tax rules, described
below, that differ from those that would apply if the REMIC Residual
Certificates were treated for federal income tax purposes as direct ownership
interests in the Certificates or as debt instruments issued by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such
a mismatching of income and cash distributions (that is, "phantom income").
This mismatching may be caused by the use of certain required tax accounting
methods by the REMIC, variations in the prepayment rate of the underlying
Mortgage Assets and certain other factors. Depending upon the structure of a
particular transaction, the aforementioned factors may significantly reduce
the after-tax yield of a REMIC Residual Certificate to a REMIC Residual
Certificateholder. Investors should consult their own tax advisors
concerning the federal income tax treatment of a REMIC Residual Certificate
and the impact of such tax treatment on the after-tax yield of a REMIC
Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would
equal the amounts that would have been reported for the same days by an
original REMIC Residual Certificateholder, as described above. The
Legislative History indicates that certain adjustments may be appropriate to
reduce (or increase) the income of a subsequent holder of a REMIC Residual
Certificate that purchased such REMIC Residual Certificate at a price greater
than (or less than) the adjusted basis such REMIC Residual Certificate would
have in the hands of an original REMIC Residual Certificateholder. See
"--Sale or Exchange of REMIC Residual Certificates" below. It is not clear,
however, whether such adjustments will in fact be permitted or required and,
if so, how they would be made. The REMIC Regulations do not provide for any
such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed
to the REMIC for interest and OID on the REMIC Regular Certificates and,
except as described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that
(i) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will
be deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC's gross income includes interest, original issue discount
income, and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income on
reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the REMIC Regular
Certificates. Note that the timing of cancellation of indebtedness income
recognized by REMIC Residual Certificateholders resulting from defaults and
delinquencies on Mortgage Assets may differ from the time of the actual loss
on the Mortgage Asset. The REMIC's deductions include interest and original
issue discount expense on the REMIC Regular Certificates, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC and realized
losses on the Mortgage Loans. The requirement that REMIC Residual
Certificateholders report their pro rata share of taxable income or net loss
of the REMIC will continue until there are no Certificates of any class of
the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue
prices of the REMIC Regular Certificates and the REMIC Residual Certificates
(or, if a class of Certificates is not sold initially, its fair market
value). Such aggregate basis will be allocated among the Mortgage Assets and
other assets of the REMIC in proportion to their respective fair market
value. A Mortgage Asset will be deemed to have been acquired with discount
or premium to the extent that the REMIC's basis therein is less than or
greater than its principal balance, respectively. Any such discount (whether
market discount or OID) will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under
a method similar to the method described above for accruing OID on the REMIC
Regular Certificates. The REMIC expects to elect under Code Section 171 to
amortize any premium on the Mortgage Assets. Premium on any Mortgage Asset
to which such election applies would be amortized under a constant yield
method. It is not clear whether the yield of a Mortgage Asset would be
calculated for this purpose based on scheduled payments or taking account of
the Prepayment Assumption. Additionally, such an election would not apply to
the yield with respect to any underlying mortgage loan originated on or
before September 27, 1985. Instead, premium with respect to such a mortgage
loan would be allocated among the principal payments thereon and would be
deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with
respect to REMIC Regular Certificates except that the 0.25% per annum de
minimis rule and adjustments for subsequent holders described therein will
not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC Residual
Certificates will be added to the issue price of the REMIC Regular
Certificates in determining the REMIC's initial basis in its assets. See "--
Sale or Exchange of REMIC Residual Certificates" below. For a discussion of
possible adjustments to income of a subsequent holder of a REMIC Residual
Certificate to reflect any difference between the actual cost of such REMIC
Residual Certificate to such holder and the adjusted basis such REMIC
Residual Certificate would have in the hands of an original REMIC Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the REMIC
Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net
loss would be allocated among the REMIC Residual Certificateholders in the
same manner as the REMIC's taxable income. The net loss allocable to any
REMIC Residual Certificate will not be deductible by the holder to the extent
that such net loss exceeds such holder's adjusted basis in such REMIC
Residual Certificate. Any net loss that is not currently deductible by
reason of this limitation may only be used by such REMIC Residual
Certificateholder to offset its share of the REMIC's taxable income in future
periods (but not otherwise). The ability of REMIC Residual
Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS recently finalized regulations (the
"Mark-to-Market Regulations") which provide that a REMIC Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-
Market Regulations replaced the temporary regulations which allowed a
Residual Certificate to be marked to market provided that it was not a
"negative value" residual interest and did not have the same economic effect
as a "negative value" residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders
of the REMIC Residual Certificates. In the case of a single class REMIC,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In general terms, a single class REMIC is one
that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC
will be allocated to holders of the related REMIC Residual Certificates in
their entirety and not to holders of the related REMIC Regular Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest
in a REMIC Regular Certificate or a REMIC Residual Certificate directly or
through a pass-through interest holder that is required to pass miscellaneous
itemized deductions through to its owners or beneficiaries (e.g. a
partnership, an S corporation or a grantor trust), such expenses will be
deductible under Code Section 67 only to the extent that such expenses, plus
other "miscellaneous itemized deductions" of the individual, exceed 2% of
such individual's adjusted gross income. In addition, Code Section 68
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a certain amount (the
"Applicable Amount") will be reduced by the lesser of (i) 3% of the excess of
the individual's adjusted gross income over the Applicable Amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable
year. The amount of additional taxable income recognized by REMIC Residual
Certificateholders who are subject to the limitations of either Code Section
67 or Code Section 68 may be substantial. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder"
generally refers to individuals, entities taxed as individuals and certain
pass-through entities, but does not include real estate investment trusts.
REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any
calendar quarter will be subject to federal income tax in all events. Thus,
for example, an excess inclusion (i) may not, except as described below, be
offset by any unrelated losses, deductions or loss carryovers of a REMIC
Residual Certificateholder; (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the REMIC Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income (see "--Tax-Exempt
Investors" below); and (iii) is not eligible for any reduction in the rate of
withholding tax in the case of a REMIC Residual Certificateholder that is a
foreign investor. See "--Non-U.S. Persons" below. The exception for thrift
institutions is available only to the institution holding the REMIC Residual
Certificate and not to any affiliate of the institution, unless the affiliate
is a subsidiary all the stock of which, and substantially all the
indebtedness of which, is held by the institution, and which is organized and
operated exclusively in connection with the organization and operation of one
or more REMICs.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar
quarter is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
all days during the calendar quarter on which the REMIC Residual
Certificateholder holds such REMIC Residual Certificate. For this purpose,
the daily accruals with respect to a REMIC Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of
the REMIC Residual Certificate at the beginning of the calendar quarter and
120 percent of the "Federal long-term rate" in effect at the time the REMIC
Residual Certificate is issued. For this purpose, the "adjusted issue price"
of a REMIC Residual Certificate at the beginning of any calendar quarter
equals the issue price of the REMIC Residual Certificate, increased by the
amount of daily accruals for all prior quarters, and decreased (but not below
zero) by the aggregate amount of payments made on the REMIC Residual
Certificate before the beginning of such quarter. The "federal long-term
rate" is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section
857(b)(2), excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder. Regulated investment companies, common trust
funds and certain cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, the amount of any alternative minimum tax net operating
loss deductions must be computed without regard to any excess inclusions.
Third, a residual holder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. The effect of this last
statutory amendment is to prevent the use of nonrefundable tax credits to
reduce a taxpayer's income tax below its tentative minimum tax computed only
on excess inclusions. These rules are effective for tax years beginning
after December 31, 1986, unless a residual holder elects to have such rules
apply only to tax years beginning after August 20, 1996.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual
Certificateholder's adjusted basis in such REMIC Residual Certificate. To
the extent a distribution exceeds such adjusted basis, it will be treated as
gain from the sale of the REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or
exchange and its adjusted basis in the REMIC Residual Certificate (except
that the recognition of loss may be limited under the "wash sale" rules
described below). A holder's adjusted basis in a REMIC Residual Certificate
generally equals the cost of such REMIC Residual Certificate to such REMIC
Residual Certificateholder, increased by the taxable income of the REMIC that
was included in the income of such REMIC Residual Certificateholder with
respect to such REMIC Residual Certificate, and decreased (but not below
zero) by the net losses that have been allowed as deductions to such REMIC
Residual Certificateholder with respect to such REMIC Residual Certificate
and by the distributions received thereon by such REMIC Residual
Certificateholder. In general, any such gain or loss will be capital gain or
loss provided the REMIC Residual Certificate is held as a capital asset.
However, REMIC Residual Certificates will be "evidences of indebtedness"
within the meaning of Code Section 582(c)(1), so that gain or loss recognized
from sale of a REMIC Residual Certificate by a bank or thrift institution to
which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool"
(as defined in Code Section 7701(i)) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Code Section 1091. In that event, any
loss realized by the REMIC Residual Certificateholder on the sale will not be
deductible, but, instead, will increase such REMIC Residual
Certificateholder's adjusted basis in the newly acquired asset.
c. Prohibited Transactions and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Asset, the receipt of income from a
source other than a Mortgage Asset or certain other permitted investments,
the receipt of compensation for services, or gain from the disposition of an
asset purchased with the payments on the Mortgage Assets for temporary
investment pending distribution on the Certificates. It is not anticipated
that the Trust Fund for any Series of Certificates will engage in any
prohibited transactions in which it would recognize a material amount of net
income.
In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day
on which such Trust Fund issues all of its interests could result in the
imposition of a tax on the Trust Fund equal to 100% of the value of the
contributed property (the "Contributions Tax"). No Trust Fund for any Series
of Certificates will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined
by reference to the rules applicable to real estate investment trusts. "Net
income from foreclosure property" generally means income from foreclosure
property other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax
that may be imposed on a REMIC relating to any Series of Certificates arises
out of or results from (i) a breach of the related Master Servicer's,
Trustee's or Asset Seller's obligations, as the case may be, under the
related Agreement for such Series, such tax will be borne by such Master
Servicer, Trustee or Asset Seller, as the case may be, out of its own funds
or (ii) the Asset Seller's obligation to repurchase a Mortgage Loan, such tax
will be borne by the Asset Seller. In the event that such Master Servicer,
Trustee or Asset Seller, as the case may be, fails to pay or is not required
to pay any such tax as provided above, such tax will be payable out of the
Trust Fund for such Series and will result in a reduction in amounts
available to be distributed to the Certificateholders of such Series.
d. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC will not be subject to any Prohibited
Transaction Tax, provided that the REMIC credits or distributes in
liquidation all of the sale proceeds plus its cash (other than the amounts
retained to meet claims) to holders of Regular and REMIC Residual
Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis
in the REMIC Residual Certificate exceeds the amount of cash distributed to
such REMIC Residual Certificateholder in final liquidation of its interest,
then it would appear that the REMIC Residual Certificateholder would be
entitled to a loss equal to the amount of such excess. It is unclear whether
such a loss, if allowed, will be a capital loss or an ordinary loss.
e. Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will
be furnished quarterly to each REMIC Residual Certificateholder who held a
REMIC Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC level. The REMIC does
not intend to register as a tax shelter pursuant to Code Section 6111 because
it is not anticipated that the REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to
furnish the REMIC, in a manner to be provided in Treasury regulations, with
the name and address of such person and other information.
f. Tax-Exempt Investors
Any REMIC Residual Certificateholder that is a pension fund or other
entity that is subject to federal income taxation only on its "unrelated
business taxable income" within the meaning of Code Section 512 will be
subject to such tax on that portion of the distributions received on a REMIC
Residual Certificate that is considered an excess inclusion. See "--Taxation
of Owners of REMIC Residual Certificates--Excess Inclusions" above.
g. Residual Certificate Payments--Non-U.S. Persons
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Amounts distributed to holders
of REMIC Residual Certificates should qualify as "portfolio interest,"
subject to the conditions described in "--Taxation of Owners of REMIC Regular
Certificates" above, but only to the extent that the underlying mortgage
loans were originated after July 18, 1984. Furthermore, the rate of
withholding on any income on a REMIC Residual Certificate that is excess
inclusion income will not be subject to reduction under any applicable tax
treaties. See "--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or
otherwise distributed (or when the REMIC Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have OID. The Code, however, grants the Treasury Department
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance
of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of REMIC Residual Certificates
- --Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding will not apply. Instead, the amounts paid to
such non-U.S. Person will be subject to U.S. federal income taxation at
regular graduated rates. For special restrictions on the transfer of REMIC
Residual Certificates, see "--Tax-Related Restrictions on Transfers of REMIC
Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their
tax advisors as to the possible adverse tax consequences of such acquisition.
Tax-Related Restrictions on Transfers of REMIC Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests
in such entity are not held by "disqualified organizations" (as defined
below). Further, a tax is imposed on the transfer of a residual interest in
a REMIC to a "disqualified organization." The amount of the tax equals the
product of (A) an amount (as determined under the REMIC Regulations) equal to
the present value of the total anticipated "excess inclusions" with respect
to such interest for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The tax is imposed on
the transferor unless the transfer is through an agent (including a broker or
other middleman) for a disqualified organization, in which event the tax is
imposed on the agent. The person otherwise liable for the tax shall be
relieved of liability for the tax if the transferee furnished to such person
an affidavit that the transferee is not a disqualified organization and, at
the time of the transfer, such person does not have actual knowledge that the
affidavit is false. A "disqualified organization" means (A) the United
States, any State, possession or political subdivision thereof, any foreign
government, any international organization or any agency or instrumentality
of any of the foregoing (provided that such term does not include an
instrumentality if all its activities are subject to tax and, except for
FHLMC, a majority of its board of directors is not selected by any such
governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of
(A) the amount of excess inclusions for the taxable year allocable to the
interest held by the disqualified organization and (B) the highest marginal
federal income tax rate applicable to corporations. The pass-through entity
otherwise liable for the tax, for any period during which the disqualified
organization is the record holder of an interest in such entity, will be
relieved of liability for the tax if such record holder furnishes to such
entity an affidavit that such record holder is not a disqualified
organization and, for such period, the pass-through entity does not have
actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means (i) a regulated investment company, real estate
investment trust or common trust fund, (ii) a partnership, trust or estate
and (iii) certain cooperatives. Except as may be provided in Treasury
regulations not yet issued, any person holding an interest in a pass-through
entity as a nominee for another will, with respect to such interest, be
treated as a pass-through entity. The tax on pass-through entities is
generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common
trust funds and publicly-traded partnerships the tax shall apply only to
taxable years of such entities beginning after December 31, 1988. Under
proposed legislation, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the
express written consent of the Master Servicer. The Master Servicer will
grant such consent to a proposed transfer only if it receives the following:
(i) an affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by
the proposed transferee to the effect that the proposed transferee agrees to
be bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic
REMIC Residual Certificate to a "U.S. Person," as defined above, unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A Noneconomic REMIC Residual Certificate is
any REMIC Residual Certificate (including a REMIC Residual Certificate with a
positive value at issuance) unless, at the time of transfer, taking into
account the Prepayment Assumption and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents, (i) the present value of the expected future distributions on the
REMIC Residual Certificate at least equals the product of the present value
of the anticipated excess inclusions and the highest corporate income tax
rate in effect for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC. A transferor is presumed not to
have such knowledge if (i) the transferor conducted a reasonable
investigation of the transferee and (ii) the transferee acknowledges to the
transferor that the residual interest may generate tax liabilities in excess
of the cash flow and the transferee represents that it intends to pay such
taxes associated with the residual interest as they become due. If a
transfer of a Noneconomic REMIC Residual Certificate is disregarded, the
transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion
of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule
appears to apply to a transferee who is not a U.S. Person unless such
transferee's income in respect of the REMIC Residual Certificate is
effectively connected with the conduct of a United Sates trade or business.
A REMIC Residual Certificate is deemed to have a tax avoidance potential
unless, at the time of transfer, the transferor reasonably expect that the
REMIC will distribute to the transferee amounts that will equal at least 30
percent of each excess inclusion, and that such amounts will be distributed
at or after the time the excess inclusion accrues and not later than the end
of the calendar year following the year of accrual. If the non-U.S. Person
transfers the REMIC Residual Certificate to a U.S. Person, the transfer will
be disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax
on accrued excess inclusions. The provisions in the REMIC Regulations
regarding transfers of REMIC Residual Certificates that have tax avoidance
potential to foreign persons are effective for all transfers after June 30,
1992. The Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with
a duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in
any purported transferee. Investors in REMIC Residual Certificates are
advised to consult their own tax advisors with respect to transfers of the
REMIC Residual Certificates and, in addition, pass-through entities are
advised to consult their own tax advisors with respect to any tax which may
be imposed on a pass-through entity.
Tax Characterization of a Trust Fund as a Partnership
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not
be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will
be complied with, and on counsel's conclusions that (1) the Trust Fund will
not have certain characteristics necessary for a business trust to be
classified as an association taxable as a corporation and (2) the nature of
the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its
taxable income. The Trust Fund's taxable income would include all its
income, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments
on the Notes and distributions on the Certificates, and Certificateholders
could be liable for any such tax that is unpaid by the Trust Fund.
a. Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Special counsel to the Depositor will,
except as otherwise provided in the related Prospectus Supplement, advise the
Depositor that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, etc. The discussion below assumes that all payments on the Notes
are denominated in U.S. dollars. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 1/4% of their principal amount multiplied
by the number of full years included in their term), all within the meaning
of the OID regulations. If these conditions are not satisfied with respect
to any given series of Notes, additional tax considerations with respect to
such Notes will be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder
of a Note issued with a de minimis amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the Note. It
is believed that any prepayment premium paid as a result of a mandatory
redemption will be taxable as contingent interest when it becomes fixed and
unconditionally payable. A purchaser who buys a Note for more or less than
its principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except
for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income
tax and withholding tax, if the interest is not effectively connected with
the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust or the Depositor (including a holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Asset Seller is a "related person"
within the meaning of the Code and (ii) provides the Owner Trustee or other
person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note
is a foreign person and providing the foreign person's name and address. If
a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however,
the signed statement must be accompanied by a Form W-8 or substitute form
provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income
and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted
that one or more of the Notes did not represent debt for federal income tax
purposes, the Notes might be treated as equity interests in the Trust Fund.
If so treated, the Trust Fund would likely be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain tax-exempt
entities (including pension funds) would be "unrelated business taxable
income", income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual holders
might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
b. Tax Consequences to Holder of the Certificates
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state
income tax, franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the Trust
Fund, the partners of the partnership being the Certificateholders, and the
Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the
Trust Fund and the Master Servicer is not clear because there is no authority
on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Mortgage Loans (including appropriate adjustments for market discount,
OID and bond premium) and any gain upon collection or disposition of Mortgage
Loans. The Trust Fund's deductions will consist primarily of interest
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such
month, including interest accruing at the Pass-Through Rate for such month
and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the
Mortgage Loans that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; (iii) prepayment premium payable
to the Certificateholders for such month; and (iv) any other amounts of
income payable to the Certificateholders for such month. Such allocation
will be reduced by any amortization by the Trust Fund of premium on Mortgage
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust Fund will
be allocated to the Company. Based on the economic arrangement of the
parties, this approach for allocating Trust Fund income should be permissible
under applicable treasury regulations, although no assurance can be given
that the IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through
Rate plus the other items described above even though the Trust Fund might
not have sufficient cash to make current cash distributions of such amount.
Thus, cash basis holders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable
for taxes on Trust Fund income even if they have not received cash from the
Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to
them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual
in whole or in part and might result in such holder being taxed on an amount
of income that exceeds the amount of cash actually distributed to such holder
over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Mortgage Loan,
the Trust Fund might be required to incur additional expense but it is
believed that there would not be a material adverse effect on
Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Mortgage Loans may be greater
or less than the remaining principal balance of the Loans at the time of
purchase. If so, the Loan will have been acquired at a premium or discount,
as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan by Mortgage Loan basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated
above, a portion of such market discount income or premium deduction may be
allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged
within a 12-month period. Pursuant to final Treasury regulations issued May
8, 1997 under Section 708 of the Code, if such a termination occurs, the
Trust Fund (the "old partnership") would be deemed to contribute its assets
to a new partnership (the "new partnership") in exchange for interests in the
new partnership. Such interests would be deemed distributed to the partners
of the old partnership in liquidation thereof, which would not constitute a
sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the holder's share of the Notes and other liabilities of the Trust Fund. A
holder acquiring Certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Mortgage Loans would generally
be treated as ordinary income to the holder and would give rise to special
tax reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result, a
holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records,
as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-1 information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information return filed
by the Trust Fund or be subject to penalties unless the holder notifies the
IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of
the Exchange Act is not required to furnish any such information statement to
the Trust Fund. The information referred to above for any calendar year must
be furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
Fund with the information described above may be subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the
income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or business in
the United States for such purposes, the Trust Fund will withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust Fund to change
its withholding procedures. In determining a holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be
entitled to file with the IRS a claim for refund with respect to taxes
withheld by the Trust Fund taking the position that no taxes were due because
the Trust Fund was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a foreign
person generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Trust Fund. If
these interest payments are properly characterized as guaranteed payments,
then the interest will not be considered "portfolio interest." As a result,
Certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a foreign holder would only
be enticed to claim a refund for that portion of the taxes in excess of the
taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged
to consult their own advisors regarding the New Regulations.
Tax Treatment of Certificates as Debt for Tax Purposes
a. Characterization of the Certificates as Indebtedness
If the related Prospectus Supplement indicates that the Certificates
will be treated as indebtedness for federal income tax purposes, then based
on the application of existing law to the facts as set forth in the Trust
Agreement and other relevant documents and assuming compliance with the terms
of the Trust Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Depositor ("Tax
Counsel"), will deliver its opinion that the Certificates will be treated as
debt instruments for federal income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related
Trust Agreement their intent that, for applicable tax purposes, the
Certificates will be indebtedness secured by the related Assets. The
Depositor and the Certificateholders, by accepting the Certificates, and each
Certificate Owner by its acquisition of a beneficial interest in a
Certificate, have agreed to treat the Certificates as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Depositor may treat this transaction as a sale of an interest in the related
Assets for financial accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured
by property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several
factors to be take into account in determining whether the substance of a
transaction is a sale of property or a secured loan, the primary factor in
making this determination is whether the transferee has assumed the risk of
loss or other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Tax Counsel will analyze and rely on several
factors in reaching its opinion that the weight of the benefits and burdens
of ownership of the Mortgage Loans will be retained by the Depositor and not
transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions of the documents
either accords with the characterization of the Certificates as debt or
otherwise makes the rationale of those cases inapplicable to this situation.
b. Taxation of Interest Income of Certificate Owners
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been
issued with OID if the interest were not treated as "unconditionally payable"
under the OID Regulations. If such regulations were to apply, all of the
taxable income to be recognized with respect to the Certificates would be
includible in income of Certificate owners as OID, but would not be
includible again when the interest is actually received.
c. Possible Classification of the Trust Fund as a Partnership or
Association Taxable as a Corporation
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as
a corporation. The opinion of Tax Counsel is not binding on the courts or
the IRS. It is possible that the IRS could assert that, for purposes of the
Code, the transaction contemplated by this Prospectus Supplement with respect
to the Certificates constitutes a sale of the Mortgage Loans (or an interest
therein) to the Certificate Owners and that the proper classification of the
legal relationship between the Depositor and the Certificate Owners resulting
form this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be
treated as indebtedness in the hands of the Certificateholders for U.S.
federal income tax purposes and that the entity constituted by the Trust will
not be a publicly traded partnership treated as a corporation or an
association taxable as a corporation, the Depositor will not attempt to
comply with U.S. federal income tax reporting requirements applicable to
partnerships or corporations as such requirements would apply if the
Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified
as a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be
treated as dividends for tax purposes to the extent of such corporation's
earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
d. Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any entity
(or portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Any
entity (or portion of any entity) will be a taxable mortgage pool if (i)
substantially all of its assets consist of debt instruments, more than 50% of
which are real estate mortgages, (ii) the entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the
entity's debt obligations (or an underlying arrangement), payments on such
debt obligations bear a relationship to the debt instruments held by the
entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that
all of the provisions of the Trust Agreement, as in effect on the date of
issuance, will be complied with, Tax Counsel will deliver its opinion that
the arrangement created by the Agreement will not be a taxable mortgage pool
under Section 7701(i) of the Code because only one class of indebtedness
secured by the Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Trust Agreement is a taxable mortgage
pool, such arrangement would be subject to U.S. federal corporate income tax
on its taxable income generated by ownership of the Mortgage Loans. Such a
tax might reduce amounts available for distributions to Certificate Owners.
The amount of such a tax would depend upon whether distributions to
Certificate Owners would be deductible as interest expense in computing the
taxable income of such an arrangement as a taxable mortgage pool.
e. Foreign Investors
In general, subject to certain exception, interest (including OID) paid
on a Certificate to a nonresident alien individual, foreign corporation or
other non-United States person is not subject to U.S. federal income tax,.
provided that such interest is not effectively connected with a trade or
business of the recipient in the United sates and the Certificate Owner
provides the required foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch
profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each
foreign partner would be credited against such foreign partner's U.S. income
tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an
applicable tax treaty.
f. Backup Withholding
Certain Certificate owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the
Certificate Owners, upon issuance of the Certificates, fail to supply the
Trustee or the Certificate Owners' brokers with their respective taxpayer
identification numbers, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to
provide the Trustee of the Certificate Owners' brokers with certified
statements,underpenaltyof perjury,thattheyare notsubjecttobackup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S.
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only "Certificateholder" of record
is Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax
and other information including the amount of interest paid on the
Certificates owned from Participants and Indirect Participants rather than
from the Trustee. (The Trustee, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and
certain other persons to complete their reports.) Each non-exempt
Certificate Owner will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct
federal taxpayer identification number and a statement that he or she is not
to subject to backup withholding. Should a non-exempt Certificate Owner fail
to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income
tax liability.
g. New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own advisors regarding the New
Regulations.
FASIT Provisions
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been
issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
Securityholders. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series. The Prospectus
Supplement for each Series of Securities will indicate whether one or more
FASIT elections will be made for that Series and which Securities of such
Series will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interest in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated company as
defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool)
must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments
issued by the holder of the FASIT's ownership interest or by any person
related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements.
All of the interests in a FASIT must belong to either of the following: (i)
one or more classes of regular interests or (ii) a single class of ownership
interest that is held by a fully taxable domestic corporation. In the case
of Series that include FASIT Ownership Securities, the ownership interest
will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5%, and (vi) if
it pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average rates).
See "Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of
REMIC Regular Certificates--Variable Rate REMIC Regular Certificates."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security
consists of a specified portion of the interest payments on permitted assets
and that portion does not vary over the life of the Security, the Security
also will qualify as a High-Yield Interest. A High-Yield Interest may be
held only by domestic corporations that are fully subject to corporate income
tax ("Eligible Corporations"), other FASITs and dealers in securities who
acquire such interests as inventory, rather than for investment. In
addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Federal Income Tax
Consequences--FASIT Securities--Tax Treatment of FASIT Regular Securities--
Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may
be lost for that year and thereafter. If FASIT status is lost, the treatment
of the former FASIT and the interests therein for federal income tax purposes
is uncertain. The former FASIT might be treated as a grantor trust, as a
separate association taxed as a corporation, or as a partnership. The FASIT
Regular Securities could be treated as debt instruments for federal income
tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for a
period of time in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of holders of
REMIC Regular Securities, holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or
accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Securityholder and a principal payment on such Security will be
treated as a return of capital to the extent that the Securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will
treat interest and principal payments on such Securities in the same manner
described for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--
"Original Issue Discount and Premium" and "--Market Discounts" above. High-
Yield Securities may be held only by fully taxable domestic corporations,
other FASITs, and certain securities dealers. Holders of High-Yield
Securities are subject to limitations on their ability to use current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption." In addition, if a FASIT Regular Security becomes
wholly or partially worthless as a result of Default and Delinquencies of the
underlying Assets, the holder of such Security should be allowed to deduct
the loss sustained (or alternatively be able to report a lesser amount of
income). See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Regular Certificates"--"Effects of Default and Delinquencies"
and "Treatment of Realized Losses."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular
Securities held by a Thrift Institution taxed as a "domestic building and
loan association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Securities would be so considered. See "Certain Federal
Income Tax Consequences--REMICs Securities--Status as Real Property Loans."
In addition, FASIT Regular Securities held by a financial institution to
which Section 585 of the Code applies will be treated as evidences of
indebtedness for purposes of Section 582(c)(1) of the Code. FASIT Securities
will not qualify as "Government Securities" for either REIT or RIC
qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield
Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities
backed by the FASIT Regular Security and that have the same features as High-
Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit
of a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security
must determine the amount of interest, original issue discount, market
discount and premium recognized with respect to the FASIT's assets and the
FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders
of FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
holders of High-Yield Interests. See "Federal Income Tax Securities--
Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition, the
seller of such Security acquires any other FASIT Ownership Security or, in
the case of a FASIT holding mortgage assets, any interest in a Taxable
Mortgage Pool that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT Ownership Security was required to be marked-to-
market under Code section 475 by such holder, then section 475 will continue
to apply to such securities, except that the amount realized under the mark-
to-market rules will be a greater of the securities' value under present law
or the securities' value after applying special valuation rules contained in
the FASIT provisions. Those special valuation rules generally require that
the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of
120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders
of REMIC Securities would be subject. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--
Information Reporting and Backup Withholding." For purposes of reporting and
tax administration, holders of record of FASIT Securities generally will be
treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Offered Securities. State and local income
tax law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences
of an investment in the Offered Securities.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election
has been made under Section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the
Securities without regard to the ERISA considerations described below,
subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Section 401(a) of the
Code and exempt from taxation under Section 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Prohibited Transactions
General
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions involving a Plan and its assets
unless a statutory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA) on parties
in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining
what constitutes the assets of a Plan. This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity investment" will be deemed for purposes of ERISA to be assets of the
Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans and any other
assets held by the Trust Fund. In such an event, the Asset Seller, the Master
Servicer, the Trustee, any insurer of the Assets and other persons, in
providing services with respect to the assets of the Trust Fund, may be
parties in interest, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of Section
406 of ERISA (and of Section 4975 of the Code), with respect to transactions
involving such assets unless such transactions are subject to a statutory or
administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity
participation in the entity will be significant if immediately after any
acquisition of any equity interest in the entity, "benefit plan investors" in
the aggregate, own at least 25% of the value of any class of equity interest.
---------
"Benefit plan investors" are defined as Plans as well as employee benefit
plans not subject to ERISA (e.g., governmental plans). The 25% limitation
must be met with respect to each class of certificates, regardless of the
portion of total equity value represented by such class, on an ongoing basis.
However, there will be no restrictions on the transfer of Securities of a
series in order to satisfy this safe-harbor rule.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided
ownership interest in property and a beneficial ownership interest in a trust
are deemed to be "equity interest" under the final regulation. If Notes of a
particular Series were deemed to be indebtedness under applicable local law
without any substantial equity features, an investing Plan's assets would
include such Notes, but not, by reason of such purchase, the underlying
assets of the Trust Fund.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of
ERISA and the Code to such investment. Among other things, before purchasing
any Securities, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to
the availability of any prohibited transaction exemptions. The Prospectus
Supplement with respect to a series of Securities may contain additional
information regarding the application of any exemptions with respect to the
Securities offered thereby.
Purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust & Savings Bank (decided December 13,
1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to make purchases of the
Securities. In particular, such an insurance company should consider the
exemptive relief granted by Labor for transactions involving insurance
company general accounts in Prohibited Transactions Exemption 95-60, 60 Fed.
Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
While the related Prospectus Supplement will specify which classes of
the Securities, if any, will constitute "mortgage related securities" ("SMMEA
Securities") for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), it is not expected that any of the Securities will be SMMEA
Securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be
subject to restrictions on investment in certain classes of Offered
Securities. Any financial institution which is subject to the jurisdiction
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation ("FDIC"), the
Office of Thrift Supervision ("OTS"), the NCUA or other federal or state
agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing any Offered Security. The
Federal Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement") setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC, the OTS and the NCUA (with certain modifications),
with respect to the depository institutions that they regulate. The Policy
Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a
standard fixed rate thirty-year mortgage security. According to the Policy
Statement, prior to purchase, a depository institution will be required to
determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce
the institution's overall interest rate risk. Reliance on analysis and
documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There
can be no assurance that any classes of Offered Securities will not be
treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for
the investment by savings institutions in certain "high-risk" mortgage
derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According
to the bulletin, such "high-risk" mortgage derivative securities include
securities having certain specified characteristics, which may include
certain classes of Securities. In accordance with Section 402 of the
Financial Institutions Reform, Recovery and Enhancement Act of 1989, the
foregoing bulletin will remain in effect unless and until modified,
terminated, set aside or superseded by the FDIC. Similar policy statements
have been issued by regulators having jurisdiction over the types of
depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth
model investment guidelines for the insurance industry. Institutions subject
to insurance regulatory authorities may be subject to restrictions on
investment similar to those set forth in the Model Law and other
restrictions.
It is not known to the Depositor how the regulators referred to above
would view investments in non-U.S. mortgage loans.
The appropriate characterization of Offered Securities under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase such Offered Securities, may be subject to
significant interpretive uncertainties, which may be increased by the fact
that the Mortgage Loans were originated in non-U.S. jurisdictions.
The Depositor will make no representations as to the proper
characterization of the Offered Securities for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution
regulatory characteristics of the Offered Securities) may adversely affect
the liquidity of the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or
to purchase Offered Securities representing more than a specified percentage
of the investor's assets. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Offered Securities of any class constitute legal investments or are subject
to investment, capital or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may
be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. If so specified in the related Prospectus Supplement, the Offered
Securities will be distributed in a firm commitment underwriting, subject to
the terms and conditions of the underwriting agreement, by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") acting as underwriter
with other underwriters, if any, named therein. Merrill Lynch is an affiliate
of the Depositor. In such event, the Prospectus Supplement may also specify
that the underwriters will not be obligated to pay for any Offered Securities
agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of Offered
Certificates, underwriters may receive compensation from the Depositor or
from purchasers of Offered Securities in the form of discounts, concessions
or commissions. The Prospectus Supplement will describe any such compensation
paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with
respect to Offered Securities that it has previously purchased or agreed to
purchase. If Merrill Lynch or such persons act as agents in the sale of
Offered Securities, they will receive a selling commission with respect to
such Offered Securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance or notional amount of such
Offered Securities as of the Cut-off Date. The exact percentage for each
series of Securities will be disclosed in the related Prospectus Supplement.
To the extent that Merrill Lynch or such persons elect to purchase Offered
Securities as principal, they may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Offered
Securities of such series.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may
be required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor or
Asset Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by
such investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the Depositor
or the Underwriter will promptly deliver, or cause to be delivered, without
charge, a paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including
certain federal income tax consequences, will be passed upon for the
Depositor by Brown & Wood LLP, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of
the guarantor, if any. Ratings on asset backed securities do not represent
any assessment of the likelihood of principal prepayments by borrowers or of
the degree by which such prepayments might differ from those originally
anticipated. As a result, securityholders might suffer a lower than
anticipated yield, and, in addition, holders of stripped interest
certificates in extreme cases might fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
INDEX OF PRINCIPAL DEFINITIONS
Page(s) on which
term is defined
Terms in the Prospectus
1986 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62, 66
Accrual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 28
Accrued Security Interest . . . . . . . . . . . . . . . . . . . . . . . . 30
adjusted issue price . . . . . . . . . . . . . . . . . . . . . . . . 62, 76
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
an accrual period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Applicable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 62
Asset Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6, 18
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . . 29
Balloon Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . 17
benefit plan investors . . . . . . . . . . . . . . . . . . . . . . . . . 94
Book-Entry Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Buydown Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . 26
Buydown Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
capital asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 71
Cash Flow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 22
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 35
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
clearing agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
clearing corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Collection Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Contributions Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Covered Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 54
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Credit Support . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 8, 22
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
daily accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Deferred Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Definitive Securities . . . . . . . . . . . . . . . . . . . . . . . . 28, 35
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 18
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
disqualified organization . . . . . . . . . . . . . . . . . . . . . . . . 79
disqualified organizations . . . . . . . . . . . . . . . . . . . . . . . 79
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 34
Due Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 93
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
excess inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
excess servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39, 94
Federal long-term rate . . . . . . . . . . . . . . . . . . . . . . . . . 76
foreign person . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 82
Government Securities . . . . . . . . . . . . . . . . . . . . . 1, 7, 18, 65
Grantor Trust Certificates . . . . . . . . . . . . . . . . . . . . . . . 11
Home Equity Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 20
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 36
Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Indirect Participants . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
L/C Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Lock-out Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . . . . . 75
Master REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6, 18
MBS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MBS Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MBS Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MBS Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Merrill Lynch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Model Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 18
Mortgage Loan Group . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 28
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Mortgage Participations . . . . . . . . . . . . . . . . . . . . . . 1, 6, 18
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 20
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Nonrecoverable Advance . . . . . . . . . . . . . . . . . . . . . . . . . 32
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Offered Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57, 59
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
pass-through entity . . . . . . . . . . . . . . . . . . . . . . . . . 79, 80
pass-through interest holder . . . . . . . . . . . . . . . . . . . . . . 76
pass-through interest holders . . . . . . . . . . . . . . . . . . . . . . 72
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 30
passive losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Payment Lag Certificates . . . . . . . . . . . . . . . . . . . . . . . . 72
Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 39
phantom income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . 36
portfolio income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
portfolio interest . . . . . . . . . . . . . . . . . . . . . . . 79, 82, 86
Pre-Funded Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 22
pre-issuance accrued interest . . . . . . . . . . . . . . . . . . . . . . 72
prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Prohibited Transactions Tax . . . . . . . . . . . . . . . . . . . . . . . 77
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
qualified mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
qualified stated interest . . . . . . . . . . . . . . . . . . . . . . . . 66
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
real estate assets . . . . . . . . . . . . . . . . . . . . . . . 61, 65, 66
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Refinance Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Related Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
REMIC Regular Certificateholders . . . . . . . . . . . . . . . . . . . . 66
REMIC Regular Certificates . . . . . . . . . . . . . . . . . . . . . 11, 65
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
REMIC Residual Certificateholder . . . . . . . . . . . . . . . . . . . . 73
REMIC Residual Certificates . . . . . . . . . . . . . . . . . . . . . 11, 65
Retained Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Security Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 31
Security Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Securityholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 18
senior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 28
Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Servicing Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Short-Term Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Single Family Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . 19
Single Family Properties . . . . . . . . . . . . . . . . . . . . . . . . . 7
Single Family Property . . . . . . . . . . . . . . . . . . . . . . . . . 19
single-class REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Stripped ARM Obligations . . . . . . . . . . . . . . . . . . . . . . . . 63
Stripped Bond Certificates . . . . . . . . . . . . . . . . . . . . . . . 60
stripped bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 60
Stripped Coupon Certificates . . . . . . . . . . . . . . . . . . . . . . 60
stripped coupons . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 60
Stripped Interest Certificates . . . . . . . . . . . . . . . . . . . . . . 9
Stripped Interest Securities . . . . . . . . . . . . . . . . . . . . . . 28
Stripped Principal Securities . . . . . . . . . . . . . . . . . . . . . 9, 28
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Sub-Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 43
Subordinate Securities . . . . . . . . . . . . . . . . . . . . . . . . 9, 28
Subsequent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 22
Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Super-Premium Certificates . . . . . . . . . . . . . . . . . . . . . . . 67
tax avoidance potential . . . . . . . . . . . . . . . . . . . . . . . . . 80
Tax Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
taxable mortgage pool . . . . . . . . . . . . . . . . . . . . . . . . 77, 88
thrift institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 6
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
U.S. Person, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Underlying MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Underlying Mortgage Loans. . . . . . . . . . . . . . . . . . . . . . . . 18
United States Department of Labor . . . . . . . . . . . . . . . . . . . . 93
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Warranting Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Whole Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the offering of the Securities being registered under this Registration
Statement, other than underwriting discounts and commissions:
SEC Registration Fee $ 304
Printing and Engraving $
Legal Fees and Expenses $
Trustee Fees and Expenses $
Blue Sky Fees and Expenses $
Rating Agency Fees $
Miscellaneous $
Total $
Item 15. Indemnification of Directors and Officers.
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 were or are such directors, officers, employees or agents, against
expenses incurred in any such action, suit or proceeding. The Delaware
General Corporation Law also provides that the Registrant may purchase
insurance on behalf of any such director, officer, employee or agent.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement (filed as exhibit 1.1 to Registration
Statement on Form S-3 (file no. 333-24327) and incorporated herein
by reference).
3.1 Certificate of Incorporation of Merrill Lynch Mortgage Investors,
Inc., as amended (filed as exhibit 1.1 to Registration Statement on
Form S-3 (file no. 333-24327) and incorporated herein by reference).
3.2 By-laws of Merrill Lynch Mortgage Investors, Inc. as currently in
effect (filed as exhibit __ to Registration Statement on Form S-3
(No. 333-07569) and incorporated herein by reference).
4.1 Form of Pooling and Servicing Agreement (including form of Certificate
as an exhibit thereto)(filed as exhibit 4.1 to Registration
Statement on Form S-3 (No. 333-07569) and incorporated herein by
reference).
4.2 Form of Pooling and Servicing Agreement (Contracts) (including form of
Certificate as an exhibit thereto) (filed as exhibit 4.2 to Registration
Statement onForm S-3 (No.333-07569) and incorporatedherein by reference).
4.3 Form of Trust Agreement (including form of Certificate as an exhibit
thereto)(filed as exhibit 4.3 to Registration Statement on Form S-3 (No.
333-07569) and incorporated herein by reference).
4.4 Form of Indenture (including form of Note as an exhibit thereto) (filed
as exhibit 4.4 to Registration Statement on Form S-3 (no, 333-07569) and
incorporated herein by reference).
4.5 Form of Pooling and Servicing Agreement (revolving home equity loans)
(including form of Certificate as an exhibit thereto) (filed as exhibit
4.5 to Registration Statement on Form s-3 (No. 333-24327) and
incorporated by reference).
5.1 Opinion of Brown & Wood LLP as to legality of certain Certificates
and Notes (including consent of such firm).
5.2 Opinion of Richards, Layton & Finger as to legality of certain
Certificates (including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1 and 8.1
hereof).
23.2 Consent of Richards, Layton & Finger (included in exhibit 5.2)
24.1 Power of Attorney (included as page II-4 to original filing).
99.1 Form of Sale and Servicing Agreement(filed as exhibit 99.1 to
Registration Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
99.2 Form of Mortgage Loan Purchase Agreement (filed as an exhibit 99.2
to the Registration Statement on Form S-3 (No. 333-07569)(and
incorporated herein by reference).
99.3 Form of Mortgage Loan Purchase Agreement (revolving home equity
loans)(filed as an exhibit 99.3 to the Registration Statement on
Form S-3 (No. 333-24327) (and incorporated herein by reference).
Item 17. Undertakings.
(a) Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change of such information in the Registration
Statement.
Provided, however, That paragraphs (1)(i) and (1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933 each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Undertaking in respect of incorporation of reference.
The undersigned 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 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, 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, 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 of
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.
The Registrant hereby undertakes to file an application for the purpose
of determining the eligibility of the trustee to act under subsection (a) of
section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under section 305(b)(2) of that act.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant 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
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York on the 11th day
of December, 1997.
Merrill Lynch Mortgage Investors, Inc.
By:/s/ Michael M. McGovern
-------------------------------
Name: Michael M. McGovern
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on December 11, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
President and Chairman of the Board of
___________________*___________________ Directors (Chief Executive Officer)
(Jeffrey W. Kronthal)
Treasurer (Principal Financial Officer and
___________________*___________________ Principal Accounting Officer) and Director
(Michael J. Normile)
Director
_______________________________________
(Donald J. Puglisi)
Director
/s/ Michael M. McGovern
---------------------------------------
(Michael M. McGovern)
*By/s/ Michael M. McGovern
---------------------------------------
(Michael M. McGovern,
Attorney-in-fact)
</TABLE>
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
Amendment No. 1
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________
MERRILL LYNCH MORTGAGE INVESTORS, INC.
(Exact name of registrant as specified in its governing instrument)
_____________________
EXHIBIT VOLUME
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
1.1 Form of Underwriting Agreement (filed as exhibit 1.1 to Registration
Statement on Form
S-3 (file no. 333-24327) and incorporated herein by reference).
3.1 Certificate of Incorporation of Merrill Lynch Mortgage
Investors, Inc., as amended (filed as exhibit 1.1 to
Registration Statement on Form S-3 (file no. 333-24327) and
incorporated herein by reference).
3.2 By-laws of Merrill Lynch Mortgage Investors, Inc. as
currently in effect (filed as exhibit 4.1 to Registration
Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
4.1 Form of Pooling and Servicing Agreement (including form of
Certificate as an exhibit thereto)(filed as exhibit 4.2 to
Registration Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
4.2 Form of Pooling and Servicing Agreement (Contracts) (including form of
Certificate as an exhibit thereto) (filed as exhibit 4.3 to
Registration Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
4.3 Form of Trust Agreement (including form of Certificate as an exhibit
thereto)(filed as exhibit __ to Registration Statement on Form S-3
(No. 333-07569) and incorporated herein by reference).
4.4 Form of Indenture (including form of Note as an exhibit thereto)
(filed as exhibit 4.4 to Registration Statement on Form S-3 (No.
333-07569) and incorporated herein by reference).
4.5 Form of Pooling and Servicing Agreement (revolving home equity loans)
(including form of Certificate as an exhibit thereto) (filed as
exhibit 4.5 to Registration Statement on Form s-3 (No. 333-24327) and
incorporated by reference).
5.1 Opinion of Brown & Wood LLP as to legality of certain Certificates and
Notes (including consent of such firm).
5.2 Opinion of Richards, Layton & Finger as to legality of certain
Certificates (including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1 and 8.1
hereof).
23.2 Consent of Richards, Layton & Finger (included in exhibit 5.2)
24.1 Power of Attorney (included as page II-4 to original filing).
99.1 Form of Sale and Servicing Agreement(filed as exhibit 99.1 to
Registration Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
99.2 Form of Mortgage Loan Purchase Agreement (filed as an exhibit 99.2
to the Registration Statement on Form S-3 (No. 333-07569)(and
incorporated herein by reference).
99.3 Form of Mortgage Loan Purchase Agreement (revolving home equity
loans)(filed as an exhibit 99.3 to the Registration Statement on
Form S-3 (No. 333-24327) (and incorporated herein by reference).
Exhibit 5.1
December 11, 1997
Merrill Lynch Mortgage Investors, Inc.
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281
Re: Merrill Lynch Mortgage Investors, Inc.
Registration Statement on Form S-3 (File No. 333-39127)
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel for you in connection with the Registration
Statement on Form S-3 (File No. 333-39127) (the "Registration Statement"),
-----
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), for the registration under the Act of
$1,000,000 aggregate principal amount of Asset Backed Securities (the
"Securities"). Each series of such Securities will be issued pursuant to (i)
a separate pooling and servicing agreement (the "Pooling and Servicing
Agreement"), among Merrill Lynch Mortgage Investors, Inc. (the "Registrant"),
a trustee to be identified in the prospectus supplement for such series of
Securities and a master servicer to be identified in the prospectus
supplement for such series of Securities (the "Master Servicer"), (ii) a
trust agreement (the "Trust Agreement") among a trustee named in the related
prospectus supplement, the Registrant and another entity named in such
prospectus supplement and/or (iii) an indenture (the "Indenture") between the
trust formed pursuant to the Trust Agreement and the indenture trustee named
in the related prospectus supplement.
We have made such investigation of law as we deemed appropriate and have
examined the proceedings heretofore taken and are familiar with the
procedures proposed to be taken by the Registrant in connection with the
authorization, issuance and sale of the Securities.
Based on the foregoing, we are of the opinion that:
(i) When each Pooling and Servicing Agreement and/or Indenture in
respect of which we have participated as your counsel has been duly
authorized by all necessary corporate action and has been duly executed and
delivered, it will constitute a valid and binding obligation of the
Registrant enforceable in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding in equity
or at law); and
(ii) When the issuance, execution and delivery of the Securities issued
pursuant to a Pooling and Servicing Agreement or an Indenture in respect of
which we have participated as your counsel have been duly authorized by all
necessary corporate action, and when such Securities have been duly executed
and delivered and sold and paid for as described in the Registration
Statement, such Securities will be legally and validly issued and the holders
of such Securities will be entitled to the benefits provided by the Pooling
and Servicing Agreement or the Indenture, as applicable, pursuant to which
such Securities were issued.
In rendering the foregoing opinions, we have assumed the accuracy and
truthfulness of all public records regarding the Registrant and of all
certifications, documents and other proceedings examined by us that have been
executed or certified by officials of the Registrant acting within the scope
of their official capacities and have not verified the accuracy or
truthfulness thereof. We have also assumed the genuineness of the signatures
appearing upon such public records, certifications, documents and
proceedings. In addition, we have assumed that each such Pooling and
Servicing Agreement and Indenture and the related Securities, as applicable,
will be executed and delivered in substantially the form filed as exhibits to
the Registration Statement with such changes acceptable to us, and that such
Securities will be sold as described in the Registration Statement. We
express no opinion as to the laws of any jurisdiction other than the laws of
the State of New York and the federal laws of the United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration
Statement, without implying or admitting that we are "experts" within the
meaning of the Act or the rules and regulations of the Securities and
Exchange Commission issued thereunder, with respect to any part of the
Registration Statement, including this exhibit.
Very truly yours,
Brown & Wood LLP
Exhibit 5.2
(Richards, Layton & Finger letterhead)
December 11, 1997
Merrill Lynch Mortgage Investors, Inc.
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281
Re: Merrill Lynch Mortgage Investors, Inc.
Registration Statement on Form S-3 (File No. 333-39127)
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel for Merrill Lynch Mortgage
Investors, Inc. (the "Registrant") in connection with the Registration
Statement on Form S-3 (File No. 333-39127) (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), for the registration under the Act of up to
$1,000,000 aggregate principal amount of Asset Backed Certificates (the
"Securities"). Each series of such Securities may be issued pursuant to a
trust agreement (the "Trust Agreement") among a trustee named in the related
prospectus supplement, the Registrant and another entity named in such
prospectus supplement. This opinion is being delivered to you at your
request.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The form of Trust Agreement (including the form of Certificate of
Trust
(the "Certificate of Trust") attached as Exhibit 4.3 thereto); and
(b) The Registration Statement.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed above, and we have assumed that there exists no
provision in any document that we have not reviewed that bears upon or is
inconsistent with the opinions stated herein. We have conducted no
independent factual investigation of our own but rather have relied solely
upon the foregoing documents, the statements and information set forth
therein and the additional matters recited or assumed herein, all of which we
have assumed to be true, complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii)
the conformity with the originals of all documents submitted to us as copies
or forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust
Agreement will constitute the entire agreement among the parties thereto with
respect to the subject matter thereof, including with respect to the
creation, operation and termination of the Trust, (ii) the due creation or
due organization or due formation, as the case may be, and valid existence in
good standing of each party to the documents examined by us under the laws of
the jurisdiction governing its creation, organization or formation, (iii) the
legal capacity of natural persons who are parties to the documents examined
by us, and (iv) that each of the parties to the documents examined by us has
the power and authority to execute and deliver, and to perform its
obligations under, such documents. We have not participated in the
preparation of the Registration Statement and assume no responsibility for
its contents.
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal
laws and rules and regulations relating thereto. Our opinions are rendered
only with respect to Delaware laws and rules, regulations and orders
thereunder which are currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. When each Trust Agreement in respect of which we have participated
as your counsel has been duly authorized by all necessary corporate action
and has been duly executed and delivered, it will constitute a valid and
binding obligation of the Registrant enforceable in accordance with its
terms; and
2. When the issuance, execution and delivery of the Securities in
respect of which we have participated as your counsel have been duly
authorized by all necessary corporate action, and when such Securities have
been duly executed and delivered and sold and paid for as described in the
Registration Statement, such Securities will be legally and validly issued
and the holders of such Securities will be entitled to the benefits provided
by the Trust Agreement pursuant to which such Securities were issued.
The foregoing opinions regarding enforceability are subject to (i)
applicable bankruptcy, insolvency, moratorium, reorganization, receivership,
fraudulent conveyance and similar laws relating to or affecting the rights
and remedies of creditors generally, (ii) principles of equity (regardless of
whether considered and applied in a proceeding in equity or at law) and (iii)
the effect of applicable public policy on the enforceability of provisions
relating to indemnification or contribution.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration
Statement. In giving the foregoing consents, we do not thereby admit that we
come within the category of Persons whose consent is required under Section 7
of the Act, or the rules and regulations of the Securities and Exchange
Commission thereunder with respect to any part of the Registration Statement,
including this exhibit. Except as stated above, this opinion may not be
furnished or quoted to, or relied upon by, any other Person for any purpose.
Very truly yours,
Richards, Layton & Finger
Exhibit 8.1
December 11, 1997
Merrill Lynch Mortgage Investors, Inc.
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281
Re: Merrill Lynch Mortgage Investors, Inc.
Registration Statement on Form S-3
(File No. 333-39127)
--------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Merrill Lynch Mortgage Investors, Inc., a
Delaware corporation (the "Registrant"), in connection with the issuance and
sale of its Asset Backed Securities (the "Securities") that evidence
interests in, or securities backed by, certain pools of loans. Each series
of Securities will be issued pursuant to (i) a Pooling and Servicing
Agreement among the Registrant, a trustee and a master servicer, each to be
specified in the prospectus supplement for such series of Certificates, (ii)
a trust agreement (the "Trust Agreement") among a trustee named in the
related prospectus supplement, the Registrant and another entity named in
such prospectus supplement and/or (iii) an indenture (the "Indenture")
between the trust formed pursuant to the Trust Agreement and the indenture
trustee named in the related prospectus supplement. We have advised the
Registrant with respect to certain federal income tax consequences of the
proposed issuance of the Securities. This advice is summarized under the
headings "Summary of Prospectus -- Tax Status of the Certificates" and "--
Tax Status of the Notes" and "Material Federal Income Tax Consequences" in
the Prospectus, all as part of the Registration Statement on Form S-3 (File
No. 333-39127) (the "Registration Statement"), filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
as amended on the date hereof for the registration of such Securities under
the Act. Such description does not purport to discuss all possible federal
income tax ramifications of the proposed issuance, but with respect to those
tax consequences which are discussed, in our opinion, the description is
accurate in all material respects.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the heading "Material Federal Income Tax Consequences" in
the Prospectus forming a part of the Registration Statement, without implying
or admitting that we are "experts" within the meaning of the Act or the rules
and regulations of the Commission issued thereunder, with respect to any part
of the Registration Statement, including this exhibit.
Very truly yours,
Brown & Wood LLP
